Business owners have the option to form a sole proprietorship, a partnership, limited liability company (“LLC”), or a corporation. Each business structure offers different types of liabilities, expenses, and tax treatment. Choosing the right business structure generally depends on the type of business, how it will be run, and the number of owners.
Owner/Business Liability
Generally, the more risky the business activity, the better it is to operate the business through a corporation or an LLC. Corporations and LLCs provide New Jersey business owners with limited liability. This means that anyone seeking compensations for anything related to the business will have a hard time placing personal liability on the business owner.
On the other hand, owners of sole proprietorship and partnerships can normally be held personally liable for business debts. Owners of sole proprietorship will always be responsible for claims against the business. Similarly, in a partnership, every partner can be held personally liable for claims against the business. This means that if someone won money in a law suit against the partnership, that person could collect from any one of the partners. Therefore, if one of the partners filed for bankruptcy or simply did not have any money to pay, the remaining partners would be responsible to make payment.
Expenses
Sole proprietorships and partnerships are the easiest to form and maintain with minimum expense. There is little special paperwork that needs to be filled out to establish these business structures, and there are rarely any fees associated to maintain them.
Conversely, corporations and LLCs are more difficult to form and can be expensive to establish and maintain. Businesses that establish a corporation are required to file “articles of incorporation” with the secretary of state and pay fees associated with the incorporation. Similarly, LLCs must register with the secretary of state, designate an agent for service of process, and pay associated fees for registration. Businesses that operate as corporations and LLCs must also have separate business bank accounts and keep detailed records of all business finances.
Taxes
Sole proprietorships, partnerships and LLCs have flow-through tax liability. Business owners must report taxes on their own tax returns for all net profits from the business, but there are no taxes at the company level. For example, if a partnership or an LLC has two owners and net profits of one million dollars, the partners must each report five hundred thousand dollars on their personal tax returns, regardless if money was taken out of the business.
If you are forming a new business in New Jersey our business attorneys can help. McLaughlin & Nardi’s attorneys regularly represent individuals with start up and formation of a business. We help owners draft partnership agreements, operating agreements, bylaws, and shareholder agreements, article incorporation, purchase and sale of businesses, from mom and pop stores to large industrial operations, including restructuring, financial counseling and tax advice.
To learn more about what we can do to help, please e-mail us or call one of our lawyers at (973) 890-0004.