3.1 Types of Business Organization: Sole Proprietorship, Partnership, LLC & Corporation
Key Takeaways
A sole proprietor and each general partner are personally liable for business debts, while LLC members and corporate shareholders generally risk only their investment.
A sole proprietor or partnership using a business name other than the owners' real names must file an assumed name certificate with the county clerk.
An LLC is formed by filing articles of organization with LARA under the Michigan Limited Liability Company Act, 1993 PA 23, and a corporation by filing articles of incorporation under the Business Corporation Act, 1972 PA 284.
A C corporation pays Michigan's 6% Corporate Income Tax on its business income, and shareholders pay tax again on dividends, while S corporations, partnerships, and most LLCs pass income through to the owners.
Any entity that contracts residential roofing needs its own Article 24 license through a qualifying officer who holds an individual license.
Why Structure Matters for a Licensed Roofer
PSI allots 4 Business and Law questions to the four basic forms: proprietorships, partnerships, limited liability companies, and corporations. On the exam, questions usually ask who is liable, how the business is taxed, what document creates it, and how it gets licensed. In practice, the choice also affects insurance, bonding, and bank credit.
Sole Proprietorship
A sole proprietorship is one person doing business, and the business is not a separate legal entity. Features:
- Formation: Nothing is filed with the state to exist. If the owner uses a name other than their own real name (for example, "Great Lakes Roofing" instead of "Pat Smith"), Michigan's assumed name law, 1907 PA 101, requires an assumed name certificate filed with the county clerk in each county where the business operates.
- Liability: Unlimited personal liability. Business creditors and judgment holders can reach the owner's personal assets.
- Taxes: Profit is reported on the owner's personal return (Schedule C). The owner pays self-employment tax and Michigan's 4.25% individual income tax (2026).
- Licensing: The owner is licensed as an individual.
Failing to file a required assumed name certificate is a misdemeanor. The unregistered business also cannot sue in Michigan courts on contracts made under the assumed name until it complies (MCL 445.5). A roofer who can't sue can't collect an unpaid bill.
Partnerships
A general partnership is two or more co-owners carrying on a business for profit. It can arise by agreement or simply from conduct, even without a written agreement.
- Each general partner can bind the partnership in ordinary business.
- General partners are jointly and severally liable for partnership debts. One partner's negligence on a roof can expose every partner's personal assets.
- A partnership files an informational federal return, and profits pass through to the partners.
- A partnership using an assumed name files the certificate with the county clerk.
A limited partnership has at least one general partner, who manages the business and has unlimited liability, and one or more limited partners, who invest but do not manage and whose liability is generally limited to their investment. Limited partnerships are formed by filing with the state.
Limited Liability Company (LLC)
The Michigan Limited Liability Company Act (1993 PA 23) lets owners, called members, form an LLC by filing articles of organization with LARA's Corporations, Securities & Commercial Licensing Bureau.
- Liability: Members are generally not personally liable for company debts. They remain liable for their own wrongful acts and for debts they personally guarantee, which lenders and suppliers often require of small contractors.
- Management: An LLC may be member-managed or manager-managed. An operating agreement sets the rules.
- Taxes: By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership. An LLC can elect corporate or S-corporation treatment.
- Licensing: The LLC designates a member or managing agent as qualifying officer (MCL 339.2405).
Corporations
Under the Business Corporation Act (1972 PA 284), a corporation is formed by filing articles of incorporation with LARA. Shareholders own it, a board of directors oversees it, and officers run daily operations.
| Feature | C corporation | S corporation |
|---|---|---|
| Owner liability | Limited to investment, subject to personal guarantees and own torts | Same |
| Federal tax | Corporation pays tax, and shareholders pay again on dividends (double taxation) | Income passes through to shareholders under a federal election |
| Michigan tax | 6% Corporate Income Tax on apportioned business income | Generally no entity-level Corporate Income Tax. Shareholders pay individual income tax |
| Owner count | No limit | Limited number and type of shareholders |
A corporation continues if a shareholder dies or sells shares, which is useful for long warranty obligations.
Comparing the Forms
| Question | Sole proprietorship | General partnership | LLC | Corporation |
|---|---|---|---|---|
| Separate legal entity? | No | Treated as an entity for many purposes | Yes | Yes |
| Personal liability for business debts | Unlimited | Unlimited, joint and several | Limited | Limited |
| State filing to form | None (county assumed name if needed) | None (county assumed name if needed) | Articles of organization (LARA) | Articles of incorporation (LARA) |
| Default income tax | Owner's return | Pass-through | Pass-through | Entity tax (C) or pass-through (S) |
| Article 24 licensing | Owner's individual license | Entity license through a qualifying officer | Entity license through a qualifying officer | Entity license through a qualifying officer |
Licensing Links to Remember
- Every Article 24 entity needs its own license. An LLC cannot contract using its member's individual license.
- The qualifying officer must hold an individual license and supervise the work. Every officer, member, or controlling person must be at least 18 and meet the non-experience requirements (MCL 339.2405).
- A foreign (out-of-state) corporation must be authorized to do business in Michigan before LARA will license it, and a nonresident files an irrevocable consent to service of process (MCL 339.2406).
- A change in members, partners, officers, or control triggers the 30-day and 10-day reporting rules in Section 1.4.
A Worked Example
Two roofers start working together with no paperwork, split profits, and sign contracts as "North Shore Roofing." They have formed a general partnership by conduct. They need an assumed name certificate from the county clerk, and the partnership needs an Article 24 license through a qualifying officer. Each partner is personally liable for the other's negligence. Converting to an LLC would limit their personal exposure to company debts they have not guaranteed. It would not protect either of them from liability for their own negligent work.
Which business form exposes each owner to joint and several personal liability for all business debts, including another owner's negligence?
General partnership
Limited liability company
C corporation
S corporation
A Michigan sole proprietor named Jordan Lee advertises as "Lakeshore Roofing." What must Jordan file to use that name?
Articles of organization with LARA
Articles of incorporation with LARA
An assumed name certificate with the county clerk
Nothing, because sole proprietors may use any trade name
Why is a C corporation said to face double taxation?
It pays both federal and Michigan sales tax on its materials
The corporation pays tax on its profits, and shareholders pay tax again when those profits are distributed as dividends
Its qualifying officer is taxed on the company's income and on wages
It must pay Michigan's Corporate Income Tax twice each year
Sections you finish are checked off in the contents.