Making it Legal: Forming a Business, Regulations and Taxes
In order to insure that your business is not violating any laws, there are three factors to consider:
The legal structure of your business
Complying with regulations
Paying the taxes
The purpose of this section is not to make you an expert in every aspect of organization, regulation and taxation, but to give you a general overview of these areas. It is recommended that you use outside professionals like accountants and attorneys to help you deal with legal and tax matters.
Forms of Organization
The three basic forms of organization are proprietorship, partnership and corporation. The one that is best for you depends on the type of business you are entering and your own financial situation.
Proprietorship
A proprietorship is the simplest type of business organization. It is owned by one individual and all the assets of the business -- tools, inventory or vehicles -- are owned by that proprietor. The owner is responsible for all debts, both personal and business.
A proprietorship can buy and sell, hire employees and deduct business expenses, just like any other business. For federal income tax purposes, the profits from a proprietorship are taxed at the same rate as employees, but are subject to self-employment taxes (1040 SE).
If you are considering a business where a high risk of being sued exists -- such as a restaurant, construction trades, medical services or riding stable -- you should protect your personal assets. Your first line of defense would be insurance coverage. Beyond that, you may consider incorporating as an S Corporation.
In order to form a proprietorship, register your business name with the assumed names section of the County Clerk's Office at 248-858-0568. Michigan can advise whether your selected name has been previously registered as a corporation. Call 517-241-6470.
A great deal of confusion surrounds the registration of names and the opening of commercial bank accounts. If your own name will be used in business and on customers' checks, it is not necessary to perform either of these tasks. However, if you choose a business name, the name must be verified through your County Clerk's office and you must be issued a certificate of assumed names called a "DBA" (Doing Business As). From this point on, the "DBA" should be used in all business matters. As stated previously, if your name will appear on customers' checks, you can use a personal bank account. If, however, the business name will appear on customers' checks, a commercial bank account must be opened. The monthly fees that banks charge for commercial accounts may be higher per month than that of personal accounts.
Names: Business names can be a marketing tool and could help customers remember you, i.e. Toys R' Us. Names that are composites of several words may be difficult to remember. Your name within the business name is important, especially if you are a consultant working closely with your customer.
Husbands and wives starting a business who file a joint return are not a partnership and one, or both, can file for a "DBA" with the County Clerk as a proprietorship.
Corporation
A corporation is the most formal way of conducting business. A corporation is a legal entity separate from its owners. Both the assets and debts of the business are owned by the corporation and are entirely separate from the personal assets of the owners. Unless the owners specifically guarantee a corporate debt, they are generally not responsible. When the initial owners of a business are contributing varying amounts of capital, a corporate form may be used. The owners are issued stock shares in proportion to their investment and officers' salaries should be spelled out in the by laws. Future earnings would be distributed as dividends based on shares. If you are in a business where you are likely to be sued, the corporate form of ownership may serve to protect your personal assets.
The two most common forms of corporations are "C" and "S." The major difference between the two is in how they are taxed. A "C" corporation pays a corporate income tax and the owners also pay their personal taxes on salaries and dividends. An "S" corporation does not pay corporate income tax; instead, all profits are allocated to the stockholders and are taxed at each stockholder's personal tax rate whether or not cash is paid out as salary.
Many small businesses consider creating a corporation to protect personal assets such as home, cars, etc. from the courts in the event of bankruptcy or a jury awards a settlement more than the limits of your insurance.
In order to form either an "S" or "C" corporation, you may want to consult with an accountant or an attorney. For the purpose of preparation, you might read or buy the following books. Your local library can interloan from another library if they do not have a copy.
Entrepreneurial America Bookstore Michael Sliman, Owner
22500 Orchard Lake Road
Farmington, Michigan, USA, 48336
248-477-3500 An excellent source for books and software dealing with starting/operating a business.
How to Form your Own Michigan Corporation Phillip G. Williams Complete with text, forms and certificates.
Incorporating in Michigan
W. Dean Brown Complete with text, forms and certificates.
Starting and Operating a Business in Michigan Michael D. Jenkins Good operating guidance, but not all forms.
Regulations
Local
Zoning: Zoning laws regulate where various types of businesses may locate. Some parts of the community are zoned for retail, some for industrial, some for apartments, etc. Each city, village or township establishes and enforces its own zoning ordinances. See the next chapter for information about home-based businesses.
Business License: Some communities require certain types of business to be licensed. Contact the clerk of the city, village or township where your business is about to be located to check their licensing requirements.
Certificate of Occupancy: Most communities require that their building inspector visit your place of business and issue a Certificate of Occupancy. Contact the local Clerk to ask about the inspection and any additional requirements before you sign a lease or purchase a building. It is wise to have all documents reviewed by professionals before signing. As the owner, you are responsible for the occupancy, so be cautious of any realtor, landlord or contractor who minimizes community regulations.
County
As discussed previously, proprietorships and partnerships in Oakland County must register with the Assumed Names Section of the Clerk's Office at 248-858-0568.
Food preparation sites must be inspected by the County's Environmental Health Division. Contact them at 248-424-7190 before you sign a lease or commit to a location. The equipment and facilities required make it almost impossible to prepare meals for sale at home. Baked goods, candy, etc. are controlled by the Michigan Department of Agriculture. See Appendix J. The County does not license or regulate any other types of businesses.
State
Licensing: Many businesses require state licenses. Call 1-877-873-4567 for a start-up kit or for other information.
Sales Tax: For sales tax information, call 1-877-873-4567.
Workers' Compensation: Workers' compensation insurance pays employees for injuries suffered on the job and is purchased from an insurance agent. If you plan to employ three or more persons at one time, or one or more persons for at least 35 hours per week for 13 weeks or longer during the preceding 52 weeks, you are required to insure them. Children, parents, spouses and owners are exempt. Call 517-322-1296 for more information. Special conditions govern contractors. For questions about buying this insurance, call 517-373-0220. Call 517-322-1195 to request the Michigan Business Guide to Workers' Compensation.
Wage and Hour Regulations: If you employ two or more persons over the age of 18, you are required to pay the minimum hourly wage and time-and-a-half for any hours worked in excess of 40 hours per week. There are exceptions, especially in the hotel, motel and restaurant industries. Contact the U.S. Department of Labor at 313-226-7447 or, for questions regarding state laws, call 313-256-3584.
State Unemployment Insurance: Employers must register with the Michigan Employment Security Commission (MESC) for unemployment taxes. Contact the MESC Customer Service Office, 7310 Woodward Ave., Detroit, Michigan, 48202; telephone: 1-800-638-3994. Unemployment taxes are paid by the employer -- no deduction is allowed from any employee's wages.
Employment of Minors: Persons between the ages of 14 and 18 must have a work permit from the school district in which they live. There are restrictions on types of occupations and hours of employment which can be addressed by the Michigan Labor Department at 517-322-1825.
Environmental: Many businesses are impacted by environmental regulations. When purchasing real property, it is important to ensure that the site is not contaminated. In site development, protection of wetlands may be an issue. The Department of Environmental Quality, 517-335-4235, will provide answers to environmental questions.
Health and Safety Standards: Employers must comply with health and safety standards under federal and state Occupational Safety and Health Acts (OSHA), and Right-to-Know laws. Contact the Department of Labor, Box 30015, Lansing, MI 48909, 517-322-1845, and the Department of Public Health, Box 30195, Lansing, Michighan, USA, 48909, 517-335-8250, for more information.
Federal
There are many federal regulations for specific industries. The trade association which represents your type of business may be a source for this information, or ask someone already in the industry. You will find trade associations listed in The Encyclopedia ofAssociations, available at public libraries.
Citizenship: The Immigration Control Act of 1986 prohibits you from hiring illegal aliens. Therefore, you must complete an "Employment Eligibility Verification" form for each employee that you hire. These forms are available from the U.S. Immigration and Naturalization Service, 313-259-8560.
Employer Identification Number (EIN): An EIN is like a social security number for a business. If your business has employees, then it must have an EIN. To apply for an EIN, contact the IRS at 1-800-829-1040 or 606-292-5467 and request Form SS-4. As a proprietor, you do not need an EIN unless you have employees. Banks and tax forms use social security numbers instead.
Americans with Disabilities Act: For business compliance implications call 1-800- 669-3362 or 202-663-4900.
Equal Employment Opportunity: Contact U.S. Equal Employment Opportunity Commission, 1-800-669-3362, for federal forms. Contact Michigan Department of Civil Rights, 303 West Kalamazoo, Lansing, MI 48913, 517-335-3165, for public information posters and literature. If you would like information on enforcement or wish to make a complaint, call 517-373-3590.
The Civil Rights Act of 1964 prohibits discrimination in employment practices because of race, religion, sex, or national origin. Public Law 90-202 prohibits discrimination on the basis of age with respect to individuals who are at least 40 but less than 70. Federal laws also prohibit discrimination against the physically disabled. This has been revised in 1992 as Americans with Disabilities Act.
Taxes
Since taxation is complex and constantly changing, an accountant should advise you on all tax matters. You will be responsible for taxes at the local, county, state and federal levels.
Local
Real Estate Taxes: These are applicable only if the business owns real estate. You will receive tax bills twice a year, once in winter and once in summer. If the real estate is financed with a mortgage, the mortgage holder usually receives these tax bills and pays them from your escrow account.
Personal Property Tax: This is a tax on assets of the business, such as furniture, fixtures and equipment. Contact your local community assessor for registration requirements and tax rates.
City Income Tax: Some cities require businesses to withhold city income tax from your employees. Contact your city for information.
County
Both real estate taxes and personal property taxes are levied by the county. They are billed with the local taxes discussed in the above section. Your local assessor will answer questions about your county taxes, too. The Oakland County Treasurer's Office phone number is 248-858-0611.
State
To register with the Michigan Department of Treasury, you must file an Application for Registration (Form C-3400). This single form is used for Sales Tax, Use Tax, Employee State Income Tax Withholdings and the Single Business Tax.
Call the Department at 517-373-0888, to request an Application for Registration or for further information.
Sales Tax: If you sell products to the user, you are required to collect a six percent sales tax from your customers and submit it to the Treasury. Many suppliers also require that you have a sales tax number before they will sell to you wholesale. You will not have to pay sales tax when you buy from wholesalers for resale.
Employee Income Tax Withholding: If your business has employees, you are required to withhold Michigan income tax from their wage. When you hire employees, each one must complete a Michigan withholding exemption certificate (MI-W4).
Single Business Tax: The Single Business Tax is a modified value-added tax influenced by compensation, depreciation, and net income. If gross revenues for your business are $250,000 or more per year, you must file a single business tax return. The tax is levied at 2.35 percent. Call 517-373-8030 for further information.
Personal Income Tax: If the business is a proprietorship, partnership, or "S" corporation, you pay Michigan income tax on your share of the business profits. With a "C" corporation, you pay tax on compensation received from the corporation. Contact the Income Tax Division at 517-373-1422 for further information.
Unemployment Compensation Insurance: A new business will pay unemployment insurance taxes on the first $9,000 of wages earned during the calendar year for each employee. When purchasing an existing business, the tax rate may be higher or lower depending on the previous owner?s tax experience rating. File Form UIA 518, Michigan Business Tax Registration to determine liability. You can do this online at www.michigan.gov/uia and clicking on: B2G On-line Services. Paper forms are also available on the website under the Forms link. For further information, visit our website or call the Unemployment Insurance Agency at 800-638-3994 or 313-456-2180.
Estimated Taxes and Quarterly Payments: Obtain information on estimated tax payments which may be required. Individuals with income from sources other than wages may be required to make estimated tax payments on a quarterly basis to both state and federal tax authorities. Contact the Department of Treasury, 517-373-3190.
State tax questions can also be discussed by calling 248-335-6102 or on a walk-in basis at the local Michigan Treasurer's Office located at 100 North Saginaw in Pontiac, Michigan.
Federal
The Internal Revenue Service will mail you, on request, "Your Business Tax Kit," which includes most of the information and commonly required forms that a new business needs.
Self-Employment Tax: This tax is paid by proprietors and partners and is similar to the social security tax on employees. If your self-employment income is less than $400, you are exempt. For more information, call 1-800-829-1040.
Personal Income Tax: See Personal Income Tax in the preceding section on state taxes.
Corporate Income Tax: "C" corporations are required to pay federal income tax on their profits. "S" corporations do not pay corporate income tax. An 1120 return is filed with your 1040.
As a new business owner, you must estimate your income, calculate your taxes and pay quarterly in advance, or you may be penalized. This applies in the first full year of business. This liability occurs based on the combination of your new business income, your continuing employment and the income of a spouse. This varies if you file joint returns with your spouse. Contact the IRS at 1-800-367-6263 for more information on the following items.
Income Tax Withholding: Withholding of federal incomes taxes is similar to the withholding of state income taxes. Employees must complete a federal withholding exemption certificate (W-4). You must file quarterly returns with the IRS. The money withheld from employees' wages must be paid quarterly to the IRS.
Social Security Tax: Also known as FICA (Federal Insurance Compensation Act). This tax is based on the wages of the employee; half of the tax is withheld from the employee's wages and the other half is paid by the employer. Request Circular E, Employer Tax Guide.
Unemployment Insurance: Also known as Federal Unemployment Tax Act or FUTA. This is a tax you pay based on the wages of your employees. When you apply for an EIN (See Employer Identification Number in the previous section on federal regulations), the IRS will send you the proper forms. For further information, call 1-800-829-1040.
Insurance: There is no government requirement to obtain any business insurance (other than those covering workers). Find an insurance representative who can review your business activities and determine the risks to be insured and the level of financial coverage. The premiums quoted by different agents are less important than the proper coverage and the selected limits. Fire and theft are generally purchased but product liability, personal liability and property liability are very important. In some cases, bonding (theft of others by employees) may also be required.
Independent Contractors
Many small businessess utilize the services of independent contractors rather than hiring employees. The advantages are many including lower overhead and less administrative efforts.
The IRS uses a 20-factor test to define if a worker is an employee is an independent contractor. In the case of an independent contractor, you are required to provide the contractor a Form Misc 1099 (statement of the total money paid to them for services rendered) at the end of the year. This information is also reported to the IRS on Form-1096.
In conclusion . . .
Get advice from your lawyer and accountant in the early stages of planning your venture. Also, with all the exact tax amounts that need to be deducted, hiring a tax service or a payroll company eliminates errors and allows you to be more productive with your time. Doing things right the first time is cheaper and easier than trying to fix it later.
