A corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the business’s assets. Thus, a corporation is liable for the business’s actions and finances, while the owners (known as shareholders) are not.
Corporation Pros
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
Corporation Cons
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLCs)
- At a minimum, corporations are required to hold an annual board of directors meeting and shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over Limited Liability Companies when a significant amount of funding is being raised from investors. However, due to the cost and complexity of a Corporation, most small businesses are better off forming an LLC.
Related: How To Form An LLC In Michigan
The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Michigan include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Steps to Forming a Corporation in Michigan
Step 1: Choose a Name
The first step in forming a Corporation in Michigan is selecting a name.
The name of the Corporation has to be different from other entity names in the state of Michigan. Check Corporation name availability in Michigan.
The name of the Corporation must include one of the following designators at the end of the business name:
- Corporation
- Company
- Incorporated
- Limited
- Or an abbreviation of one of those words – Corp., Co., Inc., or Ltd.
A comma may be used after the business name and before the designator. For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
If you want a name but are not ready to register the Corporation, you can file the Application for Reservation of Name (Form CSCL/CD-500) with the Michigan Department of Licensing and Regulatory Affairs (LARA), Bureau of Commercial Services. The name reservation will hold a name for up to 6 months.
While a Corporation has to select a unique name that another Michigan Corporation isn’t using, that doesn’t guarantee the name isn’t currently in use by someone else. Before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Resident Agent
To have a Corporation in Michigan, a Michigan Resident Agent (called a Registered Agent in many states) must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation. This can be a Michigan resident or a commercial Resident Agent service.
You can act as the Corporation’s Resident Agent in Michigan, and you are not required to pay for a Resident Agent. The requirements to be a Resident Agent are generally available during normal business hours and have a physical street address in the state. A PO Box is not allowed.
Related: Do I Need To Hire A Resident Agent In Michigan?
Step 3: File the Michigan Articles of Incorporation
Next, you can start filing the Articles of Incorporation with the Department of Licensing and Regulatory Affairs. The Articles of Incorporation can be filed on the Department of Licensing and Regulatory Affair’s website or with Form CSCL/CD-500.
The information requested includes:
- The name of the Corporation must contain the words “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation.
- The purpose of why the Corporation is being organized. In most cases, a Corporation will use the general business purpose statement, “The purpose or purposes for which the corporation is formed is to engage in any activity within the purposes for which corporations may be formed under the Business Corporation Act of Michigan.”
- Information regarding the shares of the Corporation. This section includes the series of shares (common stock is most common), the total number of shares authorized, and any details regarding the relative rights, preferences, and limitations of the shares.
- Resident Agent’s name and street address of the registered office. (PO Boxes aren’t allowed)
- Name and address of the incorporator(s). This can be one of the owners of the Corporation or someone helping with the formation of the entity.
The Michigan Articles of Incorporation can be filed online or submitted by mail. The mailing address is:
Michigan Department of Licensing and Regulatory Affairs
Corporations, Securities & Commercial Licensing Bureau
Corporations Division
P.O. Box 30054
Lansing, MI 48909
Step 4: Create Corporate Bylaws
Bylaws are the general guiding principles and procedures for the business’s operations. For example, the bylaws may include the name of the corporation’s officers, the responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors will, at minimum, elect the corporation’s officers (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
Minutes should be taken at all meetings to protect shareholders from lawsuits and court actions. The minutes record all decisions and actions taken during the meeting. Minutes aren’t filed with the state but should be stored along with other corporate documents.
Step 6: Issue Shares of Stock
The corporation can exchange shares of stock in exchange for money or services. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Articles of Incorporation.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
The EIN is free when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” meaning the Corporation does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Articles of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a Michigan Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and where it is located, various business licenses and permits will likely be needed before starting your business. Some common registrations include:
- Business Licenses – The state of Michigan doesn’t have a general business license; however, many cities require a business license to operate.
- Sales Tax License – Businesses selling products and certain services will register for a Michigan Sales Tax License with the Michigan Department of Treasury.
- Professional Licensing – Some services, such as antique dealers, bakeries, car washes, lawn services, dog groomers, and photographers, require licensing in Michigan. While this isn’t a license for the business, licensing is required in order to operate.
Related: How To Register A Business In Michigan
Step 11: File Annual Reports
Corporations are required to submit an annual report to the Michigan Department of Licensing and Regulatory Affairs by filing online or with paper form CSCL/CD-2500. The annual report is due each year on or before May 15th, beginning the year after formation.
