Forming A Michigan Corporation Versus Limited Liability Company

Choosing the proper legal entity for your new business is a tricky decision. If you're deciding between forming a corporation or an LLC in Michigan, knowing three factors you DON'T have to consider can save you time, money and stress while making your decision.

Tip #1: Ignore the Costs

People sometimes wonder about the cost and work required to incorporate a small business in Michigan versus the cost and work required to form a limited liability company. But incorporation costs don't materially differ from LLC formation costs.

In Michigan, entrepreneurs typically pay $60 to set up a small corporation (one with less than 60,000 shares). And the cost to form a limited liability company runs $50.

Note: If you're incorporating in Michigan and your corporation will authorize more than 60,000 shares of stock for issuance, the fee you pay goes up. Most small corporations, however, don't need worry about this. A small corporation might only need to issue 100 or 1000 or (at most) 10,000 shares.

In summary, then, no significant difference in setup cost exists for the small, owner-operated corporation or LLC. You don't pick one of these two choices over the other because of cost.

Tip #2: Ignore Processing Lead Times

Typically, the state agency that handles the filing of articles of incorporation or LLC organization processes the new corporation or new LLC paperwork in about the same amount of time.

Historically, Michigan requires 2 to 3 days to process your incorporation paperwork. More recently, however, the state has offered entrepreneurs options for faster filings and processing.

For example, an entrepreneur currently receives 24-hour incorporation service by remitting an additional $100 expedited processing fee.

And if an entrepreneur is in a terrible hurry, the state also offers near-instantaneous formation options. Paying an extra $500 gets a new business same-day, two-hour turn-around times (as long as the paperwork is presented by 3 p.m.). And paying an extra $1,000 gets a new business same-day, one-hour turn-around times (as long as the request is made by 4 p.m.).

To summarize, both a corporation and an LLC take about the same time to form. And you don't pick one option over the other because of a need for a speedy formation.

Tip #3: Assume Equivalent Liability Limitation

One other item you can pretty much ignore--at least when it comes to Michigan corporations and limited liability companies--is the liability protection you get with the entities. Both LLCs and corporations should equally minimize your legal liability. For both types of Michigan entities, the business owner isn't liable for the debts or obligations of the entity because of ownership of the entity.

In the state of Michigan (and other states as well), sole proprietors and the partners do bear liability for the entity merely because of the ownership connection.

Note: Some attorneys will tell you that an LLC may actually offer better liability protection than a corporation. The reasoning for these comments goes like this: Because an LLC is easier to govern and operate, the owners are less likely to make mistakes that cause the LLC's liability protection to break.

Conclusion

To sum up the LLC vs. corporation discussion provided by this short article: you don't need to worry about costs, processing times and liability protection differences if you're trying to decide between a Michigan corporation and a Michigan limited liability company. Good reasons exist for choosing one entity over the other--but cost, processing time and liability protection aren't among them.

And a final tip, which is really beyond the scope of this short article. As you continue your research about which entity to choose for a new business, look next at the differences between the federal and state tax accounting rules for corporations and LLCs. (The tax accounting differences can be very significant.) Furthermore, look into the differences in the ways the two entities are governed--that's another big difference that will be important to some entrepreneurs.