How to start a sole proprietorship in Michigan?
A Sole Proprietorship is one of the oldest and simplest business structures. As the name suggests, this type of business has a single owner and is also known as a sole trader or simply a proprietorship. Today, most home-based businesses are also considered sole proprietorships. You can start a sole proprietorship in Michigan especially if you are a first-time entrepreneur. The operations and formation of such an entity are different from most other structures like LLCs and corporations. Hence, we have created this guide to answer your queries about how to start a sole proprietorship in Michigan. The guide will provide information concerning all characteristics of a sole proprietorship like creating a business plan, filing a DBA, tax ID, business licenses and permits, and filing taxes among others.
Sole Proprietorship in Michigan
Michigan is home to over nine hundred thousand small businesses within highly diversified and advanced industries, from cutting-edge manufacturing to next-generation transportation and automotive manufacturing. The state provides a strong infrastructure, an extensive transportation network, a highly educated and efficient workforce, technology hubs and cluster industries, and small business grants among others. If you file a sole proprietorship in Michigan then you will be able to maximize your profitability by utilizing a range of state resources.
What is a sole proprietorship in Michigan?
If you are wondering how you can start a sole proprietorship in Michigan, then first it is important to understand what type of entity you want. A sole trader or proprietorship is the easiest business structure that you can establish. This is mostly due to a lack of state laws and government regulations related to the formation of the entity. It is also known as an unincorporated business, meaning the owner is responsible for all profits earned and liabilities incurred. It has a different tax structure compared to LLCs or corporations and doesn’t require the filing of federal forms.
Important features of sole proprietorship in Michigan
Small business owners prefer to file sole proprietorships in Michigan due to the salient benefits and features this type of entity has. Some of the key features are:
- One of the top features is that this type of entity has minimal formality. This type of entity has few state reporting requirements and fewer documents are required to start a sole proprietorship in Michigan.
- It is beneficial, especially for small businesses like home-based entities, bakeries, small retail outlets, and consultants among others.
- A key feature of a Michigan sole proprietorship is that unlike with a partnership or corporation, you will not be required to share the profits.
- The business structure of a sole proprietorship is quite simple as it has a single owner.
- When you file a sole proprietorship in Michigan, all decisions regarding management, finance, and operations will be made by the owner.
- The tax structure of a sole proprietorship is different from that of other structures. It has to be filed through the owner’s income tax return.
- The process of dissolution or closure of a Michigan sole proprietorship is also quite simple.
Steps to Start Sole Proprietorship in Michigan
If you are thinking about how to start a sole proprietorship in Michigan then you need first start by identifying the different requirements for a new entity. You will be required to focus on several details like finances, management, and operations. You will also need to understand the various requirements in Michigan like obtaining business licenses and tax IDs. Let’s look at some of the features that will help you run the business smoothly once you file for a sole proprietorship in Michigan.
1. Prepare a business plan
First-time business owners prefer to start a sole proprietorship in Michigan because of the simplicity of the business structure. If you want to establish this type of entity structure then one of the focal points to start with is creating an elaborate business plan. There are certain benefits to making an operational plan as it will help you identify the key strengths and weaknesses of your company. A solid business plan will provide a clear view of budgeting and other financial requirements, customers and markets, competition, sales and marketing, and also state compliances and requirements. The components of a strategic plan will vary depending on the type of business activity, structure, location, and objectives. Some of the most common features of a general business plan are:
- Executive Summary
- Company Description and Objectives
- Entry and Strategy
- Product and Services
- Target audience and competitors
- Short-term and Long-term goals
- Marketing Plan and Sales Tactics
- Financial Plan and Projection
2. Choose a Michigan business name
When you start a sole proprietorship in Michigan, one of the first requirements is choosing a business name. The name you choose for your business can build a brand or can even lead to the failure of the company. It is important to understand that a business name will communicate the nature of the business and its objectives to customers, competitors, and industry partners. Here are some easy tips to follow while choosing a business name:
- Keep the business name as simple as possible and make sure that it is easy to spell.
- The company name should represent your product or service like “Sarah’s Bakery”.
- It is important to balance creative names with relevance.
- You can use the free business name creator tools that are available on the internet.
- Check to make sure that the chosen name is copyright free.
- Conduct a trademark search for the chosen name.
- If you want to take your company online then check for domain name availability.
To start a sole proprietorship in Michigan, a business name is mandatory.
3. File the Assumed business name certificate
If you want to file a sole proprietorship in Michigan then you need to select a name first. There are two types of names that your company can have:
- Your full legal name can be used as the company name
- You can register an assumed business name or DBA
A DBA or “doing business as” (DBA) name, is also known as a trade name, fictitious name, and an assumed name. This name is chosen by sole proprietors who don’t want to use their full legal name.
For example: Your name is Jason Hicks and you want to start a Michigan sole proprietorship as an IT Consultant. You can use your own name like ‘Jason Hicks IT Consulting.’ Alternatively, you can choose to use a name like “Hick’s consulting”. In such a scenario, Hick’s Consulting will be considered as an assumed business name or DBA. You will be required to conduct a name availability search.
If the said name is available then you can file the certificate of assumed name with the Michigan Department of Licensing and Regulatory Affairs (LARA). We, at IncParadise, can also help you with the process of filing your DBA in Michigan.
Do you want to start a sole proprietorship in Michigan?
4. Get EIN
An EIN or Employer Identification Number is an important requirement for most businesses as it aids with filing taxes. It is also required for opening business banking accounts. Once you file a sole proprietorship in Michigan, you will need to file all the income and expenses using an individual tax return. This tax return is normally filed using the Social Security number (SSN) but you may need an EIN in certain scenarios. You will need to apply for an Employer Identification Number if your company meets the following criteria:
- The sole proprietorship hires employees
- If you have a Keogh plan
- The company opens a business bank account
- If you are required to file excise tax returns
- When you convert or change the entity structure from sole proprietorship to partnership or LLC
- Filing Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy
You can apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS).
5. Obtain necessary licenses and permits
If you are thinking of setting up a sole proprietorship company in the state of Michigan then there are several requirements that you need to be compliant with. One of the most vital requirements apart from the assumed name certificate in Michigan is obtaining the appropriate business licenses and permits. The relevant licenses and permits will help keep your business operational. Business licenses in the state can be categorized as under:
- Industry-based business licenses
- City or County licenses and permits
- Professional or occupational licenses
- Regulated licenses
- Zoning permits
- Other local permits
When you file a sole proprietorship in Michigan, your company may require any one of the above categories of licenses and permits or multiple licenses from different categories. The requirement for these licenses will vary depending on the primary business activity, location, industry, and occupation. The licenses and permits are overseen by the Michigan Department of Licensing and Regulatory Affairs (LARA) and issued by different agencies like the MSP/Commercial Vehicle Enforcement Division is responsible for issuing licenses and permits for delivery service carriers involved in intrastate commerce.
Similarly, local licenses and permits are issued by city departments or the office of the county clerk. It is quite an intricate task to identify the relevant licenses when you start a Michigan sole proprietorship. This is where our Business License Research Report service can provide the necessary guidance and aid. This is a detailed research report that contains a list of filing instructions, supporting document requirements, and fees for all business licenses and permits.
6. Open a bank account for your Michigan business
A bank account is one of the most important requirements for individuals and businesses when it comes to providing financial security and money management. One of the common mistakes committed by sole traders or proprietors is that they operate the business using their personal account and this makes filing their taxes very complicated. The advantage of having a business bank account is that it will keep your personal income and expenses separate from your business gains and expenses. There are several other benefits to having such bank accounts, like the flexibility in terms of accepting debit and credit card transactions from customers. You can open a business bank account before or after you start a sole proprietorship in Michigan.
You can open a business account online with Cheqly and take advantage of their services. Cheqly is our partner organization. They not only offer banking access from anywhere but they also facilitate fund transfers locally as well as internationally. It is a full-stack neobank for small businesses and startups.
7. Report and pay taxes
When you start a sole proprietorship in Michigan, there are certain state regulations and compliances that you need to meet. Keeping up with your taxes is another critically important annual state compliance to keep in mind. A sole proprietorship or sole trader is operated by a single owner therefore, the tax structure is different from the tax structure of corporations or LLCs. Normally, such an entity does not have any business tax and instead, the owner has to file personal income tax. In the state of Michigan, the individual income tax rate is 4.25 percent. Apart from this, depending on the business activity, you may be required to file a sales tax of 6 percent.
Ready to Start a Sole Proprietorship Business in Michigan
You no longer have to worry about how to start a sole proprietorship in Michigan as it is one of the simplest business structures. Unlike several other forms of businesses, a Michigan sole trader entity is not required to register with the state. However, there are several state requirements including annual compliances that such a business would have to fulfill to operate and enjoy a good standing with the state.
IncParadise, one of the top registered agents in the state can provide guidance and expertise to help you start a sole proprietorship in Michigan with ease. We also offer a wide variety of additional services like filing a DBA, and getting an EIN, among others.