LLC vs S-Corp | What Entrepreneurs Need to Know in New Jersey

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LLC vs S-Corp in New Jersey

When starting a small business in the New Jersey, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in New Jersey. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in New Jersey. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in New Jersey

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in New Jersey?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in New Jersey?

Unlike a limited liability company (LLC) or other business structures, New Jersey S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in New Jersey

Creating a business in New Jersey requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming New Jersey Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in New Jersey does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in New Jersey.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in New Jersey

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in New Jersey is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in New Jersey. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in New Jersey are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in New Jersey are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in New Jersey to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in New Jersey with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

New Jersey State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in New Jersey, it costs $75, which can be paid to the NM Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $125 (by mail and online) to the New Jersey Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in New Jersey have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

New Jersey LLC: An LLC can have any number of owners, called members, from starting New Jersey Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

New Jersey S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

New Jersey LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in New Jersey.

New Jersey S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

New Jersey LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

New Jersey S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

New Jersey LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the New Jersey Operating Agreement.

New Jersey S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

New Jersey LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in New Jersey: LLC or S-Corp?

Filing an LLC or S-Corporation in New Jersey requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in New Jersey, you must submit the Certificate of Formation to the New Jersey Division of Revenue and Enterprise Services. Your Certificate of Formation must include information about your New Jersey LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the New Jersey S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in New Jersey: LLC or S-Corp?

Taxes for LLCs and S-Corporations in New Jersey depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the New Jersey LLC Cost for detailed information.

New Jersey S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate New Jersey LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in New Jersey?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in New Jersey. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in New Jersey.

FAQs

What is an LLC in New Jersey?
An LLC is a type of business entity formed under New Jersey law that combines the advantages of a corporation with the flexibility of a partnership.
What is an S-corp in New Jersey?
An S-corp is a type of corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code, which can provide for pass-through taxation benefits for its shareholders.
How do I form an LLC in New Jersey?
To form an LLC in New Jersey, you must file a Public Records Filing for New Business Entity form with the Division of Revenue and Enterprise Services.
How do I form an S-corp in New Jersey?
To form an S-corp in New Jersey, you must file articles of incorporation with the New Jersey Division of Revenue and Enterprise Services and obtain an IRS EIN for tax purposes.
Are LLC owners known as shareholders in New Jersey?
No, LLC owners are known as members in New Jersey.
Are S-corp shareholders liable for business debts in New Jersey?
Generally, S-corp shareholders are not personally liable for business debts in New Jersey.
Can an LLC in New Jersey have more than one owner?
Yes, an LLC in New Jersey can have multiple owners, also known as members.
Can an S-corp have more than 100 shareholders in New Jersey?
No, an S-corp cannot have more than 100 shareholders under federal law, which also applies in New Jersey.
How are LLC profits taxed in New Jersey?
LLC profits are generally taxed as pass-through income to the members in New Jersey, which means they pay taxes on their individual income tax return.
How are S-corp profits taxed in New Jersey?
S-corp profits are also generally taxed as pass-through income to the shareholders in New Jersey.
Can an LLC be taxed as an S-corp in New Jersey?
Yes, an LLC in New Jersey can elect to be taxed as an S-corp for IRS tax purposes.
What is the ongoing cost to maintain an LLC in New Jersey?
LLCs in New Jersey must pay an annual report filing fee of $50 per member.
What is the ongoing cost to maintain an S-corp in New Jersey?
S-corps in New Jersey must pay an annual report filing fee of $250.
Can a non-US resident form and own a New Jersey LLC or S-corp?
Yes, a non-US resident can form and own a New Jersey LLC or S-corp if they have a valid US tax ID number.
What types of businesses are eligible to form an S-corp in New Jersey?
In New Jersey, most corporations that meet the Federal S-corp requirements are eligible to elect this taxation status.
Do New Jersey LLCs require bylaws?
Bylaws are not required for LLCs in New Jersey.
Do S-corps in New Jersey require bylaws?
Yes, S-corps in New Jersey are required to have bylaws.
How many shareholders are allowed for an S-corp to be formed in New Jersey?
In New Jersey, S-corps are not allowed to have more than 100 shareholders.
Are LLCs required to file a tax return in New Jersey?
LLCs in New Jersey are required to file either a NJ-CBT return or BTR return based on their operations and gross receipts.
Are S-corps required to file a tax return in New Jersey?
Yes, S-corps in New Jersey must file a NJ-1120S corporate business tax return.
Are there residency requirements for the owners of LLCs and S-corps in New Jersey?
There are no residency requirements for the owners of LLCs or S-corps in New Jersey.
Can a foreign LLC register to do business in New Jersey?
Yes, a foreign LLC can register to do business in New Jersey if it obtains a certificate of authority from the Division of Revenue.
Can a foreign corporation register to be an S-corp in New Jersey?
A foreign corporation cannot be an S-corp in New Jersey because the IRS model requires it to be treated as a domestic entity for tax purposes.
Do New Jersey LLCs have to hold annual meetings?
Annual meetings are not required for New Jersey LLCs unless explicitly stated in the operating agreement.
Do New Jersey S-corps have to hold annual meetings?
Annual shareholder meetings are required for New Jersey S-corps, and corporate records of minutes and resolutions must be kept and maintained.
What is the difference between an LLC and S-corp in New Jersey?
LLCs and S-corps both offer limited liability protection, but they differ in their tax structure, ownership requirements, and management style.
What are the ownership requirements for LLCs and S-corps in New Jersey?
LLCs can have an unlimited number of members, while S-corps are restricted to no more than 100 shareholders.
Can a single-member LLC be taxed as an S-corp in New Jersey?
Yes, a single-member LLC can elect to be taxed as an S-corp in New Jersey if it meets certain requirements.
Is forming an LLC or S-corp more expensive in New Jersey?
The costs of forming an LLC or S-corp are generally similar in New Jersey, but LLCs may have lower ongoing maintenance fees.
Are there any special requirements for forming an LLC or S-corp in New Jersey?
Both LLCs and S-corps must file articles of organization with the NJ Division of Revenue, and they must obtain any required permits and licenses for their specific business.
Is an S-corp better for businesses with employees in New Jersey?
Because S-corps are subject to corporate income tax in New Jersey, they may be less advantageous for businesses with employees.
What are some advantages of forming an LLC in New Jersey?
LLCs offer flexible ownership and management structures, limited liability protection, and pass-through taxation in New Jersey.
What are some advantages of forming an S-corp in New Jersey?
S-corps offer limited liability protection, pass-through taxation at the federal level, and potential savings on self-employment tax.
Can I switch from an LLC to an S-corp in New Jersey?
Yes, an LLC can elect to be taxed as an S-corp in New Jersey if it meets the eligibility requirements.
What are the limitations of an LLC in New Jersey?
LLCs in New Jersey may face higher taxes than S-corps, and they may be less favorable for businesses with more than one owner.
What are the limitations of an S-corp in New Jersey?
S-corps in New Jersey are limited to no more than 100 shareholders, and they are subject to corporate income tax.
Can an out-of-state corporation form an LLC or S-corp in New Jersey?
Yes, out-of-state corporations can form LLCs and S-corps in New Jersey, but they must comply with New Jersey’s requirements for foreign corporations.
What is the process for dissolving an LLC or S-corp in New Jersey?
LLCs and S-corps in New Jersey can be dissolved by filing articles of dissolution or a certificate of cancellation with the state.
Do LLCs and S-corps in New Jersey have to file annual reports?
Yes, both types of entities in New Jersey are required to file annual reports with the Division of Revenue.
How long does it take to form an LLC or S-corp in New Jersey?
The timing for forming an LLC or S-corp in New Jersey varies depending on the specific business and any required filings.
Can I convert an existing corporation to an LLC or S-corp in New Jersey?
Yes, an existing corporation in New Jersey can convert to an LLC or S-corp if it meets the eligibility requirements.
What is an operating agreement for an LLC in New Jersey?
An operating agreement for an LLC in New Jersey is a legal document outlining the relationships and responsibilities of the members, as well as the financial and management processes.
Can an S-corp issue stock in New Jersey?
Yes, S-corps in New Jersey can issue stock to their shareholders as long as they comply with the ownership requirements.
Do LLCs have to hold annual meetings in New Jersey?
LLCs in New Jersey are not required to hold annual meetings, but it can be advantageous to do so to discuss important business matters.
How are LLCs and S-corps taxed differently in New Jersey?
LLCs are generally taxed as pass-through entities, while S-corps are subject to corporate income tax in New Jersey.
What is the maximum tax rate for S-corps in New Jersey?
The maximum tax rate for S-corps in New Jersey is currently 11.5%.
Are there any limitations on the types of businesses that can form an LLC or S-corp in New Jersey?
Most types of businesses can form LLCs or S-corps in New Jersey, as long as they comply with any special licensing or permitting requirements.
Can a nonprofit organization form an LLC or S-corp in New Jersey?
Nonprofit organizations may be able to form LLCs or S-corps in New Jersey, but they may have other legal requirements and limitations.
Do LLCs and S-corps in New Jersey have to file for state sales tax?
Yes, if an LLC or S-corp makes taxable sales in New Jersey, they must register and file for state sales tax.
Can LLCs and S-corps in New Jersey own property?
Yes, LLCs and S-corps in New Jersey can own property, such as real estate or business assets.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in New Jersey will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in New Jersey and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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