Michigan LLC Tax Structure – Classification of LLC Taxes To Be Paid

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A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in Michigan, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.

IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of a Michigan LLC and related aspects.

Classification of Michigan LLC Taxes

An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:

  1. Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
  2. Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. Michigan does not have a separate State Tax Identification number.
  3. State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in Michigan. These taxes are handled through Michigan Workforce Commission.
  4. Franchise Tax Report – In Michigan, the LLCs do not file Franchise Tax. Instead, they file an Annual Report to the Secretary of State.

Federal Tax Classifications

When LLCs were recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.

LLC Taxes to be Paid in Michigan 

An LLC in the state of Michigan has to pay three types of taxes to the Michigan Department of Treasury   :

State Income Tax

A member of an LLC in Michigan has to pay himself through the earnings. These earnings get reflected in your personal Tax return & are calculated at the time of paying the Income Tax. The Standard Michigan State Income Tax rate of 4.25% is applicable to your earnings. You get the opportunity to claim all the standard allowances & deductions upon filing the tax return.

State Sales & Use Tax 

The state of Michigan levies Sales & use tax on tangible goods & services provided by an LLC. The State Sales & Use tax rate in Michigan is 6%. However, certain localities or towns may charge additional local sales tax.

Business tax

All corporations working in the State of Michigan are required to pay the Business tax in the State of Michigan. The Business Tax Rate of 4.95% is payable by an LLC in Michigan.

Federal Self-Employment  Tax

Every member or manager of the Michigan LLC earning profit from the LLC has to pay the Federal Self-Employment Tax (also called the Social Security or Medicare Tax). The Federal Self-Employment Tax applies to all the earnings of an LLC member or manager. The Federal Self-Employment Tax rate in Michigan is 15.3%. To deduct your LLC’s expenses from the income earned, you must calculate the Self-Employment Tax your LLC owes.

Federal Income Tax 

Like State Income Tax, this tax also applies to the earnings you make in your LLC. The Federal Income Tax Rate is subject to the earnings you make, the type of your LLC’s industry, the LLC tax bracket applicable, deductions applicable, etc. 

Employee & Employer Taxes 

Any LLC with employees on the payroll has to pay different kinds of taxes that apply to all the employees. The Employee & employer tax implications are different from all the other types mentioned above. For Example, All employees of an LLC have to collect and withhold the Payroll tax at the time of receiving the salary. Irrespective of whether you withhold the Federal Tax or not, each employee has to file an individual Tax return.

Default LLC Tax Classification Rules

By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):

Disregarded Entity (Single-Member LLC)  

A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.

Sole Proprietorship Taxes

As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. Michigan does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.

Partnership (Multi-Member LLC)

Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.

Partnership Taxes

Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.

Options to Change Default Tax Classification

The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:


An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity. 

C-corporation Taxes

An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.


The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.

S-corporation Taxes

An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.

Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation,  the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.

Choosing a Classification for Your LLC

In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in Michigan. 


Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability. 

Tax Classification Flexibility

For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.


As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. A Michigan LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)

A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).

An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a Michigan S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.

Classification of LLC Taxes – At a Glance

Points of Difference             LLCS- CorporationC-CorporationSole Proprietorship 
TaxationAs an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.  Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.  The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.
Double TaxationThe LLC does not have Double TaxationThere is no Double Taxation in S-Corporation There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.No Double Taxation in a sole proprietorship.
Self Employment TaxThe net income of the members or owners is subject to self-employment tax. The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.The C-Corporation is subject to self-employment tax.The Sole-proprietorship is subject to self-employment tax
Pass-Through Income/LossAn LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members. Yes, An S Corporation is a Pass-through Entity.No, A C-Corporation is not a Pass-through Entity.Yes, A Sole-proprietorship is a Pass-through Entity.

How Do LLCs Pay Taxes in Michigan

Any LLC operating in Michigan is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.

LLCs are unique entities that possess attributes of both corporations and partnerships. However, when it comes to taxation, LLCs are what is known as “pass-through” entities. This means that the company itself does not pay federal income taxes; instead, the tax burden passes through to the individual LLC members who report their share of profit or loss on their personal tax returns.

The state of Michigan applies the same tax principle to LLCs. Unlike in some other states, there is no specific state-level LLC tax in Michigan. LLC members pay taxes based on their share of the LLC’s profits on their individual state tax returns. The state treats LLCs as either disregarded entities or partnerships for tax purposes, depending on the number of members.

If an LLC in Michigan has only one member, it is considered a disregarded entity for tax purposes. In this case, the LLC income is treated as personal income for the single member. This income is reported on their individual federal and state tax returns, and they are subject to both federal and state income taxes on that share of profits.

On the other hand, if the LLC in Michigan has multiple members, it is classified as a partnership for tax purposes. The partnership prepares its own tax return, known as a Michigan Partnership Return (Form MI-1065), reporting its income, deductions, and credits but it doesn’t actually pay taxes itself. Instead, members receive a Schedule K-1 (Form MI-1065) that shows their share of partnership income, losses, deductions, and credits. Each member includes this information on their personal tax return.

It’s important to note that while LLCs do not pay a separate LLC tax in Michigan, they may still be required to pay other taxes depending on various factors. For example, an LLC might be subject to sales tax on the goods it sells or use tax if it purchases items for business use from out-of-state vendors. Additionally, an LLC with employees in Michigan must pay state and federal payroll taxes on their wages.

Finally, it’s worth mentioning that there may be complexities involved in understanding and fulfilling tax obligations for LLCs. Seeking assistance from a qualified tax professional or consulting the resources provided by the Department of Treasury can provide further guidance and clarification.

In conclusion, LLCs in Michigan enjoy the advantage of pass-through taxation. Individual members are responsible for reporting the LLC’s income on their personal tax returns. Regardless of whether an LLC has a single member or multiple members, the taxation principle remains relatively straightforward. Understanding the basics of LLC taxation in Michigan is crucial for all LLC owners to ensure compliance with tax regulations and meet their fiscal responsibilities.


Which Type of Corporation has double taxation?

C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.

Why is an LLC called a pass-through business entity?

An LLC is often referred to as the pass-through entity because the income or the assets pass through the members or owners of the LLC.

What is the default classification of the LLC?

The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.

What should be taken into consideration while changing the default classification of the LLC?

When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.

How Do LLCs Pay Taxes in Michigan

LLCs in Michigan are treated as separate legal entities, distinct from their owners. This characteristic allows profits and losses to be allocated in different ways among the owners. These options often lead to more favorable tax treatment compared to other business structures like sole proprietorships or corporations. Nevertheless, understanding the specific tax obligations and available options for an LLC operating in Michigan is still critical.

One of the essential aspects of an LLC tax structure is the flexibility in choosing taxation class. By default, an LLC in Michigan is classified as a pass-through entity. It means that the LLC does not pay federal income tax; instead, individual members report the profits and losses on their personal tax returns. This pass-through taxation eliminates the double taxation that occurs with C-corporations.

Regardless of its federal income tax status, Michigan imposes its tax obligations on LLCs. LLCs must file the Michigan Business Tax (MBT) returns annually or, for smaller enterprises, file the Michigan Corporate Income Tax (CIT). The amount of tax owed is generally calculated based on a combination of factors, such as the company’s gross receipts, allocated based on the sales within the state and payroll attributed to Michigan staff, and other specific industry-related factors.

Business activities also influence how LLCs pay taxes in Michigan. Companies involved in selling tangible personal property within the state are typically required to remit sales taxes collected from customers. Additionally, certain industries, such as hazardous waste management or telecommunications, might be subject to specific taxes or regulations.

Another important aspect to consider is the Employment Taxes imposed on LLCs with employees. LLCs operating in Michigan are required to pay unemployment taxes, covering their employees’ unemployment insurance. It is important for LLC owners to properly register and pay these taxes in order to avoid penalties and to provide proper unemployment benefits to their workers.

Lastly, it is crucial to note that each LLC may have unique tax circumstances depending on its financial activities, industry involvement, and the nature of its ownership structure. Seeking professional advice from tax professionals or accountants who specialize in Michigan tax laws is highly recommended. They can guide LLC owners in ensuring accurate tax reporting and compliance with the regulations.

In conclusion, understanding how LLCs pay taxes in Michigan is paramount for business owners looking to establish an LLC or those already managing one. Pass-through taxation is a key benefit of LLCs, as it means that members report profits and losses on their personal tax returns, avoiding double taxation at the corporate level. However, various Michigan taxes, such as the MBT or CIT and Employment Taxes, still apply to the LLCs and their owners. Staying well-informed about tax obligations and seeking professional tax advice are crucial steps to ensure tax compliance and avoid potential penalties in Michigan.

In Conclusion

Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.

About Author & Editorial Staff

Steve Goldstein, founder of LLCBuddy, is a specialist in corporate formations, dedicated to guiding entrepreneurs and small business owners through the LLC process. LLCBuddy provides a wealth of streamlined resources such as guides, articles, and FAQs, making LLC establishment seamless. The diligent editorial staff makes sure content is accurate, up-to-date information on topics like state-specific requirements, registered agents, and compliance. Steve's enthusiasm for entrepreneurship makes LLCBuddy an essential and trustworthy resource for launching and running an LLC.

1 thought on “Michigan LLC Tax Structure – Classification of LLC Taxes To Be Paid”

  1. If I live in Michigan and plan to sell products online how do I check how much cities levy in taxes and for the MI corporate income tax?


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