Looking to start a Michigan S corporation (S corp) but not sure how to go about it? You’re in the right place. Use our guide below to learn more about S corps in Michigan and how we can help you get started on yours.
For an LLC, filing as an S corp may provide savings on self-employment taxes in some cases. For C corporations (C corps), it can be a way to avoid double taxation. For more information about whether filing as an S corp could benefit your business, see our “What Is an S Corporation?” page.
You should understand that an S corp is not a business structure. Rather, it’s a tax classification that either an LLC or a corporation can apply for with the IRS if it meets the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for your business.
If you want to form an LLC with S corp tax status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with state and federal laws.
To create a Michigan S corporation, you’ll need to create either a limited liability company (LLC) or a C corp if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service (IRS).
If you’re ready to learn about filing as an S corporation in Michigan, we’ll walk you through it. First, we’ll show you how to form an LLC in Michigan. If you’d rather form a Michigan corporation, follow the instructions on our Michigan corporation page. Then, in Step 6, we’ll explain how to file for S corp status as either an LLC or corporation.
Note: Before you begin this process, see the section below titled “Requirements and Limitations of S Corporations” to make sure your business qualifies for S corp status.
Name your Michigan LLC. Note, however, that it’s important to do a Michigan business entity search to ensure that the name you want isn’t already being used by another Michigan business.
You’ll also have to comply with all naming regulations for a Michigan LLC (23 MCL §450.4204). For example, your company’s name must end with the proper designator. Your choices are “limited liability company” or the abbreviation “L.L.C.” or “L.C.,” with or without periods or other punctuation.
Michigan regulations forbid you from using words in your business name that imply that your company is formed for some purpose other than what’s stated in your Articles of Organization (more on that in Step 3). By the same token, you can’t suggest your LLC is a corporation by using the words “corporation” or “incorporated” or the abbreviations “corp.” or “inc.”
Register Your Business as an S Corp
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Select a Michigan resident agent, known in most states as a “registered agent.” This agent is the designated person who will receive service of process and other important legal notices for the business and is required by state law.
The resident agent is required to be available during normal business hours so they can receive notices in person. The agent may be an individual resident in Michigan whose business office or residence is identical to the registered office, or any of the following:
These entities must also have a business office identical to the registered office to qualify.
Some LLC owners opt to use a registered agent service instead of being their own resident agent. This frees them from the responsibility of constantly having to be available to receive legal notices in person and the potential embarrassment of being served with notice of a lawsuit in front of clients. Our registered agent service can provide you with a resident agent.
Next, file Articles of Organization with the state. You do so by filing with the Michigan Department of Licensing and Regulatory Affairs’ Corporations, Securities, and Commercial Licensing Bureau, Corporations Division.
You’ll complete the Articles of Organization form and submit it online, by postal mail, or in person. The filing fee at the time of this writing is $50.
Remember that we can handle this paperwork for you with our business formation services.
Draft an LLC operating agreement. Even though having an operating agreement in Michigan isn’t required by law, it’s a critical document for an LLC. An LLC operating agreement usually covers the rules your company will follow, lists LLC owners (called “members” in an LLC), each member’s ownership percentage, and much more.
The operating agreement also discusses how finances will be handled and how decisions will be made (including management and member voting structure). It’s essentially the agreed-upon rules for your LLC for you and the other members. Once signed by all members, it’s legally binding.
Get an Employer ID Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
We can obtain this number for you with our EIN service.
Submit the form to apply for S corp status. Once your Michigan LLC is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corp tax designation.
The IRS requires that you complete and file your Form 2553 with the IRS:
One caveat for limited liability companies wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
For more information on when and how to file Form 2553, visit the IRS website.
There are a few Michigan S corp filing requirements and limitations you should be aware of. Specifically, to qualify for S corporation status, an entity must:
Not all business entities are eligible for S corp classification. However, if your business entity meets these requirements, you can apply for an S corp election.
While S corp classification does come with a number of benefits for some businesses, making this election might not be right for all business types. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward.
The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. Let’s look at the advantages for LLCs first.
A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which adds up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.
But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business.
One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. The IRS considers “reasonable” to be something similar to what others in your field are earning.
Having an LLC with S corp status can have some drawbacks over a traditional LLC:
As we listed above, S corps must adhere to more regulations than a standard LLC or C corporation. All the members must be U.S. citizens (which can also include certain trusts and estates), and there can be no more than 100 of them. A traditional LLC doesn’t have these limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe many of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.
If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:
One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.
Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).
S corp status also has its downsides:
As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships, corporations, or non-resident aliens as shareholders. C corporations don’t have these limitations.
One way corporations attract investors is to offer preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corps.
Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, but they may also be able to help you find additional tax savings.
Forming a business can be complicated, but we’re here to make it as stress-free for you as possible.
When you’re ready to take the leap, we can help you form a Michigan LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Contact us now to get started.
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Start Your S Corp in Michigan
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For a corporation, one of the biggest advantages is being able to avoid double taxation on the business’s income at both the entity and individual levels, thereby benefiting from pass-through taxation.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay self-employment taxes on their salary and not the profits they receive. For some LLCs, this can add up to big savings in self-employment taxes.
Before formally registering a business name, you should first search the Michigan business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your Michigan S corporation nearly anything you want as long as you comply with any applicable state naming regulations.
S corp status may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in your state.
Calculating taxes can be confusing, but you can check out our S corp tax guide to learn more about navigating taxes for your Michigan S corporation. If you still have questions, contact a certified tax professional for more information.
Sorry, but our S corp service is only for applying for S corp status when you form your LLC with us.
According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new business, you must apply for S corp status no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business entity, whereas an S corp is a tax filing status. You can read more on our LLC vs. S Corp page.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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