Michigan boasts freshwater beaches, outdoor activities, and small-town charm. While starting a business in Michigan may seem both exciting and overwhelming, you can benefit from the state’s low taxes, affordable cost of living, access to a dedicated workforce, and supportive business community.
Choosing to form your business as an S corporation (S corp) can save you a significant amount of money in taxes, which you can then reinvest into growing your business. This guide will walk you through the process of forming your Michigan S corp and provide tips to help you keep it in good standing year after year.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Michigan
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Michigan S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Michigan S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Michigan
Starting a Michigan LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to do it for you.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Michigan.
Be sure to choose a name that complies with Michigan naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Michigan LLC:
Your name must include the phrase “limited liability company,” or one of its abbreviations (LLC, L.L.C., LC, or L.C.).
Your name cannot imply that the LLC is organized for any purpose other than the one outlined in its articles of organization.
Your name cannot contain the words "corporation" or "incorporated" or the abbreviations "corp." or "inc."
Michigan has a long list of restricted words that may require approval for your LLC to use in its name. You can see the full list on the State of Michigan website.
The name of a low-profit LLC must contain the words "low-profit limited liability company" or the abbreviation "L.3.C." or "l.3.c.,", with or without periods.
You can also read the Michigan state statute about LLC naming guidelines for more information.
2. Is the name available in Michigan? You can use the business entity search on the Michigan Department of Licensing and Regulatory Affairs website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Michigan Registered Agent
You must elect a resident agent, also known as a registered agent, for your Michigan LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Michigan LLC Articles of Organization
The Michigan Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With the Michigan Department of Licensing and Regulatory Affairs
- OR -
OPTION 2: File Form 700 by Mail or in Person
State Filing Cost: $50, payable to the Michigan Department of Licensing and Regulatory Affairs (Nonrefundable)
Michigan Department of Licensing and Regulatory Affairs
Corporations, Securities & Commercial Licensing Bureau
P.O. Box 30054
Lansing, MI 48909
Michigan Department of Licensing and Regulatory Affairs
2501 Woodlake Cir.
Okemos, MI 48864
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Michigan LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Michigan S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Michigan S Corp Compliant
After you file your business formation paperwork and elect the S corp tax designation, you’ll want to ensure you keep your business in good standing with the state of Michigan. This requires your business to remain compliant with federal, state, and local laws. In order to do that, a Michigan S corp must file an annual report and pay taxes each year.
Michigan S Corp Annual Report
Every year, your Michigan S corp will need to file an annual report with the Michigan Department of Licensing and Regulatory Affairs. The annual report you’ll file for your LLC with S corp status is the same annual report all LLCs must file with the state.
Annual reports require you to provide your business’s contact information and registered agent details in order to keep the state’s records up to date. Even if your business fails to make a profit or its contact information remains the same from one year to the next, you still must file an annual report before February 15 each year. The state of Michigan can legally dissolve your business if you fail to file an annual report.
Visit our step-by-step Michigan Annual Report guide for more information.
Michigan S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Michigan S corp owners will need to pay various taxes.
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Michigan Income Taxes
Michigan has a flat income tax rate of 4.25%, meaning the rate stays the same regardless of your income bracket. Some local jurisdictions also levy their own income tax, which you must pay on top of the state’s 4.25% rate.
While some states have income tax rates of 9% or more, others have no state income tax. Michigan’s flat rate of 4.25% may be higher than 0%, but it’s still fairly low when compared to the average state income tax rate.
Register Your Business With the Michigan Treasury
Before you begin operating your S corp, you’ll need to register your business online with the Michigan Department of Treasury. While you don’t need to pay corporate taxes as an S corp, your business must still pay state and local taxes. This registration is essential for obtaining a sales tax license and paying Michigan business taxes.
Michigan Sales and Use Tax
Michigan has a sales tax rate of 6%, and local jurisdictions don’t levy additional sales taxes. You’ll likely owe sales tax to the state if your business sells products to customers.
Additional State Taxes
The Michigan Department of Treasury provides details on other state-specific taxes your business may have to pay, depending on its industry, number of employees, and location. Some examples of these additional taxes include:
- Marihuana Retailers Excise (MRE) Tax
- International Fuel Tax
- Motor Fuel Tax
- Severance Tax
- Tobacco Tax
Visit the Michigan Department of Treasury website for more information.
Michigan Local Taxes
Local laws in Detroit differ from those in Grand Rapids. No matter where your business operates in the state of Michigan, we recommend you research how local laws, taxes, and regulations may impact your business’s daily operations.
Start a Michigan S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Is Michigan a good state in which to form an S corp?
While there’s no perfect state in which to form an S corp, you should start your business where you plan to operate. By forming an S corp in Michigan, you can benefit from the state’s supportive small business landscape while enjoying its year-round natural beauty.
What types of businesses may elect S corp status in Michigan?
Some major industries currently thriving in Michigan include agriculture, manufacturing, food and beverage, tourism, and much more. To form an S corp in Michigan, simply confirm your business meets the requirements set by the IRS because S corps can exist within most industries.