Michigan S-Corporation: Everything You Need to Know
A Michigan S-corporation is a business entity that works well for businesses who enjoy the structure and limited liability that a corporation offers.3 min read
A Michigan S-corporation is a business entity that works well for businesses who enjoy the structure and limited liability that a corporation offers — but without the double taxation that occurs with a standard C-corporation. S-corporations are taxed as pass-through entities, meaning the profits pass through the company to the shareholders to be taxed as personal income.
All corporations will start out as a standard C-corporation in Michigan, but if a company meets the eligibility requirements, it can select an S-corporation as a special tax status by filling out a Form 2553 with the IRS after officially establishing itself as a corporation.
One of the benefits of an S-corporation is that it protects the personal assets of its owners from the business debts. The corporation is considered a separate entity, so shareholders will have limited liability when it comes to debts and any legal action that stem from the business.
Additionally, shareholders cannot typically lose more than the amount that they invested in the company if the business were to go bankrupt. It is important to note that there is an exception when it comes to shareholder liability, and that is when the corporation perpetuates fraud or recklessly harms others.
Taxation of a Michigan S Corporation
An S-corporation is different than a C-corporation in terms of taxation. A Michigan S-corporation will not pay any corporate income taxes. The S-corporation will file a tax return if it has one or more shareholder, but it will not have to pay the tax liability owed. Instead, each shareholder will pay income taxes on what his or her portion of the businesses tax liability is. This will also allow shareholders to record losses on their personal return as well.
Points to Consider in Forming a Michigan S Corporation
There are definitely some considerations to make when choosing to elect an S-corporation status for your business. To elect the special tax status, your business must file the appropriate forms and pay a filing fee within a few months after your corporation is formed. Additionally, to be eligible to elect the S-corporation status, your business must meet the following criteria:
- Hold regular meetings and keep minutes for both stockholders and the board of directors.
- Have less than 100 total stockholders.
- Have shareholders that are individuals, certain trusts, or estates.
A Michigan S-corporation election will allow you to sell shares in your corporation in order to get the investment money that you need. The issuance of stock will be subject to regulation by both state and federal securities laws. In an S-corporation, you may only have one class of stock issued.
S-corporation election status does have many benefits when it comes to taxation. Some of the ways taxation is better in an S-corporation include the following:
- An S-corporation is less likely to be audited than sole proprietorships and partnerships.
- An S-corporation enjoys the benefits of pass-through taxation to prevent the double tax that C-corporations experience.
- Shareholders can report their share of both profits and losses from the business, which can offset some of their earned income for the year.
Owners and employees of an S-corporation can enjoy many benefits that they might not get in a different business structure. Owners will be eligible for such benefits as the following:
- Group health insurance plans
- Retirement and profit-sharing programs
- Tax-favored stock options and bonuses
Steps in Forming a Corporation in Michigan
When forming an S-corporation in Michigan, there are several steps that you will need to follow before your corporation will receive its S-corporation designation:
- Choose your corporation's name.
- File your Articles of Incorporation with Michigan's Secretary of State Corporation Division.
- Appoint your business's registered agent.
- Start a corporate records book for important paperwork.
- Create your corporate bylaws.
- Appoint an initial Board of Directors.
- Hold a primary Board of Directors meeting.
- Issue your corporate stock to your shareholders.
- Prepare for compliance with your state's annual reporting and filing.
- Complete any other tax or regulation requirements.
- Obtain an EIN from the IRS.
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