Learn more about LLCs and S Corps in New Jersey.
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When you start your new business, you first need to decide which business structure is right for you. Many new entrepreneurs form limited liability companies (LLCs) for simple business formalities and liability protection. We can help you learn the benefits and drawbacks of forming an LLC or S Corp in New Jersey.
The good news is that when you elect S Corp status, your underlying business structure does not change. Because the S Corp is not a business entity, you must form a legal entity (corporation or LLC) with the New Jersey Division of Revenue and Enterprise Services before filing for S Corp status. Thus, a new business owner needs to consider the pros and cons of forming an LLC vs S Corp vs C Corp in New Jersey.
The LLC combines the benefits of the corporation (personal liability) with the simplicity of a partnership (pass-through taxation) and management and ownership flexibility. As the owner of an LLC, you will pay taxes on company income at the ownership level. Similarly, with S Corp taxation, the owners pay income tax based on individual ownership, not at the entity level. When considering the LLC vs S Corp in New Jersey, you’ll need to understand how the differences affect your business goals.
The difference in the tax treatments with the S Corporation vs LLC in New Jersey depends on whether you owe taxes to the IRS or the New Jersey Division of Taxation. Here’s an overview of the tax benefits at the federal and state level.
The S Corp is an elective federal tax treatment with the IRS. Both the LLC and the S Corp use pass-through taxation. Pass-through taxation provides business owners with tax savings by avoiding corporate taxes on business income. By default, the C Corporation uses double taxation, meaning C Corps pay federal income taxes at the entity level, and their shareholders must pay personal income taxes on business distributions.
Although both LLCs and S Corps are taxed as pass-through entities, the S Corp provides owners with one significant benefit: flexibility in how the IRS applies the self-employment tax.
Under its default treatment, the LLC members include their share of the LLC’s income and guaranteed payments as wages on their personal tax returns, which are subject to self-employment tax.
On the other hand, S Corp distributions are exempt from self-employment taxes. After electing S Corp status, the members can set a reasonable salary for themselves. Owners will pay self-employment taxes on their salary. However, when the member receives additional income, they report it as a share distribution instead of wages. Depending on the members’ tax bracket, the tax rate on distributions may be lower than the tax rate on self-employment. As a result, the S Corp election can help members save money on taxes.
New Jersey is one of the few states where you must register for S Corp status at the state level. To register as a New Jersey S Corporation, you will file New Jersey S Corporation Election with the Division of Revenue and Enterprise Services. Both LLCs and S Corps must pay an annual franchise tax for the privilege of doing business in the state. Here’s a breakdown of the annual corporate tax for an LLC vs S Corp in New Jersey.
At tax time, a New Jersey LLC with default (partnership) tax treatment will file an informational return and issue NJK-1s to each member reporting their share of the business profits. If the LLC has any nonresident members (owners who live outside of New Jersey), the LLC must pay the corporate tax on a portion of their business income. In addition, the LLC will pay a filing fee for each member NJK-1 issued. Then, the resident members pay the New Jersey Gross Income Tax on all their income.
Once an LLC makes the New Jersey S Corp Election, the S Corp needs to pay the Corporation Business Tax (CBT). The Division of Revenue determines the tax rate based on the S Corp’s total entire net income plus nonoperational income. Although the S Corp rate is less than for a C Corp, the rate will be higher if any shareholders do not consent to New Jersey’s ownership allocation method.
Both the LLC and the S Corp have limitations on ownership. The operating agreement typically limits when a member can join an LLC. A majority of the members must consent before adding a new member. For an S Corp, the Internal Revenue Code sets the membership requirements. Under the law, only certain individuals can be shareholders or members for a company to qualify for S Corp status (however, an S corp can own other businesses). Among those not allowed to be S Corporation shareholders or members are:
Most importantly, an S Corp can’t have more than 100 shareholders or members or more than one class of stock. As a non-stock company preferred by small businesses, it’s simple for an LLC to qualify, but you must understand the minimum requirements before applying.
One of the most considerable benefits of forming an LLC is that your personal assets are protected from being used to pay business debts. Because the S Corp is not a separate business structure, you retain your limited liability protection when electing S Corp status. In general, members aren’t responsible for business obligations outside of their contribution to the LLC.
Filing for an S Corp is an additional step after forming your business; thus, it takes longer.
Regardless of whether you want to elect S Corp status, the first step is to file a Certificate of Formation with the New Jersey Division of Revenue and Enterprise. Filing forms your LLC as a new legal entity.
Once you’ve formed your LLC, you must file with the IRS and the New Jersey Division of Revenue to elect S Corp status. First, you’ll file Form 8832 with the IRS, so your LLC will be taxed as a corporation rather than a partnership. Then, you’ll file Form 2553 to elect S Corporation status. Next, use the state’s online portal to register as a New Jersey S Corp. Once you file an S Corp election, it remains in effect until you file and change it.
When you form your business as a legal entity, you get benefits like liability protection. However, you must also keep up with legal requirements like filing annual reports and local licenses. We know these requirements can be overwhelming for new business owners. That’s why we created our Worry-Free Compliance Service to remind you of compliance deadlines and keep your documents organized.
An existing New Jersey LLC can choose S Corp taxation. Simply file within the first two-and-a-half months of the start of the tax year. New Jersey allows an extra month beyond the federal deadline for you to make the state election.
After you form your LLC with the state, you can elect to give it S Corporation status by filing Form 8832 and Form 2253 with the IRS. Also, you’ll need to file a New Jersey S Corp election if you want S Corp taxation at the state level.
A designator is the word or abbreviation in your business name identifying it as an LLC. Because the S Corp election does not change the underlying business structure, you can continue using “limited liability company” or “LLC” in your name.
Some entrepreneurs know that S Corp status can benefit them right from the start. Many business owners choose S Corp status while they form their business to consolidate the time they spend on paperwork. Nonetheless, the best time to elect S Corp status is whenever it’s best for you. Consider consulting an accountant or professional tax advisor before making your decision. They can help you create your own LLC vs S Corp New Jersey chart. Once you file, the S Corp tax treatment will begin in the next tax year unless you file within the first two-and-a-half months of the year.
We know it can be challenging to understand how the differences between an LLC vs S Corp in New Jersey will affect you. When you use our business products and services, our business experts will be here to help. Start your new business with us using our New Jersey LLC or New Jersey S Corporation Formation Services. Furthermore, our Worry-Free Compliance Service can assist you in keeping your business legally compliant. We’ll guide you through every step of the way. Our expert business advice and services can help you make your dream of business ownership a reality today.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.