Starting a new business is a thrilling experience, but one (of many) decisions to make before printing business cards is choosing the kind of business structure to operate under. This decision influences various aspects of your business, from daily operations to how you report your taxes. Despite many business structures available, like general partnerships, corporations, and LLCs, many choose to start with a sole proprietorship.

In Michigan, sole proprietorships make up a significant portion of the business landscape. Out of 913,435 small businesses in the state, 635,733 are sole proprietorships, accounting for 69.6% of the total. This dominance in the business structure indicates a strong preference among Michigan entrepreneurs for the simplicity and direct control offered by sole proprietorships.

In this guide, you’ll learn what a sole proprietorship is, its benefits and drawbacks, and a step-by-step process on how to get registered in Michigan. By the end, you should have a better understanding of whether this business structure is the right fit for you.

Related: How to start a business in Michigan

What is a sole proprietorship?

A sole proprietorship is the simplest and most common business structure. It is owned and operated by one person, and there is no legal separation between the business and the owner. The owner has complete control over the business operations and is entitled to all profits. However, they also take on all the risks and debts.

Sole Proprietorship Advantages

Several advantages make sole proprietorship a popular choice. Here are three main benefits:

• Lowest startup costs: Compared to other business structures, a sole proprietorship requires minimal upfront expenses. There are no filing fees to start a sole proprietorship in Michigan (with the possible exception of registering a business name), making it a cost-effective choice.
• Simplicity and ease of formation: With a sole proprietorship, you can begin your business without the hassle of much paperwork or procedures.
• Control: As a sole proprietor, you have the authority and independence to make decisions for your business. The control lies entirely in your hands.

Sole Proprietorship Disadvantages

While sole proprietorships come with their set of benefits, understanding the downsides is equally important for an informed decision.

• Unlimited personal liability: The biggest disadvantage is that there is no legal separation between you and your business. This means personal assets could be at risk if your business faces debt or legal issues.
• Difficulty raising capital: In a sole proprietorship, raising funds can be challenging as you cannot sell company shares.
• Less business continuity: When a sole owner can no longer manage the business or passes away, the business ends, making it less enduring compared to other structures.

While sole proprietorships offer simplicity and control, they come with certain risks, especially regarding personal liability. If liability protection is a priority, forming a Limited Liability Company might be a better choice. An LLC offers the benefit of limited liability without the complexity of a corporation, making it a popular choice for many entrepreneurs in Michigan.

Related: How to form a Michigan LLC

Steps to Start a Sole Proprietorship in Michigan

In Michigan, setting up a sole proprietorship is straightforward as it doesn’t require formal registration with the state. However, to ensure your business is legally established, there are a few important steps to follow. Let’s walk through each of these steps to get your Michigan sole proprietorship up and running correctly.

Step 1: Choose a Business Name

As a sole proprietor in Michigan, the owner can operate their business under either their full first, and last name. However, if you opt for a unique business name, it requires registration. For example, Jane Smith could operate her bakery simply as “Jane Smith”. Or she may prefer to register a unique name, such as “Blueberry Hill Bakes.” In this case, she would need to register this name.

Step 2: Verify Name Availability

To ensure your chosen business name, like “Blueberry Hill Bakes,” is unique and not already in use in Michigan, start by checking the Michigan Department of Licensing and Regulatory Affairs website. This online search will show if the name is available. Additionally, you should check with the County Clerk’s office in the counties where you plan to operate. Some counties offer online searches, while others may require a manual search.

Step 3: File the Form

If you’re setting up under a specific business name, you need to get a “Certificate of Persons Conducting Business Under Assumed Name” for each county where your business will operate. This form is available on many County Clerks’ websites or can be picked up at the Clerk’s office.

It’s important to understand that registering an assumed name in Michigan doesn’t stop others from using the same name. For stronger legal rights to the name, the owner can apply to trademark it.

Step 4: Research Business License Requirements

Regardless of the business structure, certain licenses and permits are required to operate a business legally in Michigan. These licenses vary based on the nature of your business and its location, but some common ones include:

• Local business license: While there isn’t a statewide business license requirement, local licenses may be necessary. Check with city officials or the economic development office in your area.
• Michigan sales tax license: For businesses selling tangible personal property, certain contractors, and some services, a Michigan Sales Tax License (or Sales Tax Permit) is required. You can register for this through the Michigan Department of Treasury.
• Professional license: Several professions in Michigan are regulated and require registration before offering specific services. Examples include garbage haulers, dance studios, pet shops, etc.
• Employer Identification Number (EIN): While typically not required for sole proprietorships, an EIN is needed if you plan to hire employees. Additionally, some banks may require an EIN to open a business bank account. Otherwise, you can use your Social Security Number for business purposes.

Related: What business licenses are needed in Michigan?

Wrapping Up

To close it all off, we’ve marched through the integral know-hows of setting up a sole proprietorship in Michigan. Starting a small business is a big deal. And having this knowledge at your fingertips is an advantage.

We’d love to hear about your choice and why you’re leaning towards a particular business structure. Share your thoughts in the comments below. If you have any questions or need further clarification, don’t hesitate to ask.