Are you hoping to start a new business in New Jersey but cannot seem to decide on the best type of business entity for you? You are not alone. While the economy has generally been on a downtrend following the COVID pandemic, business is slowly picking up. More people are ready to set up a company in the state and you, too, can get in on this opportunity and start making some money. But first, you need to decide what setup works best for you. We will cover the most common business forms in New Jersey available to you and touch on why starting a limited liability company (LLC) may be your best bet.
Important Considerations in Business Entity Choice
It helps to note that whatever decision you make at this point will affect integral aspects of your business. Think about your entity choice in the following three key areas:
- How much money will go into paying taxes? The entity determines how and when you pay the government. If you opt for a structure that allows you to pass these payments to individual returns, you can avoid paying the government twice. To get a better idea of what awaits you in the future, talk to a financial expert and decide now rather than later. You may end up avoiding unnecessary payments.
- How protected will you be? Look at it this way. With some setups such as sole proprietorships, you enjoy not having to file so much paperwork. However, it is this simplicity that can soon become your undoing. If a creditor wants to stake a claim and come after you, they can easily do so and can take a huge chunk of your savings. With more structured operations like companies, yes, you will have so much paperwork to file at first. However, if someone wants to come after what you have, it will be hard because the law will recognize the entity as being separate from you as an individual. Are you willing to risk your personal assets or would you rather protect yourself now?
- How much control do you want? Some people want to be on top of the day-to-day activities in the business and cannot be comfortable with taking a seat and watching things unfold. Others are okay with pitching some ideas now and then without being too involved. Some investors are willing to be completely hands-off and watch their money work for them. Figure out how much work you want to put into the business and find a setup that works for you.
In all these cases, you can consult with an attorney to break down the jargon and help you understand what the best choice would be. You can also consider other factors such as flexibility, the ease of adding new members or expanding your operations and profitability. Once you weigh the pros and cons of each possible option, you will have a much clearer idea of which direction you should take. Let’s consider your options.
Sole Proprietorship
As the structure that takes the least effort, time, and resources to set up, the simplest type of business structure has often been a favorite for small ventures. In this case, you are the business, and this helps you easily navigate the accounts and make decisions as you go. However, starting a new business as a sole proprietorship comes with a very big disadvantage. If someone decides to come after the business, they can get what belongs to you as an individual. As such, if you would rather avoid having your finances at risk of being up for grabs by creditors and other parties, it’s better to avoid this option.
General Partnership (GP)
Combining resources with another person, whether expertise or financial, or both, enables you to expand your operations faster. Establishing a partnership in New Jersey is not very different from a sole proprietorship and the requirements are not many. Thus, you can get the business up and running in almost no time. All you need to have is a written partnership agreement that’s clear on what everyone brings to the table. Please note that in New Jersey, failure to have the profit and loss sharing arrangement will imply that everyone has equal rights and responsibilities.
Are there disadvantages to this setup? Yes, you will be personally liable for any expenses or obligations incurred in the course of running the business. That means that if your partner racks up debts in the name of the business, you pay!
Limited Partnership (LP)
A GP’s unlimited liability may not be ideal for someone who does not want to bear the burden brought on by other members of the organization. In this case, you can always choose to get into an LP where some members will be fully liable and you can be partially liable, giving you protection from personal liability. In these setups, you can bring in the capital or expertise and other people can handle the management. Thus, if anything goes wrong and the business risks closure or bankruptcy, you will not have to pay for the management decisions made. These setups are not widely used in New Jersey.
Limited Liability Company (LLC)
An easy way to separate yourself from the business is by setting up an LLC in NJ, which many business owners now do. First, it establishes that you and the business are not the same and you are not liable for the debts and liabilities accrued from its operations. As such, any debts accrued by the business are not your obligation. The business should pay these, and if it’s unable, its assets can be sold to account for the balance. It’s rare for the court to come after your personal belongings unless it can prove that you participated in illegal deals.
Secondly, you do not get to pay taxes twice like with most other setups. Instead, you can pass on what you owe to the government to your personal books. As you pay your owner’s individual income tax returns on that level, you can add what you’ve made from the business and pay only once. To make things even better, you can even elect to pay your taxes as another entity unrelated to LLCs.
It might look like it takes a lot of work to start this entity but that is hardly the case. Once you file your Articles of Organization and comply with the annual requirements, you are good to go.
Corporation
Other than an LLC, you can also ensure you enjoy some protection from personal liability by filing a Certificate of Incorporation and creating a corporation, which is a separate legal entity. It recognizes you as a stockholder and allows you to start such a setup even when engaging in professional services. You can open an s corporation or a c corporation.
Conclusion
As you create a new business in New Jersey, make sure you understand what each entity can spell for your finances. Running a successful business in NJ comes down to protecting your entity’s financial situation and legally and making the right decision at this stage plays a crucial role in this. All the best!