Steps To Take When Starting A Business
The first step in starting a business is to choose the right business idea. After deciding what kind of business to start, a prospective business owner should consider forming a legal business entity. One of the most important decisions a business owner must make is the best business entity for their organization. This is a crucial decision when starting a business because it has significant legal and tax consequences. The right business structure can provide legal and tax protection from its business owners but only when it is formed properly. If a prospective business owner chooses not to create a legal business entity or does not choose the right one for its business, the business owner is exposed financially and may be responsible for all of the debts and liabilities of their business.
In [New Jersey], the first step in forming a legal business entity is filing a certification of formation or incorporation, or other authorization documents, for the public record. Notably, general partnerships and sole proprietorships do not have file formation documents with the State but they do need to register. All domestic (in-state) for-profit businesses and foreign (out-of-state) non-profits must pay a statutory filing fee of $125, while domestic non-profits must pay a filing fee of $75. Additionally, all legal entities are subject to annual filing requirements, while corporations will be subject to corporation business tax from the date of formation to the date of dissolution.
Once the entity is formed, the business should register for tax and employer purposes using Form NJ-REG. Filing Form NJ-REG ensures that the business is registered under the correct tax returns and notices. Normally, a business will use your federal employer identification number (FEIN) as your New Jersey tax identification number. If an entity is subject to the entity formation/authorization filing in the previous step, you may submit both the business entity and tax registration filings together online.
NJ-REG can also be filed separately, but it must be filed within 60 days of forming the new business entity.
Finally, for any type of business structure comprised of more than one (1) business owner, members or shareholders should establish an operating agreement (LLCs) or shareholders agreement (Corporations). An operating (shareholders) agreement is a key document that outlines the business’ financial and functional decisions, including rules, regulations and provisions. It provides special protections and establishes responsibilities and duties. Once the document is signed by the members (shareholders), it acts as an official contract binding them to its terms.
Types of Business Entities in New Jersey
Every business owner has to choose a legal structure for their business in order to operate, register, and pay taxes. There are several types of business structures that a business owner can choose from. Each structure has its advantages and drawbacks when it comes to taxes, personal liability, partnerships, and registration requirements.
- Sole proprietorship: This is the most basic type of business to establish. There is only one (1) owner who is solely responsible for the business’ assets and liabilities. This structure provides limited protection from its owner.
- General Partnership: In a general partnership, two or more people share ownership of a single business. The partners manage the business and are responsible for all of the business’ debts and obligations. The specific details of the partnership arrangement should be written out formally in order to define the roles of each partner and what should happen if the business fails.
- Limited Partnership (LP): Limited Partnerships have both limited and general partners. The general partners operate the business while the limited partners invest in the business with limited liability and thus limited input in managing the business.
- Limited Liability Partnership (LLP): Not to be confused with a Limited Partnership, a Limited Liability Partnership is similar to an LP, but with one key distinction. In an LLP, even general partners have limited liability, i.e. they are not liable for the malpractice of another partner.
- Limited Liability Corporation (LLC): The most common type of business to establish. An LLC mixes features of both corporations and partnerships. Much like a Corporation, business owners of an LLC are not liable for the debt of the company. Unlike a Corporation, an LLC does not file separate taxes. Rather, each partner (or member in the context of LLCs) includes their share of the profits on their personal tax returns.
- C-Corporation: A C-Corporation is more complex than other business types and is suggested for larger, established companies with multiple employees. It is an entity to itself, completely separate from its owners. This means that the corporation can be sued or taxed independently from its owners, who are referred to as shareholders. The shareholders of a C-Corporation elect a board of directors to oversee major policies and decisions and appoint officers to carry out daily business operations.
- S-Corporation: An S-Corporation is similar to a C-Corporation, except that the business is not taxed separately from the owners. S-Corporations are also similar to LLCs, but with more limitations. The shareholders are able to avoid the double taxation of a C-Corporation, but the business is limited to 100 shareholders and has only one class of stock.
- B-Corporation: A B-Corporation or Beneficial Corporation is a new business structure in the United States that is set up to both benefit society and return a profit for shareholders. Directors of a B-Corporation are required to balance the interests of shareholders, workers, the community, and the environment in making decisions. Shareholders decide if the corporation has achieved a material positive impact, as defined by the organization beforehand.
Costs of Forming a Business in New Jersey
The state filing fee for New Jersey incorporation is $125. Furthermore, the Department of Treasury, Division of Revenue requires that all business entities file an annual report be filed each year by the anniversary of your original filing date. For LLCs, the filing fee for annual reports is $75, with a minimum annual tax fee of $125 per year. Corporations are also required to pay annual tax fees to the Department of Revenue, with the minimum corporate tax fee being $500 per year.
Speak To An Attorney Today
Starting a new venture in the business world is a complicated process. Whether you are starting a new business or maintaining, buying, or selling an established one, you need an attorney to guide you through the laws of the State. There are several legal ramifications of starting a business, including issues related to liability, copyright, employee rights, and everything in between. As you get your business of the ground, a business owner should consult with a business attorney. The benefits of forming a legal business entity can only be achieved when your business entity is formed correctly. Having counsel at the outset to guide you through the formation process, answer any type of questions and consult with on your particular business matters could save an owner hundreds, if not thousands, of dollars. It could save your business.