If you are planning to start a new business enterprise in New Jersey, one of the first decisions you have to make is your choice of business form—what legal structure do you want to use for the business? Here are the advantages and disadvantages of the most common business forms in New Jersey.
Though a sole proprietorship is generally the easiest to set up, it also involves the most risk. To establish a sole proprietorship, you may need nothing more than a business license. If you choose to business under any other name than your own, you may need to file “DBA,” or “doing business as” papers.
For tax purposes, all income you earn is considered ordinary income on your personal return. In addition, the sole proprietorship form does not provide any shield from liability. If your business is sued, the plaintiff may have access to your personal assets to satisfy a judgment.
There is no requirement in New Jersey that you prepare a partnership agreement or that you register with the state as a partnership. If you and another person enter into an oral or written agreement to conduct business together for a profit, you are in a partnership. You must have a business license, if required, and you’ll want to file a DBA registration.
As a partnership, all income earned will pass through to the partners and be taxed as ordinary income. In addition, as a partner, you can be personal liable for any debts or judgments of the partnership, including debts or judgments against your partners.
To run a corporation for profit in New Jersey, you must comply with state business laws by filing Articles of Incorporation and By-Laws, by issuing shares of stock, and by holding meetings and filing reports as set forth in New Jersey Statute.
Depending on the type of corporation you establish, you may recognize pass through income (Subchapter S corporations) or even face double taxation—Subchapter C corporations pay a corporate tax and have taxes assessed on dividends paid. The primary advantage of a corporation, though, is its shield from liability.
Limited Liability Company
The Limited Liability Company, or LLC, is a hybrid, with most of the benefits of a corporation and few of the reporting or tax implications. With an LLC, you must file Articles of Organization, but there are few other annual requirements. Typically, an LLC is formed to avoid personal liability for the debts of the business. Generally, only the LLC is liable for the debts and liabilities incurred by the business, not the members.
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