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Business Formation
by Charles E. Turnbull, O'Reilly Rancilio P.C.

There are various forms by which a business may be organized under Michigan law. An individual may conduct business under his or her own name, or under an assumed name, in which case the business will be considered a sole proprietorship. While this may be the simplest method of forming a business, the individual owning the business has individual liability for all debts of the business and, therefore, this is generally not a preferred method for entering into any substantial business activity.

Two or more individuals who form a business under an assumed name are considered partners and the business entity is considered a partnership. However, similar to a sole proprietorship, the partners in a partnership are liable for all of the obligations of the partnership. In addition, each partner may be bound by the other partner’s actions which can add to their respective personal liabilities.

Most business are formed as either corporations or limited liability companies.

A corporation is formed by filing Articles of Incorporation with the State of Michigan and by observing other corporate formalities required by law. The corporation is owned by shareholders and managed by a board of directors which appoints officers to run the day-to-day operations. Neither shareholders, directors, nor officers are liable for the obligations of the business except in very narrow circumstances.

Limited liability companies (“LLC”) are a newer form of organization in Michigan. LLCs are formed by the filing of Articles of Organization with the State of Michigan. There are less formalities required by law than for corporations. The LLC is owned by members who may appoint managers to run the operations of the business. Similar to corporations, the members and managers of LLCs generally are not liable for the obligations of the business. LLCs are often used for real estate investment due to the fact that the tax attributes of the organization are passed through to the individual members, in the same manner as a partnership, while providing for limited liability which a partnership does not offer.