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Choosing the Best Entity for a New Michigan Business

The importance of choosing the right entity for a new Michigan business cannot be overstated. One type of business entity may be perfect for a certain kind of business, and a disaster for another kind of business. It's important for those forming new businesses to carefully consider the kind of entity they will use. In Michigan, there are three main kinds of business entities: C corporations, S corporations, and limited liability companies (LLC's).

Basically, there are three major issues that must be considered when choosing the entity for a new business.

Who Will Own the Business?
The first issue that must be addressed is who will own the business. This issue is very important for choosing a business entity. For example, if the owners will be a small number of individuals, it could be appropriate for the business to be conducted as an S corporation, depending on the circumstances. If the business consists of a real estate investment, then an LLC will probably be the best entity choice. If the business is going to be funded with venture capital money or will be taken public, it will most likely have to be set up as a C corporation.

How Will Earnings Be Distributed?
The second issue that must be addressed is how earnings will be distributed to owners. When a business has earnings, it can either retain those earnings to fund further business growth, or it can distribute those earnings to the owners. There can be significant differences in the tax treatment of such distributions, depending on the type of business entity involved and the nature of the distributions. For example, if a business plans on distributing current income to its owners, a pass through entity, such as an S corporation or LLC, may be the best entity because there will only be one level of taxation instead of the double layer of taxation involved in a C corporation. However, if a business intends to retain its earnings to fund future growth, a C corporation may be the better entity to accomplish those goals.

Will the New Business Generate Profits or Losses?
The third issue that must be addressed is whether the new business is likely to generate profits or losses. If the business is expected to initially generate losses, a pass through entity is likely the best choice of entity because the owners will be able to deduct those loses from their income. If a company is expected to generate profits, a C corporation may be the best entity choice due to the low initial corporate tax rates as well as various tax deductions that are available to reduce taxable income.

Anyone starting a new Michigan business should consult with an experienced Michigan business attorney to help them determine the best entity for their business.

Full post as published by Michigan Business Lawyer Blog on June 18, 2008 (boomark / email).