For an aspiring entrepreneur the path towards growth is to attract capital for business. Investors generally look for a few qualities in the business they want to invest. For any investor, the return on investment is the foremost criterion. The returns can be in the form of regular cash flow or appreciation in the value of investment. For attracting such investors, the best form of business is a corporation. The advantage of a corporation is that the shares are freely transferable. The investor can invest or divest in a corporation and there are very few formalities to be observed. Another advantage of a corporation is the personal liability protection it offers to the shareholder. Due to these advantages, investors are readily willing to invest in corporations and hence the ease in attracting capital for expansion.
The state laws govern the incorporation of your small business. The incorporation rules vary in each state. The key procedure for incorporating a business is to file a certificate of incorporation with the state and pay a filing fee. In some states the certificate of incorporation is also called the articles of incorporation. The ownership in a corporation is structured as units of stock or shares, which is subscribed to and promised to pay for by the shareholders. The corporations can be of two types namely an S Corp or a C Corp. The basic legal structures of both forms are similar. The main differences are the share holding and taxation. Shares in an S Corp are restricted to natural US citizens and limited to a maximum of 100. There are no such restrictions in a C Corp. C Corporations are subject to corporate taxation where as the S Corporation advantage is that the profits are passed through to the share holders and taxed as their personal income.
Limited Liability Companies also offer personal liability protection to its owners who are called members. The advantage in LLC Vs. Corporation is that in the eyes of the general public, corporations are ‘perpetual’. LLCs are considered to be bound to the life of its members. One advantage in LLC is that procedure for taxation can be decided by the members and they can elect to be taxed as a partnership or a corporation. The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
Incorporating your company shows your seriousness and can be essential when raising venture capital from businessmen like Rick Bolander and angel investors.
The state of New Jersey offers incentives to small business to do business in the state in many ways. The Urban Enterprise Zone or Work force training programs by the state have positively impacted many New Jersey businesses in their growth and development. NJ incorporation is possible by filing the required Certificates of Business information with the Division of Revenue. You may file online or through paper documents and pay the filing fees to obtain authorization to conduct business in the state. As to why incorporate, the corporation has many advantages over other forms of business. The main advantage is that corporations are perpetual and investors contribute more readily because of the easy transferability of stock or shares in a corporation.
Forming corporation in New Jersey can be accomplished by filing Certificate of Incorporation and submitting Business registration application with the New Jersey Division of Revenue. The basic requirements for forming a corporation in New Jersey are:
Corporate Name: You must determine that the name you have selected for your corporation is available for use before filing the certificates of information for business registration. The name must not be similar to an existing New Jersey business entity. You must also not include terms and language prohibited by the state statute. The name availability check is automatic if you are filing online.
Certificate of Incorporation: The certificate should contain certain basic information regarding the corporate organization. It should list (1) the name and address of one director at the least. If there is more than one director, all their names and addresses must be listed (2) the aggregate number of shares, each class of shares and the privileges assigned to each class (3) the registered office address of the corporation, which must be a NJ street address (4) the designated registered agent and his New Jersey communication address. There can only one registered agent for a corporation. The certificate of incorporation may include additional information optionally if you wish to formalize them.
Bylaws: The directors must hold the first meeting and adopt the bylaws of the corporation. The bylaws are the charter under which the corporation will function and operate its business.
Your corporation can elect to be a C Corporation or an S Corporation under New Jersey Statutes. The C and S are not different corporate business structures but tax classifications. The C Corporation is subject to corporate tax; it has to pay federal and state income tax on profits from business directly. When the profits are distributed among the shareholders, they pay tax on that as their personal income. S Corporation advantages are, it has a lower corporate tax and has a pass through taxation. The shareholders pay tax on their share of profits through their personal tax returns.
Creating a legal business entity is a must do for operating a business. It provides your business with an individuality and separate existence. The first step to forming an entity is to know the appropriate legal business structure for your business. There are advantages and disadvantages in forming and operating any of the legal business forms. A business operated by a single person can assume the form of a Sole Proprietorship. If the business is operated by two or more persons, forming a general partnership is advisable. When only one of the business owners is actively operating the business and others are passive investors, you may form a limited partnership. These legal forms of business are simple to form and operate and do not involve too many legal formalities except for licences and registrations required for the business to operate in your state.
The main disadvantage of the above mentioned business structures are that the business owners personal liability is unlimited. The partner or sole proprietor is personally responsible for all business activities and liable to pay all business debts or obligations regardless of their interest in the business with an exception of the limited partners. To overcome this disadvantage you may adopt a structure that limits the personal liability of the business owners in business obligations. Forming a Limited Liability Partnership, Corporation or a Limited Liability Company will serve the purpose. In these forms of legal business structures, the business owner’s liability is limited to their capital contribution. Many statutory and legal formalities are involved in forming and operating these business structures.
Why incorporate is because corporations are suitable for businesses which need considerable capital infusion and time to grow and prosper. Corporations have a separate legal identity from that of its owners. Business continuity is not affected by the disability or death of a business owner in a corporation. There are two types of corporations, a C Crop and an S Corp. Though the basic structures of the both entities are same, S Corporation advantage is that it has a pass through taxation. The shareholders can report their share of profits in their personal tax returns and pay tax there. The C Corporation profits are subject to corporate taxation and when the profits are distributed as dividends to share holders, they in turn pay taxes on these profits again. To start a corporation, you have to understand the basics of incorporation. Business entities are formed under state rules and regulations. To understand how to form a corporation, you consult the state agency dealing with incorporations in your state.
Choosing the right business structure for your business is important for many reasons. You have to consider a business form according to your unique situation that offers flexibility but provides personal liability protection. There are a few legal forms of business that offer both advantages. Corporations, Limited Liability Companies, Limited partnerships and Limited Liability Partnerships offer limited liability options to business owners. In limited partnerships, a general partner will have to assume personal responsibility for all the partnership’s business obligations. Limited Liability partnership limits personal liability of all partners but is restricted to specific professions or businesses in many states.
LLC definition is limitation of personal liability of the business owners. Limited Liability Companies offers limited personal liability and flexibility in management when compared to a Corporation. The member(s) of the LLC have the ease of management and administration of business as in a general partnership without its unlimited liability of partners. Another advantage with LLC is that you can choose the tax classification in which your business is to be taxed. If a single member LLC, you are by default treated as a sole proprietorship. Multiple member LLC’s can elect to be taxed as a partnership, C Corporation or an S Corporation.
Business owners in a Corporation are called share or stock holders and have limited personal liability. The share holder’s liability is limited to the capital invested by them in the business. Corporations are expensive to form and operate as the formalities and procedures involved are elaborate. Formal share holder meetings have to be held, the board of directors and officers elected, the proceedings formally recorded etc. Corporations can be a C Corporation or an S Corporation but the formalities involved are similar. A C Corporation is subject to corporate income tax whereas the S Corporation has pass through taxation. C corps have to pay tax on its income directly and when the profits are distributed to the share holders as dividend, they have to report the dividend as income in their personal tax returns and pay tax on it if applicable. S Corporation advantage is that, the income passes through to the share holders who pay income tax as their personal income.
The main difference between and LLC and a Corporation is that LLC’s are easy to form and operate when compared to a Corporation. In LLC vs. Corporation, LLC continuity is uncertain whereas the corporation has a separate existence from that of its share holders and ownership can be easily transferred. In LLC vs. S Corp, both has the advantage of pass through taxation but the operation of an S Corp. is formal and tedious in comparison.
