How to Start a Sole Proprietorship in Michigan
Starting a sole proprietorship in Michigan provides an accessible avenue for entrepreneurs to establish and operate a small business legally. You retain complete control over your business’s operations and decisions as a sole proprietor. This comprehensive guide will outline all the steps to launch a sole proprietorship in the state of Michigan. With the right preparation and planning, you can get your Michigan sole proprietorship up and running smoothly.
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What is a sole proprietorship?
Sole proprietorships are the simplest form of business entity. It is owned and operated by a single individual responsible for the business’s finances and debts. They are easy to set up and, for this reason, are popular amongst solo entrepreneurs and business owners. Unlike other business structures like limited liability companies (LLCs) or corporations, there is no legal separation between the business and the owner.
While a sole proprietorship offers simplicity and flexibility but has some drawbacks. The main disadvantage is the lack of asset protection. As a sole proprietor, your personal assets, like your car, home, and savings, are at risk if your business runs up debts or has any legal obligations.
A step-by-step guide to starting your Michigan sole proprietorship
Choose a business name
In Michigan, you can use your legal name or create an assumed name, also known as a “DBA” (doing business as) name.
If you decide to use an assumed name, choosing a name not already registered by another business in the state is important. This will help avoid trademark infringement and confusion among consumers.
Here is how you file a DBA name:
- Choose a business name: When weighing name options, set your sights on striking and descriptive choices. A name that describes your business’s unique nature can help generate a recognized brand presence.
- Check availability: Before finalizing your name and filling in your DBA paperwork, check if it is available.
There are two key resources to check:
- Visit the Michigan Department of Licensing and Regulatory Affairs (LARA) website and complete a business name search.
- Ensure no trademark issues exist with the US Patent and Trademark Office’s Electronic Search System.
- Check online availability: The digital realm’s prominence today means businesses must have a significant online stance. Look for domain names that fit your business’s identity. A domain and social media handles in line with your business title can enhance your brand image and make it easy for customers to find you.
- Register the business name: You must file an assumed name registration with the county clerk’s office where your sole proprietorship will operate. Each county may have different procedures and filing fees, so it’s important to check with your local county clerk’s office for the specific requirements.
Obtain an (Employer Identification Number) EIN
Sole proprietors without staff can use their Social Security Number (SSN) for federal tax purposes rather than registering for an Employer Identification Number (EIN).
However, there are several advantages to proactively obtaining an EIN from the Internal Revenue Service (IRS) as a sole proprietor:
- Opens up business banking opportunities: An EIN facilitates the opening dedicated business bank accounts, credit cards, and loans to keep finances separate from your funds.
- Helps establish business credit: Applying for credit under your new EIN rather than SSN allows you to build credit tied to your company’s financial profile.
- Eases hiring process: Obtaining an EIN is beneficial for adding employees in the future, as it distinguishes your business from your tax documents.
- Enhances business privacy: Your EIN replaces using your SSN on business paperwork, protecting your identity and personal information.
- Prepares for business growth: An established EIN can streamline transitions if you incorporate or change structure as your business grows.
You can apply for your EIN here.
Obtain Michigan business licenses, permits, and zoning clearances
While no state-level general business license requirement exists for sole proprietors, specific professions and activities may require licenses or permits.
- You can visit the LARA website, an exhaustive resource regarding Michigan state licenses.
- It provides an overview of licensing and permits your business may need to apply for.
- Information on professional licensing covers over 700,000 individuals regulated by either the Michigan Occupational Code or the Public Health Code.
- Information on occupational licensing which covers 14 different occupations, ranging from accountancy to barbers to surveyors.
- In addition to state requirements, you must check with your local city and county governments for any licenses or permits required at the local level.
Register for taxes
As a sole proprietor in Michigan, you are responsible for reporting all business income and expenses on your personal tax return.
Each year, when you file your Form 1040 personal income tax return, be sure to include a Schedule C to detail your sole proprietorship’s income, profits, and losses for the year and a Schedule SE.
As a self-employed sole proprietor, you owe self-employment tax contributions for Social Security and Medicare, which you can calculate and report using Schedule SE.
Access the most current versions of Form 1040, Schedule C, and Schedule SE on the IRS website.
Additional state and local taxes
- Visit the Business Tax Section of the Michigan Department of Treasury’s website. They provide detailed information and resources to help you understand and fulfill your tax requirements.
- If you sell taxable goods or services in the state of Michigan, you will likely need to register for sales and use tax with the Michigan Department of Treasury.
- Other taxes, such as withholding and motor fuel taxes, may apply depending on your business operations.
Additional steps
Completing your EIN application, federal tax registration, and securing necessary licensing checks the core boxes for establishing your sole proprietorship. With the legal basics covered, it’s wise to take extra steps to set up your new business for ongoing success.
Open business bank accounts
Keeping your business and personal finances separated is key for accurate recordkeeping and protecting your assets. Think about opening:
- Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
- Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.
Get general liability insurance
Sole proprietors carry unlimited liability for business obligations, so insurance is critical. Policies can shield against unexpected claims or events. Consider:
- General business liability insurance: Covers claims of property damage, bodily harm, or personal injury resulting from your operations.
- Professional liability insurance: For service providers, it protects against alleged negligence, errors, or omissions in delivering your services.
Maintain business records
Careful recordkeeping helps maximize tax deductions and organize your sole proprietorship’s finances. Be sure to track:
- Income
- Expenses
- Assets/liabilities
- Inventory
- Receipts
Using bookkeeping software, spreadsheets, or an organized system makes staying on top of documentation easier for tax filing and general financial health.
Sole proprietorship vs. LLC
For some businesses, forming an LLC may better serve long-term goals than a sole proprietorship. LLCs offer advantages like:
- Liability protection: Your personal and business assets are legally distinct with an LLC structure. Your business is a legal entity that files taxes separately from the business owner.
- Credibility: The formal LLC designation can boost your professional image with customers.
- Growth potential: LLCs are well-suited if you aim to expand your current operations eventually.
- Tax flexibility: LLCs permit you to select how your business income is taxed.
However, LLCs also come with tradeoffs to weigh:
- Complexity: LLCs require drafting an operating agreement and annual reporting obligations. Sole proprietorships involve less paperwork.
- Cost: Forming and maintaining an LLC has higher upfront fees and ongoing costs.
Tips:
- Consult a tax advisor to determine the ideal structure for your goals.
- Compare liability protection needs against the desire for simplicity.
FAQs
Do I need to register my sole proprietorship with the state of Michigan?
No, there is no formal registration requirement to start a sole proprietorship in Michigan. You may need to register an assumed name with the county clerk’s office if you operate under a business name other than your own name.
Can I hire employees?
As a sole proprietor, you can hire employees for your business. In such cases, you must obtain an EIN from the IRS.
How do I report my business income?
You will report your business income and expenses on your tax return using Schedule C.
What is the cost of starting a sole proprietorship in Michigan?
The cost of starting a sole proprietorship in Michigan varies depending on factors such as licenses and permits required for your specific business activities.
Can I convert my sole proprietorship into an LLC later?
Yes, if you decide to change your business from a sole proprietorship to an LLC, you can do so by filing the necessary paperwork with the state of Michigan.
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