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What Form or Organization Should I Use in N.J. For My Business?

What Form or Organization Should I Use in N.J. For My Business?

You’ve been looking to purchase a business for months and you finally found your dream candidate.  You have reached a meeting of the minds with the seller, and done your due diligence.  The contract of purchase and sale has been signed by both you and the seller.  Now it’s time to decide upon your form of organization; i.e., corporation, sub-chapter S corporation, limited liability company, or some other form.

In New Jersey, my preference is for the sub-chapter S corporation.  In recent years, the limited liability company has become quite popular because the members in the limited liability company can write their own operating agreement; i.e., it provides for more flexibility than the corporate form.  There are, however, two tax disadvantages to the limited liability company.

The first of these disadvantages is that the members in the limited liability company cannot take a salary; they take a draw, or a guaranteed payment to partners, and then on a quarterly basis pay estimated taxes based upon the amount of the draw.  This is sometimes inconvenient because often the promoters of a new business do not have the cash available to make the quarterly tax payments; remember, with a salary the taxes are automatically withheld from the payments.  Secondly, self-employment taxes apply to limited liability profits whereas with a sub-chapter S corporation, profits can be withdrawn as dividends; self-employment taxes do not apply to dividend payments.  This can result in substantial annual tax savings.

In New Jersey, you can form your own limited liability company or corporation online.  You should visit www.nj.gov/njbusiness/starting.  The cost of forming the entity is $125.00.  Prior to forming the entity, you should go online to the Internal Revenue Service website at www.irs.gov and procure what is known as a Federal employer identification number.  The steps are procuring FEIN, form entity, register with the N.J. Division of Taxation and, if it is a corporation, file the appropriate sub-chapter S election forms with the Internal Revenue Service and the State of New Jersey.  You should seek the services of an attorney to draft an operating agreement if you have selected a limited liability company. If you have selected the corporate form of organization, then articles of incorporation should be drafted by your attorney.  Your C.P.A. can advise you as to filing dates for the subchapter S election, as well as your legal obligations concerning the filing of various tax returns and the due dates of the returns.

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 


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