Previously, in “Starting a Business–and Doing it Right!”, we briefly discussed 3 types of entities someone can use to start to run their business. Here’s a closer look at what each one involves.
“It’s all about, protecting your personal assets, protecting your business and having the right structure in place to maximize its success,” says firm partner Michael Farhi. “Too many times, owners of a business will run into problems, sometimes big problems, because they got caught up in the excitement and the huge time commitment of starting their own business and made the wrong decisions or wanted to save a few dollars.”
“Doing Business As” (DBA):
A “Doing Business As” (DBA) is a business structure that allows you to use another name but the finances and legal responsibility are not separate from the owner.
Structure:
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DBA’s most often take the form of a sole proprietorship or a general partnership. A sole proprietorship is a business owned by a single individual that is not formally organized meaning you run a business and file the taxes for it under your own name. A general partnership is when you and another person enter into an oral or written agreement to conduct business for a profit. All that is required to start a DBA is to file a Trade Name Certificate with the appropriate county clerk’s office. The filing should be in a county where you will be conducting business.
DBA’s are mainly used for branding purposes and should not be considered a type of business structure and it will not protect your personal assets in case of liability.
Costs and Fees:
- The fee for filing a DBA with your county is $50.00 per transaction. This alternate name will be effective for five years and may be renewed additional 5-year periods.
Tax Implications:
- Any money your business makes as a DBA passes through your individual tax returned and is taxed accordingly.
Benefits:
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A DBA allows an owner some flexibility in the initial branding of a business. It also allows you to get a business account in the name of your business and take payments in the name of your business even if you do not have a more formal structure like an LLC.
Even though the process and costs of starting a DBA are relatively low and simple, the benefits stop there. There is a cautioning against only created a DBA since its creation does not provide its owner(s) any legal protections. There are no corporate shields from liability touching your personal assets nor are their tax benefits. If you’re looking to commit yourself to running a business, it may be best to invest time and efforts into forming an LLC or Corporation.
Limited Liability Company (LLC):
A Limited Liability Company (LLC) is a business formation that is distinct and separate from its owner and is a hybrid of a corporation and a sole proprietorship.
Structure:
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An LLC can be formed by a single person, and if there is more than owner, they are known to be “members.” Since an LLC is a separate legal entity, its members are not personally liable for any company debt or liability from court judgments.
Professional Limited Liability Companies are available for a business that works within a specific industry such as medicine, law, or accounting. In addition to filing for a Professional LLC, this entity requires members to have their own professional licenses and they will be responsible for malpractice claims.
Costs and Fees:
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To start an LLC, one is required to complete and submit a public records filing with the New Jersey Department of Treasury, Division of Revenue. This comes at a cost of $125.00 that must be paid with the submission of documents required for an LLC.
In addition to the filing, you will need to obtain and Employment Identification Number (EIN) from the IRS for tax purposes and create an operating agreement for your LLC.
Tax Implications:
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An LLC is allowed flexibility in deciding how it will be taxed—it has the option that members can pick if they want to be taxed like a corporation, partnership, or sole proprietor depending on what makes most sense to the business.
The IRS also allows LLC members to pass gains and losses of the LLC through to their personal tax return. This helps to minimize personal tax expenses while also preventing double taxation which happens with corporate taxes.
All LLCs are subject to the minimum NJ state tax of $125.00 annually.
Benefits:
- With an LLC, owners have limited personal liability for business debts and profit and losses can be allocated differently than ownership interests. They are more expensive to create and maintain than DBAs but provide for a more formal business structure and personal security to its owners. Many people are attracted to LLC because of the tax implications as well.
Corporation:
A corporation is a separate legal entity with a more complex model than an LLC. The unique aspect of a corporation is the fact that non-founding members may purchase shares or stock in your company.
Structure:
- Most typical corporations consist of the following: a board of directors; officers; employees; and shareholders or owners.
- Board of Directors. The board of directors’ main responsibility is to protect the shareholders’ investment. The board may be one person or as many as the bylaws of the incorporation documents provide for, this person or persons are elected by the shareholders. The board reports on the business’s success through annual or quarterly reports. This body is not involved in the day to day activities of the business but does select the officers.
- Officers. The officers of a corporation include the President or Chief Executive Officer (CEO), a Vice Present, treasurer, and secretary. All these roles report to the board of directors. They handle to ins and outs of day to day responsibilities for the business operations of the corporation.
- Employees. A corporation usually has employees that report to officers. These employees may be carrying out the specific production or services the corporation aims to sell.
- Shareholders. Technically, it is the shareholders who own the corporation. This may mean one or a handful of individuals own the corporation or a spread of tens of thousands of individuals own the company. Shareholders are the most detached from the day to day operations of the business, but they do have the power to vote on the election and removal of directors. They can also vote to amend the bylaws, participation in mergers or dissolution, the disposition of corporate assets, and amendments to the articles of incorporation of the company. Shareholder power may be very influential if there is one individual or a group that owns the majority of shares.
Costs and Fees:
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The state filing fee for a NJ incorporation is $125.00. The Department of the Treasury, Division of Revenue, will then require an annual report to be filed each year after incorporation which has a filing fee of $50.00.
To file for incorporation you will need to have an article of incorporation as well as bylaws to submit along with filing fees.
Tax Implications:
- A corporation, like an LLC, must also obtain an EIN for tax purposes. C Corporation Tax Rates for taxpayers with Net Income greater than $50,000 and less than or equal to $100,000, the tax rate is 7.5%. If the corporation’s income is $50,000 or less the rate is 6.5%. If a corporation makes more than $100,000, the tax rate is 9%. The corporation is taxed as a separate entity by filing a CBT-100. The filing date for a CBT-100 is the 15th day of the fourth month following the ending month of the accounting period. New Jersey does grant automatic 6-month extensions in the case of delays.
Benefits:
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You can incorporate in any state, even if it is one you do not plan to do a majority of your operations in. Unlike an LLC, a corporation is more involved however does provide the benefit of shareholder support and value.
For those looking to incorporate in NJ, your corporation can be a part of the Grown New Jersey Assistance Program (Grow NJ) which is an incentive program aimed at encouraging start-up companies in NJ by offered tax credits that ranger from $500 to $5,000 per year.
Michael Farhi again: “Each business formation has unique benefits but you should consider what is most important and appropriate for your business idea. Selecting the right business formation for your business can create a solid foundation for your business to grow from. Choosing the wrong one can create problems from the start. Many people have a great idea or plan, work hard, invest their money, get loans on family and friends, but set themselves up to fail because they don’t do the boring stuff, which is structuring their business in the right way.”
Aleksandra Syniec is a regular contributor to our Blog section. She is a third-year law student at Seton Hall University School of Law and beyond her skill researching and writing about different legal issues, is also knowledgeable in landlord-tenant law and information technology.
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