FAQs Choosing a Business Structure in NJ

1. How do you decide what kind of business entity to start?

There are many different types of business structures to consider. The four most prevalent types include: sole proprietorship, partnership, corporation, and Limited Liability Corporation. When deciding which business structure would be right for you, consider the following: (1) the purpose, or objectives, of your new business, (2) who will be the stakeholders in the business, (3) what kind of liability are you willing to risk in your new venture, (4) the complexity and length of time it will take to start your business, (5) the amount of capital you have to get your business off the ground and (6) the state regulations that govern each different type of business.

2. Should I consult an attorney when starting a business?

It is helpful to consult with a business attorney about what might be your best option. We can assist you in properly filing the paperwork necessary to register your business with the State. We can also help to keep it compliant with state and local regulations, file any amendments or changes to your business, obtain any permits or licenses necessary for your particular business, and assist with filing an annual report with the State. We can also help you with the very important task of drafting or negotiating an Operating or Partnership Agreement.

3. What is a sole proprietorship?

A sole proprietorship is a business owned and operated by one person, but has very few legal protections. The owner receives all of the profits from the business, but the owner is also personally responsible for any and all debts or losses of the business. Additionally, the business ends once the owner decides that he/she no longer wants to continue operating the business or dies.

4. What is a partnership?

A partnership is an agreement between two or more individuals who carry on a business together for a profit. A partnership does not necessarily need to be in writing, but can be an oral agreement between parties, or even just actions that indicate an intention to be partners. However, I would highly recommend that the partners have a Partnership Agreement which outlines their roles, responsibilities and equity.

There are two main types of partnerships: general partnerships and limited partnerships. General partners share losses, profits and business management equally, unless otherwise agreed. In a limited partnership, there is at least one general partner and at least one limited partner who is solely an investor.

5. What are the advantages and disadvantages of a partnership?

The advantages of a general partnership are that partners share both the profits and losses equally and individually, so not all liability is on one person. The disadvantages are that you are liable for your partners actions and decisions taken as an agent of the partnership.

The advantages of a limited partnership is that the limited partner is only liable for the amount of money that the partner invested into the business, even if liabilities exceed that amount. However, the disadvantage is that the limited partner has no management rights of the business and are not involved in day to day operations.

6. What is a limited liability company (LLC)?

A limited liability company is distinct from its owners and has characteristics of both a corporation and a sole proprietorship. The owners have limited personal liability for company debts or losses; however, the LLC can choose how they want to be taxed: as a sole proprietorship, partnership, corporation or S corporation.

7. What are the advantages and disadvantages of a limited liability company?

The advantages of a LLC is the tax structure because the owners are only taxed once, such as in a sole proprietorship, and their personal assets are protected from the debts and liabilities of the LLC. The disadvantages however are that LLCs may end when a member of the LLC decides to leave the business or dies. Additionally, all net income of the LLC is subject to taxation.

8. What is a corporation (C corporation)?

A corporation is a rather complex business structure that has a Board of Directors and shareholders, and is an entity separate from its shareholders. Taxes are paid through corporate profits and shareholders can be paid dividends.

9. What are the advantages and disadvantages of a C corporation?

The advantages are that the shareholders have no personal liability for the debts and actions of the corporation, corporations can raise capital through selling stock in the company, and the corporation can continue in perpetuity. The disadvantages include double taxation (the corporation is taxed once on the company profits and then shareholders pay taxes on any dividends received). In addition, there are many more state regulations that must be followed, and hence, more record-keeping.