Frequently Asked

New Jersey Business

Law Questions

A New Jersey business can be created and owned a number of ways.  Your business can be a corporation, proprietorship, LLC, partnership, joint venture, etc. 

A corporation is created as a separate legal entity, differing it from some other types of businesses. This means that it is considered an independent legal body. As such, it is separate from all of the people who own, control, and/or manager it. This essentially means that New Jersey business and tax laws view the corporation as a distinct legal "person”, meaning that the corporation itself enters into contract, incurs debts, and pay taxes, not the owners. Being a separate legal entity, the owners of the corporation are generally not responsible for the debts of the corporation, except under special circumstances. This is called limited liability, and is arguably the main reason why people establish corporations.

Other important traits also arise from a corporation because it is a separate legal entity. One example is that a corporation does not end when its owners or shareholders die or sell the business.

Should You Form a NJ Corporation for Your NJ Business?

Forming a corporation requires some expense and formality in setting it up and issuing stock (shares in the corporation).  You should form a corporation if you have good reason to do so. If you merely want to limit your personal liability for business debts, forming a limited liability company (LLC) or a subchapter "S” corporation is probably smarter and less costly, because LLCs and "sub-S” corporations are both less expensive to form and less complex to run. But there are some situations in which incorporating your business instead of forming an LLC or sub-S corporations may not make sense:

Is There More Paperwork Involved in Running a NJ Corporation

Than Other Types of Businesses?

Yes, Corporations must follow specific statutory rules and regulations that other businesses, such as sole proprietorships and partnerships for example, do not have to follow. This can involve more paperwork than your average business that is not a corporation. For instance, certain corporate formalities must be followed by all corporations under law. These formalities include holding and recording minutes of annual shareholder and director meetings, as well as recording important director decisions in document form. In addition, corporations must file and pay taxes on a separate corporate tax returns and must set up double-entry bookkeeping systems to record business transactions, complete with daily journals and a general ledger.

Are There Any Legal Responsibilities That Directors and Shareholders of Closely Held Corporations Have Toward Each Other?

Yes.  NJ business and corporation law imposes a fiduciary duty on business directors.  They must act in the best interests of the company's shareholders. For closely held corporations, there may be a fiduciary responsibility between shareholders in some instances.

In closely held businesses, however, majority shareholders have potential to damage the interests of small shareholders. Since most investors do not want to buy closely held shares, minority shareholders have few options when their interests are adversely affected. In response, New Jersey and its courts have recognized fiduciary duties among shareholders of closely held businesses.

These duties depend on the state and the particular circumstances of the case.

Can You Buy or Sell a Closely Held Business in New Jersey?

Yes. Closely held businesses may be sold like any other business and may be bought as long as the current shareholders of the business are willing to sell it. Closely held businesses often involve family members or close relationships, which may complicate the sale, since sale often comes after an emotional event, such as divorce, estrangement, or death.

One complicated issue usually involved with the sale of a closely held business is determining how much the business is worth. Since the shares of the closely held business are not commonly traded, parties often disagree as to what a fair price is for the business. It can be helpful to bring in a financial expert or attorney to assist in placing a fair value on the closely held business and reaching an amicable agreement for its transfer.

Another difficulty that sometimes arises involves the transferability of the business interest. This depends on the underlying form of the business. Some transfers may be complicated, while others may not have any difficulties at all. For example, in a sole proprietorship, the transaction is relatively straightforward, as the buyer simply purchases the assets of the business and takes over the operations. However, for partnerships and limited liability companies (LLC), the transfer can be quite complicated. Even if a partner or LLC member decides to sell his/her interest, a buyer cannot participate in the business unless the remaining partners or members consent. Therefore, a buyer can only begin to see the profits that the seller was receiving if the other members of the LLC/partnership agree to allow the buyer to participate in the management of the business. With a corporation business, the ownership interest is often less complicated than a partnership or LLC, since corporate shareholders may sell their entire interest without other shareholders approval of a buyer.

Those thinking of buying a closely held business should highly consider having the sellers sign non-compete agreements. These agreements will prevent the sellers from using their knowledge and expertise gained through the business to start up another business and compete with the buyers. Without a non-compete agreement, the sellers could hypothetically set up the exact same business under a different name and simply go back to doing the same thing they were doing before they sold the original business. Courts generally will uphold these agreements as long as they are not extend too far chronologically or geographically.

What Possible Consequences Am I Subject to Based on Personal Liability for Business Debts and Obligations Under NJ Law?

Personal liability for a business mistake can devastate you financially and put you at risk. This form of liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals, including:

          Damage awards in lawsuits;

          Tax deficiencies and penalties; and

          Back wages and benefit payments.

There can be limited liability protection by incorporation to business owners which shelters business owners from personal liability. Certain types of insurance can also help protect business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

For Tax Purposes, What is the Difference Between a C Corporation and an S Corporation?

The Tax Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes.

Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders' individual returns.

Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by Subchapter C. To receive Subchapter S treatment, corporations:

          Must be domestic;

          Must not be affiliated with a larger corporate group;

          Must have no more than one hundred shareholders;

          Must have only one class of stock;

          Must not have any corporate or partnership shareholders; and

          Must not have any nonresident alien shareholders.

Additionally, after a business is incorporated, all shareholders must agree to Subchapter S treatment prior to electing that option with the Internal Revenue Service. The limitations imposed by the subchapter may affect the transferability and marketability of corporate shares.

What Benefits and Disadvantages are There to Seeking Non-Profit, Tax-Exempt Status From the IRS?

There are many financial benefits stemming from nonprofit, tax-exempt status. Companies that qualify will pay no federal, state, or local taxes. This allows them to devote a larger portion of their finances and resources to achieving other goals. Tax-exempt status also qualifies a group for government funding and special grants, as well as special rates for certain services, as well as tiny perks such as postage. Additionally, donors often prefer to contribute to nonprofit groups because this allows them to deduct such donations from their own taxes.

Companies that operate for profit also have certain advantages that nonprofits do not. Personal gain and overall financial flexibility are the two main ones. However, many small organizations operate as a for-profit business simply because they are unaware of the advantages of nonprofit, tax-exempt status. One should be fully aware of the pros and cons of both forms of business and weigh these with their organizational goals and values.

Nonprofit organizations also offer advantages in the fact that they are considered corporations, therefore limited exposure of the owners to personal liability. Owners and managers of the organization will be shielded from personal liability based on the groups actions, subject to certain legal exceptions. Nonprofit incorporation also formalizes a group’s goals and helps to maintain the focus of the organization as the effort grows.

While the advantages certainly are enticing, operating as a non-profit organization should not automatically be a goal. There are also some disadvantages. Some of the drawbacks include:

          Beyond payment of reasonable salaries, the inability to
             divide profits among members of the organization;

          Limitations on the sources of the group’s income; and

          Restrictions on the use of assets to only those purposes
             that justify the tax exemption.

What Types of Legal Formalities Must Be Maintained by

a New Jersey Business?

Once incorporators establish a new business, the directors must ensure that it retains its legal status. Depending on the business form, certain legal formalities must be followed for this purpose. Once incorporated, an ongoing business's obligations include:

          Obtaining federal and state tax identification numbers for

             the business and filing needed tax returns annually;

          Issuing shares of stock as mandated by the articles of

             incorporation and federal securities law;

          Establishing and maintaining corporate books and records,

             including accounting ledgers, shareholder records, and corporate

             minutes;

          Calling and conducting an initial meeting of the board of directors

             or shareholders, as required in the articles of incorporation;

          Holding future meetings at least as often as required by applicable

             business laws;

          Conforming all decisions and internal procedures set forth by the

             articles of incorporation;

          Recording all actions and decisions of the board of directors in

             the corporate minutes; and

          Maintaining annual registration with the state government as

             required by law

Additionally, businesses may be forced to comply with certain professional standards and/or licensing requirements in order to preserve their status. Such businesses may also need to maintain additional records or use special equipment or procedures based on their specific field and the rules involved for that field.

In many situations, failure to abide by specific corporate obligations in NJ can result in directors, officers, or shareholders being held personally liable for the obligations and debts of the business. These consequences can be significant. Based on the fact that these legal requirements are strict, specific, and vary depending on the location and form of your business, all businesses should seek a knowledgeable attorney for professional legal advice.

______________________________________________________________________

Contact:

Fredrick P. Niemann, Esq.

Toll-Free (855) 376-5291 

fniemann@hnlawfirm.com

NJ Business Law Attorney serving these New Jersey Counties:

Monmouth County, Ocean County, Essex County, Cape May County, Camden

County, Mercer County, Middlesex County, Bergen County, Morris County,

Burlington County, Union County, Somerset County, Hudson County, Passaic County

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