BUSINESS FORMATION IN NEW JERSEY With Kathryn Schwartzstein For The Small Business Owner © 2015 KATHRYN SCHWARTZSTEIN

Kathryn Schwartzstein  Boston College, summa cum laude, 1998  Boston College Law School, 2004  GoldenSource Corporation,  The Prudential Insurance Company of America  Founded Smith + Schwartzstein LLC 2009  Review and negotiate contracts  Draft Operating Agreements/ form corporations and business filings  Draft Purchase and Sale Agreements for small business  Advise small business  Civil litigation  Partnership dissolution, contract disputes, collections, affirmative defenses, sexual harassment © 2015 KATHRYN SCHWARTZSTEIN

Considerations in Selection of Business Entity 1. Type of business 2. Number of partners 3. Personal liability 4. Tax considerations- always check with an accountant 5. Place of business 6. Amount of money for initial contributions © 2015 KATHRYN SCHWARTZSTEIN

Sole Proprietorships  One Owner  Unincorporated business  Unlimited liability  Personal and business assets at risk  No formalities to create  In NJ must file a trade name certificate in the office of the clerk of the county or counties in which the business resides  Need to check that the name is available  No cost to create  Taxed as a schedule C- individual files income and expenses  Tax year the same for the sole proprietorship as for the individual © 2015 KATHRYN SCHWARTZSTEIN

General Partnerships- N.J.S.A. 42:1A-2  Similar to sole proprietorship, but more than one owner  Good to have written partnership agreement  Without written agreement each partner has an equal voice in management  Unlimited liability  Liability joint and several and;  Not limited by partners capital contributions or percentage interest in the profits and losses  Good for a business with few or no employees  Flexible arrangements for capital contributions, management control and sharing profit and losses  Taxes form flow through  Easy to form, little or no costs © 2015 KATHRYN SCHWARTZSTEIN

Limited Partnerships N.J.S.A. 42:2A-5(g)  Must have at least one general partner and at least one limited partner  General partner- same rights and liabilities as a partner in a general partnership- personal liability for debts and obligations  Limited partner- not personally liable for the obligations  Must file Certificate of Limited Partnership with Office of Treasurer and annual reports  Good idea to have a written agreement  Used frequently for real estate investment or development © 2015 KATHRYN SCHWARTZSTEIN

Limited Liability Partnerships N.J.S.A. 42:1A-18(c)  LLPs mostly used for professional practices such as medicine, accounting, engineering and law.  Good idea to have a partnership agreement in writing  Must include “limited liability partnership” or “LLP” in the name  Must have registered office and registered agent  Must file a Certificate with the NJ Office of the Treasury  Protected from the liability of another member  Pass through entity for taxes  Relatively new corporate structure (1995) © 2015 KATHRYN SCHWARTZSTEIN

Limited Liability Partnerships N.J.S.A. 42:1A-18(c) C. An obligation of a partnership incurred while the partnership is a limited liability company, whether arising in contract, tort or otherwise, is solely the obligation of the partnership. A partner is not liable, directly or indirectly by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. D. Subsection c. Of this section shall not affect the liability of a partner in a limited liability partnership for his own negligence, omissions, malpractice, wrongful acts, or misconduct, or that of any person under his direct supervision. © 2015 KATHRYN SCHWARTZSTEIN

Limited Liability Companies Revised Uniform Limited Liability Company Act (RULLCA)  Hybrid entity  For federal and state tax purposes an LLC is treated as a pass through entity  Must chose how the entity is to be taxed (partnership or corporation)  Must obtain Federal Employer Identification Number (FEIN)  Formed by filing a Certificate of Formation with the NJ Office of the Treasurer  Must have registered agent and office  Must complete annual filings  Due to revisions, LLC can now have perpetual existence  Series LLC not an option in New Jersey © 2015 KATHRYN SCHWARTZSTEIN

Limited Liability Companies (continued)  Members do not have personal liability for the debts of the company  But LLC can be held liable for the debts/obligations of a member  Management is determined by the Operating Agreement  Can have any number of owners and different types of owners, i.e. managing member  High degree of flexibility in structuring management rights and profit and loss allocations © 2015 KATHRYN SCHWARTZSTEIN

Limited Liability Companies (continued)  In NJ remedy for creditors is a charging order  Charging order only allows creditor rights to the profit of the LLC and not to the assets (different than a corporation)  Good protection for property assets, real estate, etc.  Can be dissolved by:  Death of a member  Bankruptcy  Judicial Decision © 2015 KATHRYN SCHWARTZSTEIN

Subchapter S Corporation N.J.S.A. 14A:1-1  Formed by filing a certificate of incorporation with NJ Treasurer’s Office  Must file annual reports  Must follow formalities:  Hold meetings  Must have by-laws for meetings of Board of Directors and Officers  Guidelines for issuing stock certificates  Act through officers who function in corporate capacities  Segregate corporate assets from personal assets  Failure to do so can affect personal liability  Best way to protect owner from personal liability for debts of corporation  Shareholders generally not liable for claims against corporation for amounts greater than their investment © 2015 KATHRYN SCHWARTZSTEIN

S Corp. (continued)  Management vested in Board of Directors who are elected by shareholders  Board of Directors appoint officers to manage the corporations day to day business  Only need one director  Same person may act in more than one office  Can have perpetual existence  Not effected by transfer of stock or death or retirement of shareholder  Stocks freely transferrable, subject only to agreement among shareholders, some federal securities laws © 2015 KATHRYN SCHWARTZSTEIN

S Corp. (continued)  Tax issues:  S corporation taxed as a partnership  C corporation dividends taxed as income at the shareholder level- effectively results in double tax  Advantages  Limited liability of shareholders for debt and obligation  Centralized management  Freely transferable shares of stock  Perpetual Existence  Ability to raise lots of capital by selling stock © 2015 KATHRYN SCHWARTZSTEIN

Dissolution  Sole Proprietorship- end contractual relationships, settle outstanding liabilities/debts, file final payroll and taxes  General Partnership- Continues until winding up is finalized. Should have a writing stating that partnership is dissolved, liquidate assets, pay debts, end contractual relationships, file a certificate of dissolution with county clerk (if trade name was filed)  LPs- Must file certificate of cancellation with NJ Treasurer’s Office  LLCs- Similar to LP. Must file certificate of cancellation with NJ Treasurer’s Office.  Corporations- more involved  Need action from directors and shareholders  File a Certificate of Dissolution, but need a tax clearance certificate from NJ Division of Taxation  Publish a notice in the paper of corporation’s dissolution © 2015 KATHRYN SCHWARTZSTEIN

Questions? and helpful info   Filing fees $125 for domestic corporation  If you have one employee need employment insurance and worker’s compensation insurance © 2015 KATHRYN SCHWARTZSTEIN