Chapt 3 Starting a Business in Michigan Legal Issues for Businesses

Crucial Legal Issues

• Businesses face various legal issues, including choosing the right entity, complying with laws, and performing tax withholdings
• As a business owner, ensure your structure allows efficient, profitable operation while protecting owners/investors from liability
• Determine if the business has necessary permits/licenses
• Ensure compliance with state/federal regulations, protecting intellectual property, and appropriate insurance coverage
• Ensure adherence to Michigan and federal employment laws

Finding Legal Advice

• Guides provide basic state/federal business law information but should not be considered legal advice
• Consult an experienced attorney for specific legal compliance questions
• A certified public accountant (CPA) can help with legal structure, financial strategies, and IRS compliance

Legal Structure

• Choices can be sole proprietorship, partnership, corporation, or LLC
• Before choosing consider business type, and relationships with investors, partners, and key team members
• Major factors include: potential risks and liabilities, income taxes and investment needs, and the formalities/expenses of each structure
• It is recommended to consult with a business attorney and tax professional before registering your business

Sole Proprietorship (DBA)

• It is a business structure with one owner
• Most small businesses are sole proprietorships because it is easy to set up and maintain
• The business will default to sole proprietorship if no formal structure is chosen
• The only paperwork to file is additional schedules on personal income tax returns
• To operate under a name other than your own, you must file for a DBA certificate with the county clerk
• A DBA certificate only applies to the county where registered, not the entire state
• There is no legal separation between the business and the owner
• The Owner has responsibility for the liabilities and debts
• Profits are taxed at the owner's income tax rate
• Ownership is limited to one person

Partnerships

• Two types exist: general and limited
• A general partnership is similar to a sole proprietorship but with multiple owners
• A general partnership is easy to set up and maintain
• Do not need to register with the state unless operating under a business name other than that of the partners
• Limited partnerships have one or more general partners and one or more limited partners
• General partners are 100% liable for the business' debts and control/operate the business
• Limited partners do not participate in daily operations, and liability is limited to their contribution or investment
• To form a limited partnership in Michigan, a certificate of limited partnership must be filed with LARA
• It is highly recommended that all partners create an operating agreement to address roles, responsibilities, and contingencies
• Have the operating agreement when seeking financing
• In general partnerships, owners have unlimited liability for the business' debts, even with shared profits
• Shared profits are only taxed once
• Can have more than one individual
• General partners can only sell or transfer their interest in the business with consent of all partners
• General partnerships may have unlimited personal liability for business debts and are legally responsible business acts

Corporations

• A separate legal entity with its own rights, privileges, and liabilities separate from its owners
• Owners, called shareholders, are not personally responsible for the business's debts unless they personally guarantee them
• It can be 100% owned by one person, but usually has more than one shareholder
• There are three layers; Shareholders who elect a board of directors, The Board of Directors who oversee major policies, Officers who run the company on a day-to-day basis
• Shareholder rights/obligations are generally set by Michigan law; director and officer rights/obligations via the corporation's bylaws
• Corporations can be more expensive and complex to establish due to the three-tiered structure and legal formalities
• Corporations are created by filing Articles of Incorporation with LARA, subject to an annual fee to maintain existence

C and Subchapter S Corporations

• The IRS characterizes corporations as C corporations by default
• C corporations pay taxes at corporate tax rates on earnings
• C corporations distribute earnings to shareholders as dividends, taxed at the shareholder level
• Corporate earnings face "double taxation:" at the corporate level and shareholder level
• Qualified small corporations and LLCs can be treated as Subchapter S corporations
• Subchapter S entities do not pay taxes on earnings; income passes to individual shareholders/members and is reported on tax returns, eliminating "double taxation"
• Subchapter S status requires businesses to meet requirements, including having 100 or fewer shareholders/members
• Corporations are easier to raise capital through sale of stock
• Shareholders have limited liability for business debts and only risk their investment
• Ownership is readily transferable
• Can elect Subchapter S status with the IRS
• Corporations are more expensive to set up and maintain than other entity types
• Corporate formalities are complex but must be strictly followed to maintain status and shareholder limited liability
• They are closely regulated by both federal and state governments
• Subject to double taxation if not eligible or failing to elect Subchapter S status with the IRS

Limited Liability Company (LLC)

• An LLC combines advantages from both partnerships and corporations
• LLC members (business owners) have limited liability protection like corporate shareholders, but gain simpler operation and pass-through tax characteristics of a partnership
• In Michigan, LLCs need to file Articles of Organization with LARA, with an annual fee to maintain existence
• Members create and enter an operating agreement
• That details hierarchy, assigns duties, contributions, calculates profits/losses, limits liability and membership changes
• LLCs have limited liability for business debts and claims
• Flexible tax options
• Easier to establish and maintain than a corporation
• Start-up requirements more complex when compared to partnerships/sole proprietorships

Low-Profit Limited Liability Company (L3C)

• A relatively new business entity that can be formed as new or by converting existing
• Michigan is one of a few states that allow this hybrid entity
• An L3C is a for-profit company with a charitable mission and simplified compliance guidelines
• Must significantly further one or more charitable purposes
• The production of income and property appreciation cannot be a significant purpose of the L3C
• Cannot pursue any political or legislative purposes
• Articles of Organization must be filed with LARA with: “low-profit limited liability company" or the abbreviation “L.3.C.” or “l.3.c.” in the name of the new entity

Professional Service Corporation (PC) or Professional Limited Liability Company (PLC)

• A professional service corporation (PC) is a corporation that practices certain licensed or “learned professions," such as law, medicine or architecture
• A professional limited liability company (PLC) is an LLC formed for the same purpose
• All shareholders or members of a professional entity must be licensed professionals

Registering a Business Name

• A business name is registered in Michigan when the business legal entity is formed
• While you can use your personal name as your business' name, many businesses opt to use a different or assumed name
• If you choose an assumed name, pick a name that is not already being used by another business
• It is suggested to run online searches to determine that the name is not already in use or registered at: U.S. Patent and Trademark Office (uspto.gov) and the Michigan Corporations Name Availability Search
• Select and register your business name depend on your business’ structure
• A sole proprietorship or partnership using the names of the owners does not have to register their business name
• A DBA is required if the sole proprietorship or partnership is assuming a different name
• Corporations and PCs register a name when filing Articles of Incorporation
• LLCs, L3Cs and PLCs register a name when filing Articles of Organization
• Conduct a thorough entity search before filing paperwork
• For corporations or LLCs, this form of DBA is not the same as one filed with the county. A corporation, PC, LLC, PLC, or L3C must file a Certificate of Assumed Name for each name used

Protecting Intellectual Property

• Patents are issued for inventions by the United States Patent and Trademark Office
• A patent grants property rights to the inventor
• The right is to exclude others from making, using, offering for sale or selling the invention in the United States or importing the invention into the United States for a period of time, typically 20 years
• Obtaining a patent is a complicated and highly technical process

Trademarks

• A word, phrase, symbol, design, or combination of words, phrases, symbols or designs that identifies and distinguishes one party’s goods from those of others
• A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product
• Registration notifies the public of your claim of ownership and establishes a legal presumption that you have the exclusive right to use the registered mark
• The symbol should be used only in connection with registered marks
• Registration of a mark used in Michigan gives the owner of the mark certain limited legal protections
• The trademark symbol provides notice of a claim of rights to an unregistered trademark but does not guarantee protection under trademark laws

Copyrights

• A copyright gives its owner property rights and prevents others from reproducing certain works, such as books, musical compositions, technical drawings or computer programs
• Copyright notice is the symbol or "Copyright,” followed by the year of the work’s first publication and the name of the copyright holder

Licenses, Permits and Business Regulations

• A business may need a specific certification, license or permit to operate
• There is no generic Michigan business license
• If unsure if a business will require a license, can access the State License Search site or check with county, city, village or township clerk for local permits
• The Michigan Department of Environment, Great Lakes and Energy (EGLE) issues permits, licenses and other authorizations when a business' activities impact the environment or generate air emissions and solid or liquid waste

Navigating Michigan’s Business Regulations

• Small Business regulations are becoming increasingly difficult to address
• The Environmental Assistance Center provides free information
• "The Michigan Guide to Environmental, Health and Safety Regulations" guide is a reference that provides an overview of regulatory programs
• EGLE has a simple checklist to help determine if business requires any type of environmental permit

Baseline Environmental Assessment (BEA)

• Allows people to purchase or begin operating at a facility without being held liable for existing or previous contamination

EPA's Brownfields Program

• Brownfields are properties that contain hazardous substances or contaminants
• The EPA’s Brownfields Program gives grants for environmental assessment, cleanup, and job training
• Regulation adherences can be burdensome but non Compliance costs include fines, penalties and even business closure

Zoning, Building Codes, and Ordinances

• Startups and expanding businesses must comply with local laws and regulations, including zoning and building codes
• Contact the city assessor and city, township or village clerk about applicable rules and a local building inspector about codes and regulations before any construction project
• A home-based business is subject with local government if any special permits apply

Accessibility Considerations

• Part of Michigan’s building code and federal law ensures that public facilities are accessible to and usable by all citizens

Business Taxes and Withholding

• Consult with a professional on all business tax matters, as the rules can be complicated and subject to change
• An Employer Identification Number (EIN) identifies a business for federal and state tax purposes
• If the sole owner of business changes cant use the EIN
• EIN need to be included on any return, statement or other official financial document if you exist as the employer
• An owner is an employee of a corporation and subject to all payroll and employment taxes
• Partnerships are liable to filing a partnership return in addition to the personal income tax return; the partnership return distributes profits and losses between partners
• Most businesses are required to make estimated tax payments every quarter for Michigan income tax, federal income tax and self-employment tax

Sales and Use Taxes

• Anyone who engages in retail sales of tangible personal property from a Michigan location needs a sales tax license
• Michigan sales tax is 6% of sales receipts and local governments cannot levy sales tax
• Out-of-state seller needs to register for use tax, which is also 6%
• For this you can enroll online with MTO

Corporate Income Tax (CIT)

• Its based on business income and apples to C corps
• Taxpayers with less than $350,000 in gross receipts are not required to file a Michigan business return or tax
• Motor fuel taxes levied on state taxes. Contact local authorities for property tax rate

Michigan Treasury Online (MTO)

Lets registered businesses access, view, and make changes to their information online 24/7 on the Michigan Treasury Online website

Business Insurance

• Types to investigate are as follows
• Liability insurance is a potential liability faced by your business, need to perform an analysis on needs
• Property insurance ensure you what repair and rebuild is needed
• Workers compensation insures employee injuries
• Business interruption includes funds to help expenses when business is not operational
• Officers and director
• Automobiles
• Home office

Selling to the Government

• Government requires special legal considerations and buyers a lot of small business by proactively marketing contracts and contracts usually require that a business has been operational for at least two years,
• Michigan Economic Development Corporation (MEDC) provides support to a network that helps with information process and contract to finish
• PTACs of Michigan is the arm that helps other business