Sole Proprietorship This is a business where one person furnishes all the capital and assumes all the responsibility and liability. If you have all the skills and capital necessary to operate your business, then this form of business organization should be considered very carefully. All business entities must register with the state of New Jersey before conducting business. A sole proprietorship can be registered under the individual owner’s Social Security number or under an Employer Identification Number (EIN) obtained from the IRS. Partnership In a partnership, the liability of each general partner for all the debts of the firm is unlimited, just as it is in a sole proprietorship. This generally means that each of the general partners is personally responsible for all the debts of the firm. This amount could very easily be in excess of the amount they have invested in the business. A partnership, like a sole proprietorship, lacks continuity. This means that the business terminates upon the death of the owner or partner, or upon the withdrawal of a partner. In some special situations, a limited partnership (see below) should be considered. You also have to remember that one of the principal causes of failure among businesses is inadequate financing, so don't overlook the fact that it is your responsibility to provide, or obtain from others, sufficient money to establish a firm foundation for your enterprise. Should you need more money, sharing the ownership of the business is one way of obtaining it. You also may lack certain technical or management skills that are of major importance to the business you have chosen. Obtaining a partner with these skills may prove the most satisfactory way of covering this deficiency. Great care should be taken in deciding on a partner. Compatibility, personality, and character, as well as the ability to render technical or financial assistance, should all be given serious consideration. Friendship is a wonderful thing, but friendship alone should not be the sole or determining factor in selecting a partner. The selection of a partner could well be one of the most important decisions you will have to make. Base your decision on logic and not on emotion. The act of any one partner, relative to the business, will bind the partnership and partners for all their assets, whether or not they invested in this particular business. Although the law does not specifically require it, we very strongly recommend that written Articles of Partnership be executed and that this agreement cover all the points suggested below. It is extremely important that partners sign a written agreement if profits or losses are to be shared in any way other than strictly according to the interest each partner holds in the business. A written agreement, properly drawn, can prevent misunderstandings among partners in later years; verbal agreements are subject to different interpretations by well-intentioned people, especially after the passing of a few years' time.
Limited Partnership: Refer to the NJ State Statutes--N.J.S.A. 42:2A for information on limited partnerships. Also, you may wish to consider a new form of partnership, the limited liability partnership. Refer to N.J.S.A. 42 for more information on limited liability partnerships. Corporation In a corporation, the liability of the owners is limited to the amount they pay for their shares of stock. A corporation is a legal entity, and its continuity is unaffected by death or the transfer of shares of stock by any or all owners. There is a certain type of corporation, known as an "S corporation," in which profits are passed through to the individual stockholders, much the same way as in a partnership. To be treated as an S corporation, all shareholders must elect S-Corporation status. There is also a taxation arrangement known as a Qualified Subsidiary Sub-Chapter S (QSSS). Information concerning New Jersey tax treatment of income from S corporations received by individuals is available in GIT-9S, Income from S Corporations. One arrangement may be more advantageous for you than the other, so please discuss them with your financial advisor.
C Corporation A C corporation is not actually a business structure, but the "tax status" of the company. All corporations are C corporations unless they opt to take advantage of a provision in both federal and state tax laws to become S corporations. Taxes on profits of a C corporation are paid both by the corporation itself and by the shareholders when the profits are received as dividends. However, shareholders cannot deduct any losses posted by the C corporation. S Corporation As of July 7, 1993, Federal S corporations may elect New Jersey S corporation status; prior to July 7, 1993, New Jersey law did not recognize S corporations. New Jersey S corporations pay a lower corporate tax rate, and the shareholders report their pro rata share of S corporation income on their New Jersey individual income tax returns. The combined tax between the electing New Jersey S corporation and its shareholders generally will not exceed the 9% New Jersey Corporation Business Tax Rate. The rate is 7.5% for corporations with entire net income of $100,000 or less. A corporation may elect to be a New Jersey S corporation only if it meets all of the following conditions: - The corporation is registered as a New Jersey corporation or as a foreign corporation authorized to do business in New Jersey by the Division of Revenue's Business Services Bureau; and
- The corporation is or will be an S corporation pursuant to Section 1361 of the Federal Internal Revenue Code; and
- Every shareholder of the corporation consents to the election and the jurisdictional requirements as detailed in Part II of the New Jersey S Corporation Election Form CBT-2553 [pdf 372k]; and
- The corporation consents to the election and the assumption of any tax liabilities of any non-consenting shareholders who were not initial shareholders as indicated in Part III of Form CBT-2553 [pdf 372k].
Corporations that have not made the election or have not been approved as New Jersey S corporations must continue to file the New Jersey Corporation Business Tax Return, Form CBT-100. Approved New Jersey S corporations must file the S Corporation Business Tax Return, Form CBT-100S. For more information on S corporations, refer to NJ Division of Taxation publication:
S GIT-9S, Income from S Corporations [pdf 420k]  Limited Liability Company (LLC) The New Jersey Limited Liability Company (LLC) Act, N.J.S.A. 42:2b-1, provides for the establishment of LLCs in New Jersey and makes many choices available to people establishing an LLC as a business entity. To form an LLC in New Jersey, one or more authorized individuals must complete a Certificate of Formation and file it with the Division of Revenue. The certificate should include the name of the limited liability company and the name and address of the registered agent. The latest date of dissolution should be noted, if applicable, as well as any other matters the members decide to include in the certificate. The certificate must include a statement that the LLC has one or more members, and it may stipulate that the entity will be formed at any date or time after filing that is specified in the certificate of formation. An LLC formed under the Act is a separate legal entity and shall continue as such until cancellation of the LLC's certificate of formation. A foreign LLC must register with the Division of Revenue before doing business in New Jersey. Typically an LLC will be governed by an "operating agreement." The operating agreement or other written agreement may set forth details relating to membership, including relative rights, powers, and duties (e.g., voting). It may also provide that the LLC is headed by a manager and may even provide for classes or groups of members in the manner established in the operating agreement. Generally, LLCs are treated as partnerships for tax purposes. However, under certain circumstances, you may elect to treat your LLC as a single member entity or as a corporation for tax purposes. Consult with a tax professional for advice on electing the single member or corporate tax treatment options. Not for Profit A not for profit organization is a type of business whose primary objective is to support issues or matters of private interest or public concern for non-commercial purposes.
There is no simple form or single government agency to help establish a nonprofit organization. Rather, you may need to follow a number of steps and consult a number of different agencies, to comply with all the pertinent procedures and laws. Although most of the procedures below do not involve the Division of Taxation, we offer the following basic information and links to assist you.
Formation - You form a nonprofit organization through incorporation or, if you do not incorporate, with a constitution, articles of association, trust or other instrument.
Note: if your organization wants IRS 501(c)(3) status, the certificate of incorporation or other formation instrument must contain IRS-required wording. See IRS Pub. 557 (pdf 418k).
Formation by Incorporation - You may form a nonprofit corporation by completing and filing the Division of Revenue's Public Records Filing for New Business Entity form. Or an attorney or the Center for Nonprofit Corporations may draft a certificate of incorporation for a fee. Also, libraries and bookstores have do-it-yourself resources. Religious nonprofits may want to call Commercial Recording at 609-292-9292 for details on "Title 16" incorporation (reduced filing fee and no annual report required.)
Formation without Incorporating - For information on forming a nonprofit with a constitution or other formation instrument, consult a professional or visit a library or bookstore for do-it-yourself resources. No New Jersey State form is available.
Bank Accounts - Have your bank specify the type of documentation or number needed. Or obtain a federal identification number (FEIN) with federal form SS-4.
Federal Tax Exemption, 501(c)(3), etc. - Visit the IRS website at www.irs.gov or call the IRS exempt organization number, 877-829-5500, for information and an application for federal exemption as a 501(c)(3) or (c)(4), etc. organization.
For details on the above and other procedures, view or download Starting a Nonprofit in New Jersey - Questions and Answers (pdf 163k) (Division of Taxation Publication RSB-100) Links and Information for Charities Registration and other Offices Comparison Chart The principal advantages and disadvantages of the three most commonly used business organizations are as follows:
Sole Proprietorship Advantages - Low start-up costs
- Greatest freedom from regulation
- Direct control by owner
- Minimum working capital requirements
- Tax advantage to small owner
- All profits to owner
| Disadvantages - Unlimited personal liability
- Lack of continuity
- More difficult to raise capital
| Partnership Advantages - Ease of formation
- Low start-up costs
- Additional sources of venture capital
- Broader management
- Limited outside regulation
| Disadvantages - Unlimited personal liability
- Lack of continuity
- Divided authority
- Difficulty in raising additional capital
- Hard to find suitable partners
| Corporation Advantages - Limited liability
- Specialized management
- Ownership is transferable
- Continuous existence
- Legal entity
- Easier to raise capital
- Unity of action account having
centralized authority in board of directors
| Disadvantages | Limited Liability Company Advantages
- Limited liability
- Flexible management structure and ownership
- Continuous existence (NJ LLC's)
- Legal entity
- Easier to raise capital
| Disadvantages
- More expensive to organize than a partnership or proprietorship
- More regulations than a partnership or proprietorship
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