Michigan Corporation Advantages and Disadvantages
Should I Incoprorate in Michigan ?
A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Michigan Corporation
- Shareholders have limited liability for the corporation's debts or judgments against the corporations.
- Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
- Corporations can raise additional funds through the sale of stock.
- A corporation may deduct the cost of benefits it provides to officers and employees.
- Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
- A corporation pays 15% federal income tax on taxable income up to $50,000; 25% tax on income from $50,001 - $75,000; 34% tax on income from $75,001 - $100,000; 39% tax on income from $100,001 - $335,000; and 34% tax on income over $335,000.
- A sole proprietor who filed a federal income tax return under the status of married, filing jointly, would pay 15% federal income tax on taxable income up to $35,800; 28% tax on income from $35,801 to 86,500; and 31% tax on income over $86,501.
Disadvantages of a Corporation
- The process of incorporation requires more time and money than other forms of organization.
- Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
- Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice.
Federal Tax Forms for Regular or "C" Corporations
- Form 1120 or 1120-A: Corporation Income Tax Return
- Form 1120-W Estimated Tax for Corporation
- Form 8109-B Deposit Coupon
- Form 4625 Depreciation
Michigan's 2011 Business Tax Climate Ranks 17th
Michigan ranks 17th in the Tax State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property. Neighboring states ranked as follows: Indiana (10th), Ohio (46th), and Wisconsin (40th).
Michigan's Individual Income Tax System
Michigan's personal income tax system consists of a simple 4.35% tax on an individual's federal adjusted gross income (with some modifications). Among states levying individual income taxes, Michigan's flat tax rate is 40th highest. Michigan's 2008 state-level individual income tax collections were $716 per person, which ranked 36th highest nationally.
Michigan's Corporate Income Tax System
Michigan levies a Single Business Tax (SBT), which is a modified value-added tax (VAT). The rate is 4.95% and there is an additional modified gross receipts tax at a rate of .8%. In 2008, state-level corporate tax collections (excluding local taxes) were $177 per capita, ranking it 14th highest nationally.
Michigan Sales and Excise Taxes
Michigan levies a 6% general sales or use tax on consumers, slightly above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $1,180 per person, which ranks 38th highest nationally. Michigan's gasoline tax stands at 35 cents per gallon, ranking 13th highest nationally. Additionally, Michigan's 6% general sales tax is levied on the sale of gasoline purchases. Michigan's cigarette tax stands at $2.00 per pack of twenty, which ranks 10th highest nationally. The sales tax was adopted in 1933, the gasoline tax in 1925 and the cigarette tax in 1947.