Key Takeaways

  • A Michigan S corporation (S corp) offers pass-through taxation—profits and losses go directly to shareholders, avoiding double taxation.
  • To form a Michigan S corp, you must first incorporate as a Michigan C corporation or LLC, then file IRS Form 2553 to elect S corporation status.
  • Michigan S corps benefit from limited liability, perpetual existence, and flexible ownership structure, but must comply with IRS restrictions (e.g., no more than 100 shareholders, all U.S. citizens or residents).
  • Michigan imposes a 6% corporate income tax on C corps but not on S corps that have properly elected pass-through status.
  • Common advantages include potential tax savings on self-employment taxes, credibility with investors, and easier stock transferability.
  • Disadvantages include stricter ownership limits and the requirement to file annual reports with the Michigan Department of Licensing and Regulatory Affairs (LARA).

An S corporation Michigan is a C corporation that has qualified for its election to receive a special tax status with the IRS. What makes an S corporation of particular interest is that its income goes directly to the shareholders and avoids the impression of double taxation. A C corporation can elect to become an S corporation at any time.

S Corporation Michigan

An S corporation Michigan is recognized as its own legal entity. The stockholders' financial records are kept completely separate from the business financial records. The The corporation's employees or officers have the authorization to conduct business on the corporation's behalf. Regarding credit application approval, it's likely a lender will have specific requests for newly formed corporations. 

The same applies to corporations with minimal assets and a small record of credit use. Under these conditions, a personal guarantee is necessary from one or more of the stockholders or the officers of the corporation. When a personal guarantee is provided, the signers will be liable for all the corporation's debts. An S corporation allows the income to go directly to the shareholders. Therefore, it avoids the perception of double taxation you get with a C corporation.

How to Form a Michigan S Corporation

To form a Michigan S corp, you’ll first need to register your business as either a C corporation or an LLC with the Michigan Department of Licensing and Regulatory Affairs (LARA). Once the entity is legally formed, you can elect S corporation tax status through the IRS.

Here are the main steps to form a Michigan S corp:

  1. Choose a Business Name: Confirm name availability through the Michigan Business Entity Search. The name must be unique and include a corporate designator (e.g., “Inc.,” “Corp.,” or “Ltd.”).
  2. File Articles of Incorporation: Submit the Articles of Incorporation (Form 502) to LARA, either online or by mail, with a $60 filing fee.
  3. Appoint a Registered Agent: Michigan requires every corporation to have a registered agent with a physical address in the state.
  4. Create Corporate Bylaws: Establish internal management rules that govern how the business will be run.
  5. Obtain an EIN: Apply for an Employer Identification Number (EIN) from the IRS, which is required before electing S corp status.
  6. File IRS Form 2553: Submit this form within 75 days of incorporation or within the first 75 days of the tax year in which you wish S corp status to apply.
  7. Meet Michigan Tax Obligations: Register with the Michigan Department of Treasury for any applicable business taxes, such as sales or employer withholding tax.

Differences Between Michigan C Corporations and S Corporations

The exact moment that a C corporation becomes an S corporation is confusing for many people. Many individuals believe that a corporation must elect to be an S corporation at inception. This is not true. When you form a corporation in Michigan, you'll want to know how a Michigan C corporation becomes a Michigan S corporation. Be aware of the restrictions that apply to S corporations and not C corporations. You'll also want to know the differences between the two types of corporations. 

Corporations chartered by Michigan are C corporations and remain that way if you do nothing further. A C corporation can file to become an S corporation at any time after forming. 

You may elect to become an S corporation months or even years after originally forming the C corporation. You'll need to contact the Michigan income tax agency or speak with your tax advisor to find out how Michigan treats S corporations. 

It's necessary to find out if you need to file a separate S corporation election form. Make this contact before attempting to make the S corporation election for your Michigan corporation. You'll want to find out if there are any taxes that apply to S corporations.

Michigan S Corporation Requirements

To qualify for S corporation status, a Michigan corporation must meet the IRS’s eligibility criteria:

  • Have no more than 100 shareholders.
  • All shareholders must be U.S. citizens or permanent residents.
  • The corporation may issue only one class of stock.
  • All shareholders must consent to the S corp election.
  • The company must be domestic, formed under Michigan law.

Failure to maintain these requirements may result in the loss of S corp status. Michigan does not require a separate state-level S corp election; once approved federally, your Michigan S corp will be recognized as such for state purposes.

C Corporation and S Corporation Similarities

1. Legal Entities

Both a C corporation and an S corporation are treated as legal entities. This means the business is treated as its own individual, separate from the shareholders. Oftentimes, this means the business receives the same treatment as a human being.

2. Creating a Corporation

C corporations and S corporations are formed in the same way. A Certificate of Incorporation or Articles of Incorporation must be filed with the state.

3. Life

Both S and C corporations have unlimited existence. Both corporation types have a life that will last beyond the death of the owners.

4. Makeup 

The shareholders of S corporations and C corporation are made up of:

  •  

Elected directors 

  •  

Owners of the corporation 

  •  

Appointed officers responsible for the corporation's daily operations.

5. Limited Liability

S corporations and C corporations are protected by limited liability for the obligations, debts, and liabilities the corporation obtains. This applies to shareholders or owners who are not normally held responsible for corporation obligations.

6. Ownership

To transfer ownership of an S corporation or a C corporation, shares of the corporation's stock must be sold.

7. Capital

More capital can be raised by C corporations and S corporations through selling the corporation's stock.

Michigan S Corporation Taxes

A key benefit of forming a Michigan S corp is avoiding double taxation. Profits and losses “pass through” to shareholders, who report them on their individual tax returns. The S corp itself generally doesn’t pay federal income tax.

However, S corps must still comply with certain state tax obligations:

  • Corporate Income Tax (CIT): Michigan C corporations pay a 6% CIT, but S corps are typically exempt unless they have built-in gains or specific taxable income.
  • Employer Taxes: If your S corp has employees, you must register for state withholding tax and unemployment insurance.
  • Franchise and Annual Reports: Every corporation must file an Annual Report with LARA by May 15 each year to remain in good standing. The filing fee is $25.

It’s also worth noting that shareholders who actively work for the business must receive “reasonable compensation,” subject to employment tax, before any remaining profits can be distributed as dividends.

Michigan S Corporation: Advantages

A Michigan S corporation has an independent life. The corporation continues undisturbed, no matter if there is a death or incapacitation of one or more of the stockholders. Regarding initial ownership of a stock, fractional ownership shares can be easily accommodated. Ownership changes within a corporation through gifting, selling, and purchasing stock. This does not perturb the corporation's abilities to conduct business. 

Stockholder records and finances are kept separate from the corporation's records and finances. The risk of equity liquidations that are unrecognized is reduced because of this requirement. According to Subchapter S, an S corporation does not pay income taxes. The loss or income of the corporation is directed to the shareholders. The exceptions to this are few under this taxation election.

Disadvantages of a Michigan S Corporation

While a Michigan S corp provides many benefits, there are some drawbacks to consider:

  • Ownership Restrictions: Only individuals and certain trusts or estates can be shareholders—no corporations or partnerships.
  • Strict IRS Oversight: The IRS requires strict adherence to S corp election and operational rules. Failure to meet these requirements can cause automatic reversion to C corporation status.
  • Administrative Complexity: S corps must maintain corporate minutes, issue stock, and adhere to shareholder formalities, which adds compliance obligations.
  • Compensation Rules: The IRS monitors “reasonable salary” payments closely; underpayment to avoid employment taxes can trigger audits and penalties.
  • Potential Self-Employment Tax Limits: While distributions may save on self-employment taxes, not all income qualifies, and incorrect classifications can result in penalties.

Frequently Asked Questions

1. What is the main difference between an LLC and a Michigan S corp? An LLC provides flexibility in management and taxation, while an S corp offers potential tax savings by classifying income as wages and dividends, which can reduce self-employment taxes.

2. Does Michigan recognize federal S corporation status? Yes. Once approved by the IRS, Michigan automatically recognizes the S corp election, meaning you don’t need to file a separate state form.

3. How long does it take to form a Michigan S corp? Standard processing for Articles of Incorporation with LARA typically takes 2 to 3 weeks, but expedited options (24-hour or same-day service) are available for additional fees.

4. Are Michigan S corporations required to pay franchise tax? Michigan does not impose a traditional franchise tax, but S corps must file annual reports and pay a $25 filing fee.

5. Can I convert my Michigan LLC into an S corporation? Yes. You can file IRS Form 2553 to elect S corp tax status for your LLC, provided it meets all S corp eligibility criteria.

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