LLC vs S-Corp in Michigan

Michigan has a flat 4.25% individual income tax, a 6.0% corporate income tax that applies to C corporations, and local income taxes in a handful of cities (including Detroit, Lansing, Grand Rapids, Flint, and Highland Park) that apply on top of the state rate. This shapes the LLC vs S-corp math for a trade business. The Michigan LARA Corporations, Securities & Commercial Licensing Bureau (CSCL) handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. A Michigan LLC can elect to be taxed as an S corporation. Michigan LLC basics. - Articles of Organization filed with LARA's Corporations Division. - Filing fee is $50. - Annual statement required every year. The statement fee is $25, due by February 15. LLCs formed after September 30 are not required to file an annual statement on the February 15 immediately following formation. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. Michigan S corp basics. - Michigan's 6.0% Corporate Income Tax (CIT) applies to C corporations, not to federal S corporations. An S corp's income flows through to shareholders, who report and pay the 4.25% Michigan individual income tax on their share of the business income. - A Michigan S corp files federal Form 1120-S. For Michigan, the business itself is generally not subject to CIT, and shareholders report their share on Michigan Form MI-1040. - Michigan also offers an elective Flow-Through Entity Tax. A pass-through (including an S corp or a partnership) can elect to pay entity-level tax using Form 5772 and related forms, which can create a federal deduction workaround for the SALT cap and generates a refundable credit for members on their Michigan individual return. Whether to elect is a CPA decision based on each owner's tax facts. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Michigan has state unemployment insurance through the Unemployment Insurance Agency. - Local income tax. If the business or the owner operates in a Michigan city that levies its own income tax (Detroit, Grand Rapids, Lansing, Flint, Highland Park, and others), that city's filing and rate apply on top of the state rate. Why a Michigan trades shop might elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Michigan's 4.25% individual rate still applies to both the wage and the distribution, so the state calculation is similar across forms. The savings are mostly on the federal side. Rule of thumb. Start as a Michigan LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, look at an S-corp election. A CPA with Michigan construction clients can run the breakeven for your numbers, factor in any local city income tax, and advise on the Flow-Through Entity Tax election.