Entrepreneurs planning to launch a company in Michigan will find conditions that are in their favor: the state offers one of the most business-friendly tax climates, in addition to an affordable cost of living. The Great Lakes state ranks 12th overall in Tax Foundation’s 2020 State Business Tax Climate Index based on its low corporate and individual income tax rates, while US News named it the 5th most affordable state in the nation on the strength of its cost of living and housing affordability, both of which are top ten in the nation. When a business is in its infancy, a low tax burden and manageable expenses can be major factors in its survival.
In addition to the state’s affordability, Michigan has plenty for entrepreneurs with a passion for the outdoors: sandy dunes, lush forests, and more miles of shoreline than any other state, except Alaska. To aid you in your journey towards entrepreneurial success, we’ve produced this guide to all the key steps of starting a business in Michigan, from drafting a business plan to securing funding from investors.
Starting a business in Michigan? Check out our ranking of the Best Cities to Live in Michigan.
Michigan small business statistics at-a-glance
- 870,301 small businesses operate in Michigan, accounting for 99.6% of Michigan businesses.
- 1.8 million Michigan residents are employed by small businesses, which is 49.2% of the state’s workforce.
- Health care and social assistance is the leading small business employer industry, followed by manufacturing, and accommodation and food services.
- Michigan’s corporate tax rate is rated the 18th most business-friendly in the nation, while its individual income tax is the 12th most business-friendly.
- 85.28% of new entrepreneurs in Michigan start their businesses by choice rather than by necessity.
- 80.95% of Michigan startups are still active after their first year, which is the 7th highest rate in the nation.
- Michigan startups generate 4.33 new jobs in their first year, on average.
Sources: Tax Foundation, Kauffman, U.S. Census Bureau: Statistics of U.S. Businesses
Starting a business in Michigan in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Michigan market for your business idea.
- Is there a demand for your product/service in Michigan?
- Who is your target market?
- Do existing businesses in Michigan offer a similar product/service?
- What makes your business unique compared to the competition?
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Michigan.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in Michigan.
Michigan Angel Investors and VCs
- Blue Water Angels – A Michigan-based investment group with over 25 portfolio companies. Currently accepting applications from startups in the health, energy, tech, software, and mobile fields.
- Grand Angels – An organization with fifteen years of experience in investment in Michigan companies. To date, the group has invested nearly $30 million in Michigan businesses.
- Woodward Angels – A recently-launched investment group dedicated to funding early-stage tech and digitally scaling companies in the Detroit area.
- Michigan Angel Fund – A for-profit, professionally managed fund with a focus on early-stage Michigan companies.
Additional Investor Resources
- AngelList: Michigan Angel Investors – A broad directory of nearly 5,000 angels seeking funding opportunities in the Great Lakes State. Individual listings provide a brief bio including professional history, a sum of total investments, and areas of interest.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
6. Register your business
After settling on an entity, you can register your business with the state of Michigan. The process varies depending on whether you plan to run a sole proprietorship, LLC, or corporation.
For sole proprietorships
Establishing a sole proprietorship in Michigan requires no special filings if your business includes your own name, although if you plan to use an assumed name separate from your given name, you must file an assumed name certificate.
First, run a business entity search with the Michigan Department of Licensing and Regulatory Affairs to confirm that your chosen name is available for use in the state. After confirming your name is free to use, visit your local county clerk’s office to fill out, notarize, and submit an assumed name certificate. The filing fee varies depending on the municipality. Once you file, you’re free to run your business, but you must renew the assumed name certificate every five years.
For LLCs and corporations
The first step for every entrepreneur forming a corporation or an LLC in Michigan is appointing a registered agent to receive process notices and other government correspondence on a business’s behalf. If you have a physical address in Michigan, you can be your own registered agent, however, hiring a professional is inexpensive ($50-$200 a year) and will ensure that your forms are filled out and filed correctly.
Next, perform a search to see that your business’s name is available for use in the state. Then you can move on to filing the necessary documents to register your business with the Michigan state government.
To form a corporation in Michigan, you must file Articles of Incorporation. This can be done online, through the mail, or in person. The filing fee is $10 dollars, plus an additional fee ranging from $50 to $500 depending on how many authorized shares your company has.
Those forming an LLC are required to file Articles of Organization through the mail, online, or in person. The filing fee is $50.
Check here for more information on filing fees.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.
Each state has its own laws and taxes regarding businesses. Visit this page for more information on the Michigan Business Tax (MBT) and head to the Michigan Department of Treasury to register your business online for taxes.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in Michigan good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
Use the State License Search hosted by the Michigan government to find out whether you’ll need one or more special licenses, permits, or certifications to operate your business legally in the state.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
In Michigan, the college towns of Ann Arbor (home of the University of Michigan) and Mount Pleasant (home of Central Michigan University) offer the best balance of affordability, quality of life, and entrepreneurial opportunity.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Michigan small business resources
Michigan SCORE branches
The nation’s top business mentorship network has many local chapters in the Great Lakes State: