Start an S Corporation in Michigan
Form an S Corp in Michigan in 7 steps to avoid double taxation on corporate income. File your business online and elect an S Corp status at the same time.
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Swyft Filings is committed to providing accurate, reliable information to help you make informed decisions for your business. That's why our content is written and edited by professional editors, writers, and subject matter experts. Learn more about how Swyft Filings works, our editorial team and standards, what our customers think of us, and more on our trust page.
Would your Michigan small business do well as an S corp? The move could lower your taxes—but it does require you to stay on top of staying compliant. In this article, we’ll review the pros and cons of S corp status for Michigan corporations and LLCs. Then we’ll show you how to elect S corp status with the IRS.
S Corporation in Michigan: Key Takeaways
An S corporation is often referred to as a business structure. But S corp status is actually a tax classification.
Luckily for business owners, Michigan only has a franchise tax for banks and other financial institutions.[5] S corporations won’t have to worry about franchise tax in the state of Michigan.
For C Corporations, S corp status allows Michigan corporations to avoid corporate income tax.[1] Instead, shareholders claim the company’s profit or loss on their personal tax returns, similar to an LLC.
Unlock tax savings and ensure compliance with critical regulations with our assistance.
What Is an S Corporation?
An S corporation is often referred to as a business structure. But S corp status is actually a tax classification. Your Michigan corporation — either a limited liability company (LLC) or a C Corporation — can choose to be taxed as an S corporation, provided it meets the requirements of S corporations.
• What is an S Corp? |
• An S corporation is a company (LLC or C corp) that chooses the S corp tax status with the IRS. To become an S corp you need to file Form 2553 to the Internal Revenue Service (IRS). The business entity needs to meet specific requirements in order to qualify for S corp status. |
We’ll cover the business entity requirements to qualify for S corp tax status in more detail later in this article.
The filing process for S corp status with the IRS is known as an S corp election because businesses “elect” to be taxed as an S corp.
Tax Considerations for an S Corporation in Michigan
You would choose S corp status for your Michigan business mainly for federal tax purposes. These tax advantages look different for LLCs versus C corporations. Here’s a quick overview:
For C Corporations, S corp status allows Michigan corporations to avoid corporate income tax.[1] Instead, shareholders claim the company’s profit or loss on their personal tax returns, similar to an LLC.
There may be drawbacks: you can only have 100 shareholders or fewer to stay an S corp, and those shareholders must all be U.S. citizens. This limits your potential growth, investors, and partnerships down the road.
Shareholders will also have to be paid wages for the work they do on behalf of the company.[2] This creates a higher payroll and tax burden and may offset some of the tax benefits.
For LLCs, S corp status might help reduce your self-employment tax burden, especially if you’re making more money than your peers. After paying themselves a “reasonable salary,” members of LLCs with S corp status don’t have to pay self-employment taxes (Medicare and social security) on distributions that exceed that reasonable salary.[3]
It may not always be worth the effort. An S corp is more expensive to maintain than a limited liability company and requires more effort to administer. Your LLC will have to be unusually profitable for your dividends to surpass the “reasonable salary” of business owners in your sector.
Michigan Tax Treatment of S Corporations
Michigan S corporations are not subject to the Michigan Corporate Income Tax. Instead, shareholders claim the S corporation’s business income or losses on their personal income tax returns. This allows a qualifying C corporation to access the same tax treatment as an LLC.
For tax purposes, the state of Michigan considers S corps to be “flow-through entities.”[4] Michigan has an opt-in Flow-Through Entity Tax (FTE Tax) designed to help S corp shareholders maximize their tax deductions. A tax professional or attorney can advise you on this option when filing your tax returns.
If you’re a shareholder in a Michigan S corporation, here are some quick notes on your tax treatment:
• If you do work for your S corp: | • If you don’t do work for your S corp: |
• Your income will go through payroll as wages for your services to the S corporation, until your pay reaches “reasonable compensation” for the work you’ve done. After that, your dividends will not be subject to self-employment tax. | • Your compensation will “pass through” the business entity and you’ll pay self-employment tax on your distributions, but your dividends won’t be “double taxed” as with a corporation. |
Business taxes applicable to your company in the state of Michigan apply as usual.
Michigan Franchise Tax for S Corporations
Luckily for business owners, Michigan only has a franchise tax for banks and other financial institutions.[5] S corporations won’t have to worry about franchise tax in the state of Michigan.
Pass-Through Taxation
“Pass-through” taxation is the key advantage of S corp tax status for C corporations. When S corps pay federal income tax, their profits and losses “pass-through” the business entity and are instead the responsibility of shareholders. In place of a business tax on corporate income, shareholders pay self-employment tax on their non-wage distributions.
This is a massive improvement over standard corporate taxation. By contrast, shareholders in C corporations are subject to “double taxation.” First, the C corporation pays corporate taxes; then, shareholders pay personal income tax on their distributions.
Avoiding double taxation can provide a considerable tax advantage for S corporations and is the primary reason a company will elect S corp status.
Requirements for Forming an S Corporation in Michigan
S corp status is not available to all businesses. To begin with, you’ll have to be a limited liability company (LLC) or C corporation. Sole proprietorships and partnerships can’t file for S corp status.
Beyond that, C corps and LLCs have to meet the following qualifications to become Michigan S corporations:[6]
S corporations must be located in the United States (in this case, Michigan).
Corporations, partnerships, or non-resident aliens cannot be S corporation shareholders.
S corporations can have up to 100 shareholders.
S corporations cannot issue more than one class of stock.
If your business is in the financial sector (such as a bank or insurance provider), it may be ineligible for S corp status. Talk to an attorney if you’re unsure about this.
These limitations should help inform your decision of whether or not to become an S corp.
Swyft Filings can help you navigate these requirements to get things done right the first time. Whether starting an S corp from scratch or filing an S corp election for your current business, our online filing service will make your S corp formation quick and painless.
Filing as an S Corp in Michigan
Here are the steps to start your S corporation in Michigan.
By the way: If you already have a C corporation or LLC in Michigan, you don’t have to start a new business—you just need to file Form 2553 to the Internal Revenue Service (IRS) for S corp status. That’s explained in Step 6.
Step 1: Choose a Business Name
Your Michigan S corp needs a unique business name. Search the Michigan database from the state corporations division or use Swyft Filing’s free name search to see if your preferred business name is available.
Your S corp name needs to follow these guidelines:
It can’t contain words that indicate that it does any type of business other than its stated purpose.
It must contain one of the following corporate identifiers or abbreviations: corporation, company, incorporated, limited, corp., co., inc., ltd. (Periods are optional).[7]
It can’t use or misuse restricted and prohibited words. Refer to this list from the state of Michigan.
Are They Different Enough?
To tell if your preferred business name is “distinguishable” from other Michigan corporations, limited liability companies, and limited partnerships, follow these rules:[8] |
Your business name has to have “a different sequence of letters or numbers from all active names,” according to the state of Michigan. |
A different business designation or abbreviation doesn’t make two names different. Same goes for punctuation. |
If two words sound the same but are spelled differently, that’s okay. For example, “American Greats” and “American Grates” are different enough to be approved. |
When you find the name you want, you can reserve it for just $10 when you file an application for reservation of name. The reservation is good for six months, and it’s renewable.
As you’re deciding the business name for your S corporation in Michigan, keep these additional critical business factors in mind:
Find out if a domain for your business is available. In the 21st century, every business needs a website. You’ll want to know that customers and partners can find your business name on the web. Name.com is a free and effective domain search engine.
Consider trademarking your business name or other aspects of your business. When you create an original business process or tagline, it’s not proprietary unless you trademark it. Shield yourself from copycats right away by looking into trademarks.
If you want to use multiple names, get an assumed name (DBA). A “doing business as” or certificate of assumed name allows you to do business under various names. Swyft Filings can take care of this for you easily.
Step 2: Appoint Directors and a Registered Agent
Who’s going to run the show? Your Michigan S corporation shareholders need a board of directors. All members must be eighteen years of age or over. You need at least one director to get the company started. The company’s shareholders appoint or hire the S corp directors to oversee the business. They may be the S corporation shareholders themselves.
Starting an LLC for Your Michigan S Corp? |
If you’re going to start an LLC (limited liability company) with the intention of making it into an S corp, you won’t need to appoint directors. Instead of shareholders, directors, and bylaws, LLCs are governed by members through an operating agreement. State fees in Michigan can be slightly higher for LLCs than for corporations. Learn more about starting an LLC in Michigan at this link. |
You’ll also need a registered agent (“resident agents” in Michigan) with an address in Michigan that can receive legal correspondence on behalf of your company. Your Michigan registered agent should not be an afterthought. If anyone ever sues your business or government agencies need to get in touch with you, your resident agent will need to be reliable and professional.
While Swyft Filings does the paperwork for your Michigan S corporation, don’t go hunting for a random registered agent—our own registered agent service has served thousands of businesses like yours. You’ll hear from us when you need to—and when you don’t, we’ll have your important documents stored securely online for instant, easy access.
Step 3: File Articles of Incorporation
The Articles of Incorporation make your Michigan corporation official with the state Department of Licensing and regulatory affairs. You’ll need the following information to complete the document:
Your Michigan C corporation’s business name
The purpose of the business (this can be a boilerplate statement provided by the state)
The number of authorized shares (common shares and preferred shares)—remember, to file form 2553 successfully, the corporation must have fewer than 100 shareholders and only one class of stock
Your resident agent’s name, office location, and mailing address (if different)
Names and addresses of the business incorporators (these can be directors, shareholders, or none of these)
If you’re starting an LLC to convert to an S corp, you’ll file Articles of Organization, not Articles of Incorporation.
File online at the state corporations division website. The filing fee for Michigan Articles of Incorporation is $10 plus an additional fee depending on the number of shares you’re issuing (the first 60,000 shares cost you $50).
Once you’re an official Michigan small business, you won’t owe franchise tax to the state—but you will need to file an annual report (with a $25 filing fee) on or before May 15 of the following year.[9]
Step 4: Create S Corp Bylaws
If your Articles of Incorporation establish your company’s executive branch, who will serve in primary leadership roles, the bylaws are its legislation. This is a document signed by your C corporation’s shareholders detailing:
Who is responsible for the business, and how?
How is ownership distributed?
How will decisions be made? Directors recruited? Officers hired?
What if the business needs to close? How will that be decided and carried out?
How will everyone be compensated?
Bylaws answer fundamental questions about your business. This is a complex and vital process, so get Swyft Filings on board to help create your bylaws and adopt a sound structure for your business.
Step 5: Apply for an Employer Identification Number
Your Employer Identification Number (EIN) is imperative for the functioning of your business. The IRS issues every business a unique EIN, similar to a social security number. It’s also known as a Federal Tax ID.
Without an EIN, you cannot open a business bank account, apply for a credit card, hire employees, pay state or federal employment taxes or income taxes, or register for licenses and permits you likely need to do business.
Step 6: File Form 2553 for S Corporation Election
Now it’s time to turn your business entity into an S corporation. IRS Form 2553 is the S corporation election form you must file to get S corp status.
Some quick notes about timing:
If you’re filing for S corp status for the coming tax year, you can file Form 2553 anytime in the year.
If you’re filing for S corp status for the current year, you have until two and a half months into your tax year.[10]
You’ll need to adopt an approved tax year to have your S corp status go through. (A natural business year, a tax year ending on December 31, and several others are fine).
• Note For LLCs: |
• If your LLC files Form 2553 on time, you’re all set. But if you miss the deadline and want to file for your current tax year, you’ll need to fill out IRS Form 8832 at the same time that you file Form 2553. Swyft Filings can help take the process off your hands. |
You don’t want to have to file this form multiple times. For guidance and assurance that you’ll get this right—and in as little as ten minutes—let Swyft Filings take care of your S corporation election for you.
Michigan S Corp vs. Michigan LLC
If you’ve researched business structures, you’ll know that LLCs have pass-through tax status. So what would be the point of filing an S corporation election for your Michigan LLC? Here are some factors to consider.
Advantages of Starting an LLC in Michigan
A limited liability company (LLC) is simple to manage and maintain, with limited oversight, filing requirements, and state fees. Members can easily develop an operating agreement and manage the business as they please. For tax purposes, LLCs meet the needs of most small business owners because they allow them to avoid corporate tax.
Disadvantages of Starting an LLC in Michigan
LLCs can be complicated to transfer from one set of members to another. With C or S corporations, it’s easier to change ownership in complex ways because shares are simpler to exchange than members. In addition, LLCs have limits on how they can raise capital and can’t go public.
The Michigan LLC tax treatment is often a plus but can disadvantage some businesses. All income from your LLC is subject to self-employment tax. If your profits exceed the “reasonable compensation” you would earn in your work for your LLC, then S corp status might help you reduce your self-employment tax liability.
Advantages of forming an S Corporation in Michigan
S corps have one crucial advantage that LLCs don’t. Their shareholders can pay themselves a “reasonable” salary and then take distributions free from self-employment tax.
For example, let’s say a reasonable salary for the work you do is about $70,000. If you are netting $100,000 every year and not putting that profit back into the business, you could set your salary at $70,000 and take $30,000 in distributions without paying a 15.3% self-employment tax on those distributions. That could save you about $4,600 every tax year.
Disadvantages of forming an S Corporation in Michigan
S corps require more onerous paperwork and more expensive filing/state fees to maintain. They also fall under more scrutiny by the IRS. Additionally, if you work for your company, you’ll need to be compensated in wages, which means if you’re not already doing payroll for your small business, it may be a pain to set up.
There are many situations where the effort of an S corporation election and maintaining S corp status don’t work for a Michigan LLC. Their profits and administrative capacity must be high; otherwise, it’s not worthwhile.
There are also S corp limitations on shareholders. If you have non-U.S. citizens, other businesses, or other partnerships as members of your LLC, you won’t be able to form an S corp. This can be a dealbreaker for potential partnerships and investors down the road.
Ready to File for S Corp Status in Michigan?
S corp status is supposed to save you money. But if it takes hours to get the paperwork right, or heaven forbid you get rejected the first time and have to file again or miss a deadline, that’s savings down the drain and opportunities missed.
This is why a formation service like Swyft Filings is so powerful: while we file your S corporation in Michigan, you can focus on anything a business owner needs to do.
Successful small business leaders know how to delegate. Make the wise move and let our experienced team handle your S corp formation at an affordable rate. Your time is too valuable not to.
Maximize Tax Benefits: Experience pass-through taxation with Michigan S corp status and avoid double taxation.
Access a One-Stop Solution: Establish an LLC or C corporation easily and then transition to S corp status, all within our platform.
Stay Compliant: Our compliance alerts help keep you up-to-date on all the complex compliance requirements of an S corp so you can stay on the government’s good side.
FAQs
What is an S Corporation in Michigan?
An S corporation is an LLC or C corporation that has elected the S corporation tax status with the IRS. This tax status allows for “pass-through” taxation and confers potential tax advantages for shareholders in some companies.
Does Michigan recognize S corporations?
Yes.
What is the turnaround time for filing for S corp status with the IRS?
It takes about 60 days to file for S corp status if all goes to plan. A formation service can ensure you’ve done everything possible to make the process go smoothly.
What is the difference between an S corp and an LLC?
LLCs can elect to be taxed as S corps. S corp shareholders who work for the company get compensated in wages and can save money on self-employment tax. S corps also require more costly paperwork and administration than a Michigan LLC.
What are the requirements for an S corporation in Michigan?
To receive S corp status from the IRS, S corporations must file their Articles of Incorporation with the state of Michigan if they’re not already a business and then file Form 2553 to the IRS.
Are taxes for LLCs and S corps the same?
LLCs and S corps both benefit from pass-through taxation and don’t pay corporate taxes. However, their tax treatments have essential differences. S corporations pay wages to their shareholders, while LLC members take all of their compensation as self-employment income.
What is the S corp tax rate?
S corps do not pay corporate taxes. Their shareholders are subject to their individual income tax rates as individual taxpayers.
How do I dissolve an S corporation in Michigan?
Your S corporation bylaws should include provisions on how to dissolve your S corporation. You’ll have to file a simple dissolution form to the state of Michigan with a $10 filing fee.
Bibliography:
Michigan Department of Treasury. “Filing requirements 23. Is an S corporation subject to the CIT?” Accessed February 6, 2023.
Internal Revenue Service. “2022 Instructions for Form 1120-S.” Accessed February 6, 2023.
Internal Revenue Service. “S Corporation Compensation and Medical Insurance Issues.” Accessed February 7, 2023.
Michigan Department of Treasury. “Flow-Through Entity Frequently Asked Questions (FAQ).” Accessed February 6, 2023.
Michigan Department of Treasury. “The Tax.” Accessed February 7, 2023.
Internal Revenue Service. “S Corporations.” Accessed February 7, 2023.
Michigan Legislature. “Section 450.1211.” Accessed February 7, 2023.
State of Michigan Corporations Division. “Choosing a Business Name.” Accessed February 7, 2023.
Michigan Department of Regulatory Affairs. “Michigan Profit Corporation Filing Information.” Accessed November 7, 2023.
Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed February 8, 2023.
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