How to Start an S-Corporation in New Jersey (2024 Guide)

Start an S-Corporation in New Jersey

If you want to start an LLC in New Jersey, there are things that you should consider. New Jersey is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in New Jersey, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in New Jersey if qualified for the limitations and requirements.

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How to Form an S-Corporation in New Jersey?

To create S-Corp in New Jersey, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Formation, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in New Jersey

After you have decided on the idea to start an S-Corp in New Jersey, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on New Jersey Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in New Jersey.
  • Limit of restricted words that need a license in New Jersey
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in New Jersey is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in New Jersey.

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Step 3: File For Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). New Jersey Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Formation to be filed in NM Secretary of State, you need to pay a filing fee of $125. In New Jersey, the filing fee of forming an LLC is $125 (by mail and online).

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Formation, the next step is to create an operating agreement in New Jersey. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in New Jersey can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In New Jersey, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in New Jersey, including:

  1. Filing Fees: When forming a corporation in New Jersey, you must file Certificate of Incorporation with the New Jersey Secretary of State and pay a filing fee of $125 for filing online, by mail, or in person.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in New Jersey are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as New Jersey General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in New Jersey are subject to the annual franchise tax, which can financially burden some businesses.

In an New Jersey S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with New Jersey franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is the process for starting an S-Corporation in New Jersey?
To start an S-Corporation in New Jersey, you need to file a certificate of incorporation with the New Jersey Division of Revenue and Enterprise Services.
What are the advantages of starting an S-Corporation in New Jersey?
Some advantages of starting an S-Corporation in New Jersey include limited liability for shareholders and pass-through taxation.
What is New Jersey’s minimum shareholder requirement for an S-Corporation?
New Jersey does not have a minimum shareholder requirement for an S-Corporation.
What is the maximum number of shareholders allowed for an S-Corporation in New Jersey?
The maximum number of shareholders allowed for an S-Corporation in New Jersey is 100.
Can a non-US citizen or non-resident alien be a shareholder in an S-Corporation in New Jersey?
Yes, a non-US citizen or non-resident alien can be a shareholder in an S-Corporation in New Jersey.
Can an S-Corporation in New Jersey have subsidiaries?
Yes, an S-Corporation in New Jersey can have subsidiaries.
What is the filing fee for starting an S-Corporation in New Jersey?
The filing fee for starting an S-Corporation in New Jersey is $125.
Do I need to file a separate election to become an S-Corporation in New Jersey?
Yes, you need to file a separate election to become an S-Corporation in New Jersey.
When should I file the S-Corporation election in New Jersey?
You should file the S-Corporation election in New Jersey within two and a half months of forming your corporation.
How do I file the S-Corporation election in New Jersey?
You can file the S-Corporation election in New Jersey by filing Form 2553 with the IRS.
What are the tax requirements for an S-Corporation in New Jersey?
An S-Corporation in New Jersey must file an annual report with the Division of Revenue and Enterprise Services and pay the appropriate taxes.
What is the state tax rate for an S-Corporation in New Jersey?
The state tax rate for an S-Corporation in New Jersey is 9%.
What is the federal tax rate for an S-Corporation in New Jersey?
The federal tax rate for an S-Corporation in New Jersey is the same as for a C-Corporation, but profits and losses are passed through to shareholders.
Can an S-Corporation in New Jersey have a fiscal year?
Yes, an S-Corporation in New Jersey can have a fiscal year.
Does New Jersey have a franchise tax or other annual fees for S-Corporations?
Yes, New Jersey has a franchise tax and other annual fees for S-Corporations.
What is the New Jersey franchise tax rate for S-Corporations?
The New Jersey franchise tax rate for S-Corporations is based on the corporation’s net worth.
Can an S-Corporation in New Jersey elect to be treated as a professional corporation (PC)?
Yes, an S-Corporation in New Jersey can elect to be treated as a professional corporation (PC).
What is a professional corporation (PC) in New Jersey?
A professional corporation (PC) in New Jersey is a corporation organized for the practice of certain licensed professions, such as law, medicine, or engineering.
What forms of professional corporations (PC) are available in New Jersey?
New Jersey recognizes PC, Limited Liability Company (LLC), and LLP structures for professional corporations.
Are there any special filing requirements for a professional corporation (PC) in New Jersey?
Yes, there are special filing requirements for a professional corporation (PC) in New Jersey, and they must follow additional regulations.
Is there a minimum capital requirement for a professional corporation (PC) in New Jersey?
No, there is no minimum capital requirement for a professional corporation (PC) in New Jersey.
What is the New Jersey Sales and Use tax rate?
The New Jersey Sales and Use tax rate is 6.625%.
Is there a Sales and Use tax exemption available to my S-Corporation in New Jersey?
There may be Sales and Use tax exemptions available to your S-Corporation in New Jersey, depending on its activities and products.
Can an S-Corporation in New Jersey be a non-profit corporation?
Non-profit corporations are subject to special rules and regulations, but it is possible for an S-Corporation in New Jersey to be a non-profit corporation.
How do I dissolve my S-Corporation in New Jersey?
To dissolve your S-Corporation in New Jersey, you must file a certificate of dissolution with the New Jersey Division of Revenue.
Are there any tax consequences to dissolving my S-Corporation in New Jersey?
Yes, there may be tax consequences to dissolving your S-Corporation in New Jersey, depending on your circumstances.
Can I reinstate my S-Corporation in New Jersey if it was involuntarily dissolved?
Yes, you can reinstate your S-Corporation in New Jersey if it was involuntarily dissolved, but you must take certain steps to do so.
What is the penalty for failing to file an annual report with the Division of Revenue and Enterprise Services in New Jersey?
The penalty for failing to file an annual report with the Division of Revenue and Enterprise Services in New Jersey is $200 for each month that the report is late.
What is an S-corporation and how is it different from a regular corporation?
An S-corporation is a type of corporation that is eligible for special tax treatment by the IRS, whereas a regular corporation is subject to corporate income tax at the federal and state levels. In New Jersey, S-corporations also have certain tax advantages over regular corporations.
How do I form an S-corporation in New Jersey?
To form an S-corporation in New Jersey, you must file Articles of Incorporation with the New Jersey Division of Revenue and Enterprise Services, and then file Form 2553 with the IRS to elect S-corporation status.
What are the benefits of forming an S-corporation in New Jersey?
Some of the benefits of forming an S-corporation in New Jersey include lower tax rates, limited liability protection, and the ability to raise capital through the sale of stocks.
What are the eligibility requirements for forming an S-corporation in New Jersey?
To be eligible for S-corporation status in New Jersey, your corporation must have no more than 100 shareholders, and all of its shareholders must be U.S. citizens, permanent residents, or certain types of trusts.
Can an S-corporation in New Jersey have multiple classes of stock?
No, S-corporations in New Jersey are generally required to have only one class of stock, meaning that all of the corporation’s shareholders must have the same rights and privileges.
What are the tax implications of forming an S-corporation in New Jersey?
S-corporations in New Jersey are generally taxed at a lower rate than regular corporations, and their shareholders are also eligible for certain tax deductions and credits.
How does the taxation of S-corporations in New Jersey differ from that of regular corporations?
S-corporations in New Jersey are generally not subject to corporate income tax at the state level, whereas regular corporations are. Instead, the income of an S-corporation is passed through to its shareholders, who are then responsible for paying taxes on their share of that income.
Are there any filing fees required to form an S-corporation in New Jersey?
Yes, there are filing fees associated with forming an S-corporation in New Jersey. As of 2021, the filing fee for Articles of Incorporation is $125, and the fee for filing Form 2553 with the IRS is $60.
What types of businesses are eligible for S-corporation status in New Jersey?
Most types of businesses can be organized as S-corporations in New Jersey, including small businesses, startups, and even some larger businesses.
Can an existing corporation in New Jersey convert to S-corporation status?
Yes, an existing corporation in New Jersey can elect to become an S-corporation by filing Form 2553 with the IRS.
How often does an S-corporation in New Jersey need to file tax returns?
S-corporations in New Jersey are required to file annual federal and state tax returns. The due date for the federal return is March 15th, and the due date for the state return is the 15th day of the fourth month after the close of the tax year.
What is a registered agent, and why do I need one for my S-corporation in New Jersey?
A registered agent is a person or entity that is designated to receive important legal and tax documents on behalf of a corporation. S-corporations in New Jersey are required to have a registered agent with a physical address in the state.
Where can I find a registered agent for my S-corporation in New Jersey?
There are many companies that provide registered agent services for S-corporations in New Jersey. You can also search for registered agents through the New Jersey Division of Revenue and Enterprise Services.
Do I need to obtain any special licenses or permits to operate an S-corporation in New Jersey?
Depending on the type of business you are operating, you may need to obtain certain licenses or permits to operate in New Jersey. Some common examples include a business license, sales tax permit, and health department permit.
How do I register my S-corporation for taxes in New Jersey?
To register your S-corporation for taxes in New Jersey, you will need to obtain a New Jersey Tax ID number, which you can do by registering with the New Jersey Division of Revenue and Enterprise Services.
Can I form an S-corporation in New Jersey if I am not a resident of the state?
Yes, you can form an S-corporation in New Jersey even if you are not a resident of the state. However, you will need to appoint a registered agent with a physical address in the state.
What is the minimum and maximum number of shareholders an S-corporation can have in New Jersey?
S-corporations in New Jersey are required to have between one and 100 shareholders.
Can an S-corporation in New Jersey have foreign shareholders?
Yes, S-corporations in New Jersey can have foreign shareholders, as long as they are U.S. citizens, permanent residents, or certain types of trusts.
What is the LLC pass-through loophole and how does it affect S-corporations in New Jersey?
The LLC pass-through loophole is a tax strategy that allows certain LLCs to avoid paying taxes on some of their income. This can affect S-corporations in New Jersey that have multiple shareholders who are also members of LLCs.
Can an S-corporation in New Jersey make political contributions?
Yes, S-corporations in New Jersey are allowed to make political contributions and are subject to disclosure requirements.
Can an S-corporation in New Jersey vote in shareholder meetings?
Yes, S-corporations in New Jersey are permitted to vote in shareholder meetings and may be entitled to dividends or other distributions.
Do I need to file annual reports with the state of New Jersey as an S-corporation?
Yes, S-corporations in New Jersey are required to file annual reports with the New Jersey Division of Revenue and Enterprise Services.
How much does it cost to file annual reports for an S-corporation in New Jersey?
The fee for filing annual reports for an S-corporation in New Jersey is $50.
Are there any restrictions on how S-corporations in New Jersey distribute profits to their shareholders?
S-corporations in New Jersey are generally required to distribute profits to their shareholders in proportion to their ownership interests and cannot discriminate between shareholders.
Can S-corporations in New Jersey have employees?
Yes, S-corporations in New Jersey can have employees and are subject to state and federal employment laws.
Do S-corporations in New Jersey pay state unemployment tax?
Yes, S-corporations in New Jersey are required to pay state unemployment tax on wages paid to employees.
What is the statute of limitations for New Jersey state tax audits of S-corporations?
The statute of limitations for New Jersey state tax audits of S-corporations is three years from the date the tax return was filed.
Can an S-corporation in New Jersey be sued?
Yes, S-corporations in New Jersey can be sued like any other legal entity, but they do enjoy limited liability protection.

Also Read

Why You Should Start New Jersey S Corp

One of the main reasons to consider starting a New Jersey S Corp is the potential tax benefits that come with this structure. S Corporations are “pass-through” entities, which means that profits and losses pass through to the personal income of the shareholders. This can result in significant tax savings, as S Corporations are not subject to double taxation like traditional C Corporations. The taxes are only paid at the individual shareholder level, allowing for more efficiency and potentially lower tax burdens for the business owners.

In addition to tax benefits, S Corporations also offer limited liability protection to shareholders. By incorporating as an S Corporation, the personal assets of shareholders are typically protected from the debts and liabilities of the business. This can provide peace of mind to business owners and investors, knowing that their personal assets are not at risk in the event of a lawsuit or financial trouble.

Furthermore, S Corporations can also provide a level of credibility and professionalism to a business. By incorporating, a business demonstrates a commitment to formalized structure and compliance with state regulations. This can be reassuring to customers, investors, and other stakeholders, as it signifies that the business is serious about its operations and long-term success.

Additionally, S Corporations can offer more flexibility in terms of ownership and ownership transfer. Unlike other structures, S Corporations allow for different classes of stock, making it easier to attract investors or sell shares of the business. This can be especially advantageous for businesses looking to expand and raise capital in the future.

Another key benefit of starting a New Jersey S Corporation is the potential for ongoing growth and sustainability. S Corporations have the ability to issue shares of stock and raise capital through equity financing, which can help fuel business growth and expansion. This additional capital can be used for hiring more employees, investing in marketing and advertising, or expanding into new markets and territories.

Overall, starting a New Jersey S Corporation can be a smart move for many businesses looking to maximize tax benefits, protect personal assets, enhance credibility, and facilitate growth. While this structure may not be the right choice for every business, it is definitely worth considering for those looking to take their business to the next level. With the potential for tax savings, limited liability protection, and increased flexibility, the S Corporation is a strong choice for entrepreneurs and small business owners in New Jersey.

Conclusion

Forming an S-Corporation in New Jersey can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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