Choosing the Right Form of New Jersey Business Entity
New Jersey business law gives owners the ability to choose between different forms of entities to meet their particular concerns. The choice is important and has long lasting effects. Below is an overview of the basic types of business entities allowed by New Jersey business law.
A general partnership is an entity where two or more people own a single business and have not formed any other form of business entity. The partners own the business and are personally responsible for the business’s debts and obligations, so if the business goes out of business they partners must still pay the business’s debts. A partnership may be “de facto,” where the partners are acting together but have taken no steps to formalize their relationship; or it may be “de jure,” where they have formalized their relationship and how the business will be run. There is no income tax at the entity level in a general partnership, meaning there is more revenue to be distributed as profit to the owners. While a de facto partnership will exist without a partnership agreement, it is important to have a well written partnership agreement to ensure the smooth operation of the business and to avoid disputes between the owners.
A sole proprietorship is the basic form of solo business. There is one owner who is personally responsible for the business’s debts and other obligations. Like a general partnership, the business itself pays no income tax.
Limited Partnership (LP)
A limited partnership has two classes of owners: limited partners and general partners. General partners own and operate the partnership’s business and are personally liable for its obligations, while limited partners have an ownership interest but do not participate in its management and have no personal liability. A limited partnership must have a written agreement spelling out the interests of the different classes of partners.
Limited Liability Partnership (LLP)
Limited liability partnerships are most often used in the professional services. In an LLP, while a general partner has liability for most of the company’s obligations, none of the partners are responsible for the malpractice of the other partners. Because of an LLP’s nature, it is even more important to have a well written partnership agreement.
Unlike partnerships, in most cases the owners of corporations, or shareholders, do not have personal liability for the debts of the business, which means if the business fails the owners can walk away from its debts. However, generally a corporation (except for an S Corporation, see below) is taxed on its income at the entity level and then the shareholders are taxed at the personal level on the income they receive from the corporation after it was taxed at the corporation level, thus imposing “double taxation” which the partnership form of entity legally avoids.
A C-Corporation (C-Corp) is generally used for larger or more complex business with multiple employees. It is a separate entity from those who own it, and is taxed independently from its owners, but maintains the “corporate shield” from liability. The owners elect a board of directors to oversee major policies and decisions. Day to day operations are carried out by officers, who may or may not also be shareholders.
An S-Corporation (S-Corp) is similar to a C-Corp but has the advantage that, like a partnership, it is not taxed separately from its owners. The shareholders thus avoid the double taxation of a C-Corp, but keep the “corporate shield” from liability. However, there are significant restrictions on C-Corps. For instance, the business can have no more than 100 shareholders and can only have one class of stock.
Limited Liability Companies
A limited liability company, known as an “LLC,” combines the advantages of both partnerships and corporations. Like a corporation, the owners, known as members, are not responsible for the company’s debts. However, like a partnership, an LLC is not taxed at the business level, and thus like partnerships LLCs avoid the double taxation imposed on C corporations without the complex rules imposed on S-Corporations.
What We Can Do
Our attorneys help owners choose the form of entity that it best for them, organize that entity and register it with the appropriate governmental authorities, and help draft agreements to ensure that the business will operate smoothly for the success of the business – and the owners themselves. We also represent businesses in lawsuits with employees, regulatory agencies, the public and other businesses, as well as in disputes among the owners themselves. This experience gives us a unique advantage in anticipating problems that may occur down the road and trying to avoid them before they happen.
Call us at (973) 890-0004 or fill out the contact form on this page to schedule a consultation with one of our New Jersey business attorneys. We can help.