By Jake Lawson, LLC Formation Strategist
Starting a sole proprietorship in Michigan? Let me be blunt: it’s the easiest business structure to launch, but that doesn’t make it the smartest choice for most entrepreneurs.
Here’s the reality after helping over 1,200 business owners navigate Michigan’s business landscape: sole proprietorships offer simplicity at the cost of protection. You can literally start one this afternoon without filing a single document, but you’ll be putting your personal assets—your house, car, savings—directly in the line of fire if something goes wrong.
I’ll walk you through exactly how to start a Michigan sole proprietorship, but I’ll also show you why an LLC might be the better move for your long-term success and security.
What Exactly Is a Michigan Sole Proprietorship?
A sole proprietorship is the default business structure when you’re flying solo. No partners, no corporate formalities, no state registration required. In Michigan, you become a sole proprietor the moment you start doing business activities with the intention of making money.
The Legal Reality: Your business and personal identity are legally identical. There’s no separation between “you” and “your business”—they’re the same legal entity in Michigan’s eyes.
Example: Sarah starts offering freelance graphic design services from her Detroit apartment. The moment she creates her first client proposal or builds her portfolio website, she’s operating as a sole proprietorship under the name “Sarah Johnson.” No paperwork required.
The Sole Proprietorship Advantages: Why Some Choose This Route
Ultra-Simple Setup Process
You don’t file formation documents with Michigan’s Department of Licensing and Regulatory Affairs (LARA). No state fees, no registered agent requirements, no annual reports. You’re in business as soon as you decide to be.
Straightforward Tax Filing
Your business income flows directly onto your personal tax return via Schedule C. No separate business tax return to file, no complex tax elections to worry about. Your accountant (or TurboTax) handles it alongside your regular income.
Complete Control and Flexibility
Every business decision is yours alone. No operating agreements, no member meetings, no corporate resolutions. Want to pivot your business model tomorrow? Go for it—no legal paperwork required.
Minimal Ongoing Compliance
Michigan doesn’t require sole proprietorships to file annual reports or maintain corporate formalities. As long as you’re paying your taxes and following industry regulations, you’re compliant.
The Sole Proprietorship Disadvantages: Why I Usually Recommend Against Them
Zero Personal Asset Protection
This is the big one. When your business gets sued (not if, when), your personal assets are fair game. Your home equity, personal savings, vehicles—everything you own personally can be seized to satisfy business debts and judgments.
Real Example: I worked with a Michigan contractor who operated as a sole proprietor for years. One job went sideways, the client sued for $150,000, and he nearly lost his family home. An LLC would have protected his personal assets completely.
Credibility Challenges
“Johnson Consulting” sounds more professional than “Sarah Johnson.” While you can file a DBA (more on this below), you’re still seen as a one-person operation rather than an established business entity.
Difficulty Raising Capital
Banks and investors prefer lending to established business entities. Getting business credit cards, loans, or investment becomes significantly harder as a sole proprietor.
Complex Conversion Process Later
Switching from sole proprietorship to LLC isn’t a simple upgrade—it’s starting over. You’ll need to:
- Close your sole proprietorship tax accounts
- Form a new LLC with Michigan LARA
- Transfer business assets and contracts
- Update banking, licensing, and vendor relationships
- Revise marketing materials and business documentation
Jake’s Take: If you’re starting a business with any growth ambitions or liability risks, skip the sole proprietorship phase entirely. The $50 Michigan LLC filing fee is cheap insurance compared to the conversion headaches later.
Michigan Sole Proprietorship vs. LLC: The Honest Comparison
| Factor | Sole Proprietorship | Michigan LLC |
| Setup Cost | $0 | $50 state fee |
| Personal Asset Protection | None | Complete protection |
| Tax Filing | Schedule C on personal return | Same tax treatment (Single-Member LLC) |
| Credibility | Limited | Professional business entity |
| Annual Requirements | None | No annual report required |
| Business Banking | May require DBA | LLC name on all accounts |
| Growth Potential | Limited | Unlimited |
The Bottom Line: For an extra $50, a Michigan LLC gives you everything a sole proprietorship offers plus asset protection and credibility. The math is pretty simple.
How to Start a Michigan Sole Proprietorship: Step-by-Step Process
If you’ve decided sole proprietorship is right for your situation, here’s exactly how to get started:
Step 1: Business Foundation Planning
Before diving into paperwork, nail down your business fundamentals:
Business Model Clarity
- What products or services will you offer?
- Who’s your target customer in Michigan?
- How will you price and deliver your offerings?
- What’s your revenue timeline and growth plan?
Financial Foundation
- Estimate startup costs (equipment, supplies, marketing)
- Project first-year revenue and expenses
- Determine how much personal money you’re investing
- Plan for 3-6 months of operating expenses
Operational Basics
- Choose your business address (home office is fine)
- Decide on business hours and communication methods
- Plan your workspace and equipment needs
- Consider insurance requirements for your industry
Step 2: Choose Your Business Name Strategy
By default, your sole proprietorship operates under your full legal name. “Sarah Johnson” is the business name, period.
Option 1: Use Your Legal Name Pros: No additional paperwork or fees Cons: Limited branding potential, sounds like a person rather than a business
Option 2: File a DBA (Assumed Name) Pros: Professional branding, memorable business name Cons: Additional paperwork and fees with county clerk
Michigan DBA Process: In Michigan, DBAs are called “Assumed Names” but function identically. You file with the County Clerk in any county where you’ll operate.
Required DBA Information:
- Your legal name as the business owner
- Your business address
- The assumed name you want to use
- Signature and notarization
DBA Costs: Varies by county, typically $25-$50
Jake’s Recommendation: If you’re serious about building a brand, get the DBA. “Michigan Marketing Solutions” gets more respect than “Mike Thompson.”
Step 3: Obtain Your Federal EIN
While not required, getting an Employer Identification Number (EIN) from the IRS is highly recommended for Michigan sole proprietors.
Why You Need an EIN:
- Identity Protection: Use your EIN instead of Social Security Number on business documents
- Banking Requirements: Many banks require an EIN for business accounts
- Future Employee Hiring: Required if you ever plan to hire staff
- Business Credit Building: Necessary for establishing business credit history
How to Get Your EIN:
- Apply directly through the IRS website (it’s free)
- Complete the online application in 10-15 minutes
- Receive your EIN immediately upon approval
- Save your EIN confirmation letter for banking and tax purposes
Cost: Free through IRS.gov (avoid third-party services that charge fees)
Step 4: Research Michigan Licensing Requirements
Michigan doesn’t require a general business license for sole proprietors, but your specific industry might have requirements.
State-Level License Research: Check with Michigan LARA’s Bureau of Professional Licensing for industry-specific requirements. Common regulated industries include:
- Healthcare and medical services
- Construction and contracting
- Food service and retail
- Professional services (accounting, legal, real estate)
- Transportation and logistics
Local License Requirements: Contact your city and county offices to research municipal licensing requirements. Many localities require:
- General business licenses for operating within city limits
- Zoning compliance for home-based businesses
- Special permits for certain business activities
Jake’s Time-Saving Tip: Call your city clerk’s office directly. They’ll tell you exactly what’s required for your business type and location in 5 minutes versus hours of online research.
Step 5: Set Up Business Banking and Financial Systems
Open a Business Bank Account Even though you’re not legally required to separate business and personal finances as a sole proprietor, it’s crucial for:
- Clean financial records for tax purposes
- Professional appearance when receiving payments
- Simplified bookkeeping and expense tracking
- Protection during IRS audits
Bank Account Requirements:
- Photo ID
- EIN confirmation letter (if you obtained one)
- DBA filing certificate (if you filed an assumed name)
- Initial deposit (varies by bank)
Financial Management Setup:
- Choose accounting software (QuickBooks, FreshBooks, Wave)
- Establish expense tracking systems
- Set up invoicing and payment processing
- Create a system for saving tax payments (set aside 25-30% of profits)
Step 6: Understand Your Michigan Tax Obligations
Federal Tax Requirements:
- File Schedule C with your personal Form 1040
- Pay self-employment tax (15.3% on net earnings)
- Make quarterly estimated tax payments if you owe more than $1,000 annually
Michigan State Tax Requirements:
- Michigan Individual Income Tax applies to sole proprietorship profits
- No separate business income tax filing required
- Sales tax registration if you sell tangible goods
- Use tax obligations for out-of-state purchases
Record Keeping Essentials:
- Maintain detailed income and expense records
- Save all business receipts and invoices
- Track business mileage and travel expenses
- Keep records for at least 3 years (IRS audit window)
Michigan Sole Proprietorship Compliance and Maintenance
Ongoing Compliance Requirements
Tax Filing Deadlines:
- Personal income tax return (including Schedule C): April 15th
- Quarterly estimated tax payments: January 15th, April 15th, June 15th, September 15th
- Annual self-employment tax calculations
Record Maintenance:
- Business income and expense documentation
- Bank statements and financial records
- Tax returns and supporting documentation
- Business license renewals (if applicable)
Insurance Considerations: While not legally required, consider:
- General liability insurance for customer interactions
- Professional liability insurance for service-based businesses
- Business property insurance for equipment and inventory
- Umbrella insurance for additional personal asset protection
Converting to LLC Later: What’s Involved
If you start as a sole proprietorship and later want LLC protection, here’s what the conversion process involves:
Legal Steps:
- Form a new Michigan LLC with LARA
- Obtain new EIN for the LLC
- Transfer business assets to the LLC
- Close sole proprietorship tax accounts
- Update all business contracts and agreements
Administrative Updates:
- Change business banking to LLC accounts
- Update business licenses and permits
- Revise insurance policies
- Modify vendor and supplier agreements
- Update marketing materials and website
Timeline and Costs:
- LLC formation: 1-2 weeks, $50 state fee
- Complete conversion process: 4-8 weeks
- Additional professional fees: $500-$2,000 depending on complexity
When Sole Proprietorship Makes Sense (Rare, But Real)
Despite my general recommendation against sole proprietorships, there are scenarios where they’re appropriate:
Ultra-Low-Risk Businesses
- Digital content creation with no customer interaction
- Consulting work with comprehensive insurance coverage
- Investment or real estate activities with minimal liability exposure
Extreme Budget Constraints
- Literally can’t afford the $50 LLC filing fee
- Testing a business idea before committing to formal structure
- Very part-time activities with minimal revenue potential
Short-Term Business Activities
- One-time consulting projects
- Seasonal businesses with defined end dates
- Market testing before formal business launch
Jake’s Reality Check: Even in these scenarios, the $50 for an LLC is usually worthwhile. I’ve seen too many “low-risk” businesses face unexpected liability issues.
Michigan Sole Proprietorship FAQs
Do I Need to Register My Sole Proprietorship with Michigan?
No. Michigan considers you a sole proprietor as soon as you engage in business activities. No state registration required.
Can I Have Employees as a Michigan Sole Proprietor?
Yes, but you’ll need an EIN and must comply with all employment laws, including payroll taxes, workers’ compensation, and unemployment insurance.
What’s the Difference Between DBA and LLC?
A DBA is just a name registration—it doesn’t create a separate legal entity or provide asset protection. An LLC creates a separate legal entity with liability protection.
How Do I Close a Michigan Sole Proprietorship?
Simply stop doing business. Cancel any licenses, close business bank accounts, and file your final tax return. No formal dissolution required.
Can I Convert My Sole Proprietorship to Partnership Later?
No direct conversion exists. You’d need to form a new partnership or LLC and transfer business assets, similar to converting to an LLC.
The Bottom Line: My Honest Recommendation
After 15 years of helping Michigan entrepreneurs launch businesses, here’s my straight advice: unless you’re in an extremely unique situation, skip the sole proprietorship and form an LLC.
The math is simple:
- Sole proprietorship: $0 + unlimited personal liability
- Michigan LLC: $50 + complete asset protection + professional credibility
The reality is simpler: That $50 LLC filing fee is the best insurance you’ll ever buy. It protects your house, car, savings, and future earnings from business-related lawsuits.
My recommended path:
- Form a Michigan LLC instead of sole proprietorship
- Choose single-member LLC for identical tax treatment
- Get the same simplicity with added protection and credibility
- Sleep better knowing your personal assets are protected
Ready to Launch Your Michigan Business Right?
If you’re convinced that Michigan LLC formation is the smarter path (and I hope you are), you can form your LLC with Michigan LARA for just $50. The process takes 5-10 business days, and you’ll have complete personal asset protection from day one.
For those who want professional help with the formation process, I recommend Northwest Registered Agent for Michigan LLCs. They handle the paperwork correctly, provide registered agent service, and offer privacy protection—all for $39 plus the state fee.
Whatever business structure you choose, launch it correctly from the start. Your future self will thank you for making the smart choice today.
Jake Lawson has guided over 1,200 entrepreneurs through business formation decisions, including hundreds of Michigan businesses. His practical, no-nonsense advice helps business owners choose the right structure for their specific needs and circumstances. Connect with Jake at llciyo.com for personalized business formation guidance.