How to Start a Sole Proprietorship in Michigan

Last updated: March 8th, 2024
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Ready to start a business in Michigan? Entrepreneurs in Michigan can set up a sole proprietorship. This comprehensive guide will help you understand everything you need to know about sole proprietorships, including the advantages and risks.

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What is a sole proprietorship?

A sole proprietorship is a business entity where an individual owns and operates the business as a sole owner. Unlike other business structures, there is no legal distinction between the owner and the business itself. It is the simplest form of business entity, making it a popular choice for small businesses and startups because of its minimal regulatory requirements. 

Examples of a Michigan sole proprietorship

A lot of well-known Michigan businesses started out as sole proprietorships, which means that starting small isn’t always a bad idea. Some examples of sole proprietorships include freelance writers, consultants, independent contractors, small retail grocery or liquor stores, and professional service providers like photographers, barbers, and more. These businesses showcase the versatility of sole proprietorship in various industries.

What qualifies your business as a sole proprietorship?

If you are a sole owner of a small business and are personally responsible for all business activity and operations, you can qualify as a sole proprietor. However, one key aspect to consider as a sole proprietor is that there is no legal sepparation between your personal and business liabilities, meaning your personal assets are also at risk if your business incurs debts and other legal issues.  

Sole prop vs LLC

If you are thinking about opening a sole proprietorship, it is important to understand the key differences between a sole proprietorship and a Limited Liability Company (LLC). While a sole proprietorship offers simplicity and complete control, an LLC provides limited liability protection. In an LLC, your personal assets are generally protected from business debts and liabilities, unlike in a sole proprietorship where the owner has unlimited liability.

Who is it best for?

Sole proprietorships are particularly well-suited for individuals who desire complete control over their business, have minimal start-up capital, and operate in industries with relatively low liability risks.

How to set up a sole proprietorship in Michigan

If you think that a sole proprietorship in Michigan is the ideal business entity for your business, you can quickly set one up without formal paperwork, depending on the nature of your business. Although some businesses need minimal paperwork, and some don’t need any, you can consider following these easy steps to set up a sole proprietorship in Michigan. 

Is there any formal paperwork filed to establish this type of business?

One of the reasons why sole proprietorships are one of the most popular choices among new business owners is that there is generally no formal paperwork required to establish this type of business.

Unlike corporations or LLCs, there is no need to file formation documents with the Secretary of State in Michigan. However, depending on the type of business or industry, you may need to obtain some licenses and permits if you want to operate legally.

Naming your business

As a sole proprietor, you have the option to name your business or continue using your personal legal name for your business to avoid registering for a trade name or DBA. However, in some industries, having a trade name is ideal, especially if you want to add an extra layer of legitimacy for potential customers. 

Using your own name

If you are using your own name, you don’t need to take additional steps of applying for a fictitious name with the Michigan Department of Licensing and Regulatory Affairs, also known as LARA. 

Although some potential customers will find a business that operates under a business name more appealing and trustworthy, you can still use your own name if you are trying to build a personal brand instead of building just one business. 

Setting up a DBA

If you do decide to use a business name and operate your business under a DBA (Doing Business As) or trade name, you can register an appropriate business name with LARA. But before that, you will need to come up with an appropriate name for your business and check its availability. 

To check if the name you want to use for your business is available, you can visit the Corporations Division on the Michigan LARA website and use their business name search tool. If the business name you like has no exact matches or matches that are highly similar that could cause confusion, then the name you selected is available to use. 

To apply for a DBA name in Michigan, you must visit your local county clerk’s office. You can use this guide to find the nearest county clerk in your area. You can download the DBA registration form here before visiting so you have everything you need to expedite the process. 

Michigan licenses

Although some small business owners don’t need a business license or permit to operate, there are some industries that require licenses, such as selling liquor and tobacco, as well as other professional services like barbering, accounting, etc. 

To learn more about the business licenses you need and apply for them, you can visit the Michigan Licensing and Regulatory Affairs website here

Set up business bank accounts

In the state of Michigan, it’s a good idea to open business bank accounts. If you keep your personal and business finances separate, it’s easier to file taxes.

To open a business bank account, you’ll need an Employer Identification Number, or EIN, which is issued by the IRS. This nine-digit ID number is attached to your account and is used as a tax ID too, as opposed to your social security number.

Michigan taxes

From a tax perspective, a sole proprietorship is considered a “pass-through” entity, meaning that the business profits and losses are reported on your personal tax return using a Schedule C form. You are personally responsible for paying self-employment taxes, which may also include social security and Medicare taxes based on your net income. 

If you have a separate job, you will need to use your W-2 or 1099 form together with your Schedule C form to compute tax payments.

Pros

  • Simple and easy to set up and operate
  • You have complete control over decision-making and finances
  • There is minimal paperwork needed and low regulatory requirements from the government
  • Managing your business and operations is flexible
  • You are entitled to all business profits and you can use them how you see fit

Cons

  • You are personally liable for business debts and obligations
  • There is no continuity when the owner passes or away or doesn’t have the capacity to run the business
  • It is more challenging to find investors or partners for future expansions
  • The ability to raise capital is limited compared to other business structures

FAQs

How does personal liability work for a sole proprietorship in Michigan?

In a sole proprietorship, there is no legal distinction between the business and the owner. This means that the owner has unlimited personal liability for the business’s debts and liabilities. To protect personal assets, you may consider a different business entity, like an LLC.

Can a sole proprietorship in Michigan hire employees?

Yes, a sole proprietorship in Michigan can hire employees. However, there are legal requirements and obligations, such as obtaining an EIN, withholding and remitting payroll taxes, and complying with employment laws such as minimum wage and overtime regulations.

What are the key considerations when choosing a business name?

When choosing a business name for a sole proprietorship in Michigan, it is important to select a name that is not already in use by another business. You can search the business name database on the LARA website to check for availability. Registering the business name with LARA is not required, but it can provide additional protection and exclusivity.

Are there any specific zoning or location restrictions that sole proprietors should consider in Michigan?

Zoning and location restrictions for a sole proprietorship in Michigan vary by municipality and depend on the type of business. It is important to consult with the local zoning authority or planning department to ensure compliance with any specific requirements.

What are the record-keeping and reporting requirements for a sole proprietorship in Michigan?

As a sole proprietor in Michigan, you are required to keep accurate and organized records of your business transactions. This includes maintaining financial statements, invoices, receipts, and other relevant documents. Additionally, you will need to file annual income tax returns and may be required to make estimated tax payments throughout the year.

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