BUSINESS ORGANIZATIONS

 Your can chose to do business under many different types of entities.  Which one you choose will depend upon who are the owners of the business and what type of business you will be pursuing. It is crucial that you obtain proper legal assistance at the outset of your business endeavor.  Without that assistance there is a significantly increased probability of business disputes among your business associates and potential liability to third parties.  While there is some initial expense involved in getting legal assistance from us, it will invariably be much less expensive then paying us later in a business dispute with your associates or incurring third party liability. 

Some business organizations which you may wish to consider and some of their attributes are as follows: 

SOLE PROPRIETORSHIP

This is a business controlled and operated by one person.  It is the most basic, least expensive and easiest to form and to organize.  However, a major drawback to doing business as a sole proprietorship is the individual liability of the proprietor for the business’ debts. Therefore, most clients desiring to start the business will not select a sole proprietorship if they will be incurring trade debt.

If you will be doing business under a "Trade Name" it must be filed with the County Clerk.

Filing a “Trade Name” does not create a "Trademark".  Therefore if the name infringes on another business’ trademark or service mark, you may be subject to infringement claims by them.

Generally your income taxes are dealt with on your own personal return.

PARTNERSHIPS

Partnerships are formed by an oral or written agreement among the partners to do business as a partnership.  The partners may be individuals or entities.  Partnerships offer great flexibility in running the affairs of the business without many of the statutory operational requirements of entities such as corporations.  While partnerships can be established under verbal agreements, a properly drafted written agreement is clearly warranted.  Without such a written agreement, the New Jersey Uniform Partnership Law would control aspects of the partnership business. 

The lack of a properly drafted partnership agreement is frequently the cause of expensive disputes between the partners.  This is one of those "Pay us now or pay us a lot more later" situations.  When there is a dispute between the partners the written agreement usually resolves the issue- frequently amicably.  If there is no written agreement the partners have to guess what was agreed to years previously- frequently in a very hostile setting that may have a bad effect on the business.

Occasionally we encounter partnership disputes involving a "do it yourself" partnership agreement self drafted by the partners using a legal form purchased at a stationery store, a do it yourself "legal" computer software, or just drafted by the partners.  These often are worse than no written partnership agreement at all.  This is because when the dispute arises among the partners along with the issues we must determine is whether the "do it yourself" form language or the New Jersey Uniform Partnership Law controls.  In a dispute where there is uncertainty or room for argument legal expenses tend to escalate.

If a name other than that of the partners is used, it must be registered a "Certificate of True Name". Generally, partnership informational income tax returns are filed with the partners reporting the income on their own tax return.  Frequently this results in favorable tax treatment to the partners.

The individual partners are liable for the debts of the business if all partnership assets have been exhausted. Therefore, if you anticipate incurring significant debt in your business a partnership may not be the way to go.

LIMITED PARTNERSHIPS

Limited partnerships are statutory and are formed when there is an agreement among individuals or entities to do business as a limited partnership and a certificate outlining the agreement is filed with the Secretary of State.  There are two types of partners- general partners and limited partners.  General partners operate the partnership and, after exhaustion of partnership assets are liable for the partnership's debts.  General partners operate in much the same way as partners in a regular partnership.  Limited partners have no say in the operation of the partnership and are liable for the partnership debts only to the extent of their investment.  The general partners have an obligation of good faith and fair dealing to the limited partners.

The governmental filings are somewhat more complex than those of a partnership.

LIMITED LIABILITY PARTNERSHIPS

Limited liability partnerships are statutory and are formed when there is an agreement among individuals or entities to do business as a limited liability partnership and a certificate outlining the agreement is filed with the Secretary of State.  They may be new businesses or converted from general partnerships.  Their main advantage is an insulating each partner from personal liability for negligence or wrongdoing of another partner or employee of the partnership except for those caused by their own negligence or wrongdoing.  However, each partner has the same liability for other debts as an in a general partnership.

The governmental filings are somewhat more complex than those of a partnership.

LIMITED LIABILITY COMPANIES

Limited liability companies are statutory and are formed when there is an agreement among individuals or entities to do business as a limited liability companies and a certificate outlining the agreement is filed with the Secretary of State.  Their main advantage is an insulating each member from personal liability for the company's liabilities.  Normally, the members execute an operating agreement governing the affairs of the company and the conduct of its business.

It may be classified for federal income tax purposes as either a corporation or a partnership depending upon how it is structured.

CORPORATIONS

 Incorporation is probably the most frequently sought business legal service.  Corporations are statutory entities.  They can be owned and operated by single or multiple individuals or entities.  They can be formed by incorporators who designate the initial directors and the registered agent in the State of New Jersey in the certificate of incorporation which is filed with the office of the Secretary of State.  Those initial directors adopt bylaws and issue shares to stockholders.  Those stockholders may then elect directors and officers.  The directors generally set overall policy of the corporation while the officers administer the policy. Registration with Federal and State Tax Offices is required.  While incorporation provides limited liability to the shareholders, it is important for the directors and officers of the corporation to conduct corporate affairs strictly under the law in order to potentially eliminate personal liability.

Corporations, being true entities, have state and federal income tax obligations distinct from their owners. This results in corporate income first being taxed to the corporation and any residual income in the form of dividends being taxed to the individual shareholders.  In smaller, less profitable corporations the salaries paid to officers being deductible to the corporation sometimes avoid this.

Additionally, certain smaller corporations may make a “Subchapter S” election for income tax purposes which would pass the tax obligation on to the stockholders as opposed to the corporation.  Generally, corporations with only one class of stock issued and outstanding with less than 35 shareholders who are all resident aliens or US citizens are eligible to make the "Subchapter S" election.

SHAREHOLDER AGREEMENTS

Depending on the type of business and the relationship between the shareholders, a Shareholders Agreement may also be desirable.  Such agreements between the shareholders can regulate who can be a shareholder and how and to whom shares may be sold.  For instance, in a "close corporation" agreement the shareholders may agree to control who would be able to buy stock or whether it had to be offered for sale first to the other shareholders.  There are many and varied provisions which can be placed in shareholder agreements to tailor them to the needs of the principles of the corporation.  Similar types of agreements are also available for many of the other business organizations described.

BUSINESS NAMES AND TRADEMARKS

Mere filing of a name in connection with the registration of a business does not in itself create a "Trademark" or “Service mark”.  Therefore if the name infringes on another business’ trademark or service mark, you may be subject to infringement claims by them. This topic is discussed in more detail in the Trademark section of this website.