Finding Solutions for Growing Businesses

CHOOSING YOUR BUSINESS STRUCTURE

A business may be conducted through a variety of organizational structures. A specific business structure is generally chosen for liability and/or tax reasons. The three most common types of business organizations are sole proprietorships, partnerships, and corporations (either "C" Corporation or Subchapter "S" Corporation).

SOLE PROPRIETORSHIP

One person operating a business as an individual is a sole proprietorship. The sole proprietorship is the most common form of business organization. Profits are taxed as income to the owner personally. This rate is usually lower than the corporate tax rates would be. The owner has complete control of the business but faces unlimited liability for its debts. Since this is a fairly simple type of legal structure, there is very little government regulation and reporting.
A sole proprietorship registers an assumed name or "DBA" ("doing business as") at the county clerk's office in the county in which the business is located. The process protects the name for five years in the county where it is registered, at which time it can be re registered.
For more information, contact your local county clerk.

GENERAL PARTNERSHIP

A partnership exists when two or more persons join together in the operation and management of a business venture. Partnerships, like sole proprietorships, are subject to relatively little regulation and are fairly easy to establish. A formal partnership agreement is recommended in order to address potential conflicts before they arise; for example, who will be responsible for performing each task, what if any, consultation is needed between partners before major decisions are made, and so on. Under a general partnership, each partner is liable for all debts of the business. All profits are taxed as income to the partners based on their percentage of ownership.
A general partnership, like a sole proprietorship, registers an assumed name with the county clerk's office in the county in which the business is located.
For more information, contact your local county clerk.

LIMITED PARTNERSHIP

Like a general partnership, a limited partnership is established by an agreement between two or more individuals. In a limited partnership, however, there are two types of partners. A general partner has greater control in some aspects of the partnership; for instance, only a general partner can decide to dissolve the partnership. General partners have no limitations on the dividends they can receive from profit and also incur unlimited liability. Limited partners can only receive a share of profits based on the prorated amount of their investment, and their liability is similarly limited in proportion to their investment.

"C" CORPORATION

A corporation is a legal entity made up of persons who have received a charter legally recognizing the corporation as a separate entity having its own rights, privileges and liabilities, apart from those of the individuals forming the corporation. It is the most complex form of business organization and is comprised of three groups of people; shareholders directors, and officers. The corporation can own assets, borrow money, and perform business functions without directly involving the owner(s) of the corporation. The corporation, therefore, is subject to more government regulation than proprietorships or partnerships. Corporate earnings are subject to "double taxation" when they are passed through as stockholder dividends. However, corporations have the advantage of limited liability.
In order to form either a profit or non-profit corporations, "Articles of Incorporation" must be filed with the Corporation and Securities Bureau of the Michigan Department of Commerce. The business name becomes protected in Michigan by the Bureau, and no other business may register a name currently on file.
A copy of the Business Corporation Act is available for $2 from the Corporation and Securities Bureau. For additional information and assistance, contact: Michigan Department of Commerce Corporation and Securities Bureau 6546 Mercantile Way PO Box 33054 Lansing, MI 48909 or call (900)555-0031 (at a charge of $1.50 per minute).

SUBCHAPTER "S" CORPORATION

A special section of the Internal Revenue Code permits a corporation to be taxed as a partnership or sole proprietorship, with the profits taxed at the individual rather than the corporate rate. To qualify as a Subchapter "S" corporation, a business must meet certain requirements.
For a chart summarizing the different types of business structures click here. For more information on choosing a legal structure, call the Michigan Mi-SBDC Headquarters at (313)964-1798 (for the location of your nearest Small Business Development Center.

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