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Choosing the Right Legal Structure for Your Business

One of the most critical decisions to make when you are setting up a new business enterprise is the choice of legal structure. There are tax and liability implications to the different forms, and some are far easier to administer and maintain than others. Here’s an overview of the choices available.Sole Proprietorship

A sole proprietorship is the easiest business form to establish, as there are no filing requirements with the state. You simply choose your business name, file for a trade name at your county clerk’s office and secure any required licenses or permits. The sole proprietorship provides no shield from liability for any debts or obligations of the company—your personal assets can be taken to satisfy a judgment. In addition, all income from a sole proprietorship is ordinary income for tax purposes.

Partnership

A partnership in New Jersey differs only slightly from a sole proprietorship. First, there must be at least two members of the partnership. In addition, you want to prepare and execute a partnership agreement to address issues, including but not limited to, the contributions, duties and obligations of the parties to contribute to the joint enterprise, the benefits to be derived, voting/decision making, buyouts, etc . From a liability standpoint, it’s similar to a sole proprietorship—your personal assets can be taken to satisfy a judgment against the partnership or against another partner. All income from the partnership passes through to the partners as ordinary income.

Corporation

To establish a corporation, you must file articles of incorporation with the state of New Jersey, and must prepare by-laws. You will also need to set up tax identification numbers with state, local and federal revenue agencies. There are also other annual requirements—shareholders’ meetings, filings that must be made with the state. However, a corporation generally limits your liability to the amount of your investment in the company. As a general rule, you receive a certain number of shares of stock for your investment and can only lose that investment—your personal assets are typically shielded from liability for any obligations of, creditors or judgments against the company, provided you engage in appropriate corporate formalities,. The tax ramifications depend on the type of corporation established. With a subchapter S corporation (no more than 100 shareholders), all income passes through as ordinary income. With a subchapter C corporation, there is a tax at the corporate level, as well as a tax on any distributions made to shareholders.

Limited Liability Company

Provided you engage in appropriate formalities and elections, a limited liability company offers the protections afforded by a corporation—your liability is limited to the amount of your investment—with the tax advantages of a partnership or S corporation—all income passes through as ordinary income. In addition, limited liability companies generally have more flexibility, fewer annual filing requirements and less paperwork.

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