Small businesses are truly the backbone of our economy, and they also help empower local business leaders to step up to the plate and come up with innovations to help people go about their day-to-day lives. This feature on Ann Arbor tech startup REV-1 outlines how the best startups are those that identify a community need — in this case, the need for safe food and grocery deliveries — and then work to address it.

Coming up with a new invention or helpful service is just one part of the business equation. There are important administrative processes that business owners need to see through, which are a lot less glamorous than product research but are just as vital.

Registering your business entity may seem menial, but choosing the right business structure can have a massive impact on your operations and overall business growth. With that in mind, this article aims to help Michigan-based business owners make this important decision by outlining the different business entities available as well as the pros and cons for each.

Sole proprietorship

A sole proprietorship is the most common set-up for entrepreneurs because of the easy set-up process. You can just start your work and you essentially count as a sole proprietor, like freelance graphic designers or writers. This means that your business accounts and personal accounts are one and the same, and you don't need to file any business taxes.

However, Chron's overview on registering a sole proprietorship notes that this option is available for those who want to take it. You can simply register online through Michigan Business One Stop, and you can also check online databases to see that the business name you want is available.

On the subject of business names, it's important to note that sole proprietors who want to operate their business under a different name (i.e. you don't want your business to be under your name), Michigan requires you to have that name registered with your county clerk. You don't need to register for an employee identification number (EIN) unless you're planning to hire employees.

Limited liability corporation (LLC)

The main difference between an LLC and a sole proprietorship is liability protection. An LLC requires you to keep your personal and business bank accounts separate, and in doing so shields business owners from incurring any personal liability when lawsuits or claims are made against their business. Setting up an LLC in Michigan consists of five main steps, some of which you’ve probably already completed. It’s safe to say you have a business name and an operating agreement by now, so the next steps are to choose a registered agent who will receive your legal documents and file an article of organization.

The EIN procedure is the same as that of a sole proprietorship. If you are the only employee in your LLC, you can get by with your Social Security number. Make sure to also file a Michigan license and permit search to see if there are any other requirements that you'll need to obtain depending on your industry.

Limited liability partnership (LLP)

Our previous post on the Native American Business Incubators Act underscores the importance of community and lifting fellow business owners up. To that end, setting your business up as a partnership with family members or friends can be a great way to increase business while empowering those around you. This focus on partnership is why some small businesses prefer to establish themselves as an LLP, whereby a partner is not held liable for the negligence of the other business partner. This setup allows you to reap the benefits of working as a partnership while still mitigating risk.

The biggest drawback of an LLP is that you're required to do a bit more paperwork. You'll need to file a Certificate of Co-partnership with your county clerk. A partnership agreement is also recommended to keep business operations on the right track.

Choosing the right business entity for your business is a decision only you (and your partners) can make. Knowing the options available can make the decision a lot easier, and you can rest easy knowing that you're setting your business up for success.