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If you want to start a company in New Jersey, several different business structure options are available. The right one for you depends on your business needs and goals. Although not a formal entity type, S Corporations are a federal tax election that can provide significant tax savings. With an S Corporation, the company’s income, losses, deductions, and credits pass through to the shareholders who pay tax at their personal income tax rate. S Corporations don’t pay federal corporate income tax. Learn more about S Corporations by visiting our S Corporation information page.
In this guide, we’ll explain how to set up an S Corporation in New Jersey. Remember, to create an S Corporation, you first need a business in place, like a limited liability company (LLC) or standard corporation (C Corporation), before making a New Jersey S Corporation election. With our New Jersey LLC Formation Service and New Jersey Corporation Service, we can help you get started with the first step. We also provide ongoing support with our Worry-Free Compliance Service so that your business can operate smoothly. We offer a wide variety of products and services that are all aimed at starting, running, and growing your business.
Your business name is the first impression people get of your company. Choose one that reflects your business and also meets the state’s requirements. For example, New Jersey has a list of restricted terms for business names.
It’s important that you run a business name search to see if your desired name is available. With our Name Reservation Service, we can reserve the business name while you prepare the rest of your paperwork to file.
A registered agent is a person or company who agrees to receive important communication and documents for your business. Your registered agent must meet New Jersey’s requirements.
Every business needs at least one person who manages the company’s operations. Corporations call them the directors, and LLCs appoint managers. LLCs can choose to have their members act in this role, or hire someone.
When you’re ready to form your business, file the formation documents with the New Jersey Division of Revenue and Enterprise Services. C Corporations file Articles of Incorporation, and LLCs submit a Certificate of Formation. Once the paperwork is accepted, your business is official!
At this point, you want to apply for an Employee Identification Number (EIN), which we can do for you. This frees up time for you to file the New Jersey S Corporation election. Your EIN number is how the IRS identifies your business when filing the election.
To make a New Jersey S Corporation election, you must submit Form 2553 with the IRS within two and a half months of filing your business formation documents with New Jersey’s Department of Revenue. Otherwise, you have to wait until the following year to get the New Jersey S Corporation tax status.
If you have an LLC, you need to change the tax election to a corporation first and then file your S Corporation election.
There are also New Jersey S Corporation filing requirements. Using the New Jersey Division of Revenue and Enterprise Services’ S Corporation Election Service, you must file an SCORP application. For the election to be in effect for the current tax year, file the election within three and a half months from the beginning of the fiscal year. Every shareholder of the corporation must consent to the election.
The IRS has strict requirements for business entities filing for an S Corporation election. For corporations to qualify for S Corporation status, they must:
Clearly, not all businesses meet these qualifications, but you may want to speak with a legal or financial professional to discuss your options.
While S Corporations are favorable among small business owners, they’re not for everyone. It’s important to look at the pros and cons of this entity type to see if it aligns with your business functions and goals.
S Corporations are advantageous in terms of the asset and liability protection they provide, as well as their allowance for the cash method of accounting.
The hallmark of the S Corporation, however, is its favorable tax treatment. As discussed above, S Corporations are treated as pass-through entities, so for federal income tax purposes, their income is only taxed once at the personal level. Another tax advantage is that only a portion of the S Corporation’s earnings is subject to self-employment taxes. S Corporations can classify income distributed to employees and shareholders as either dividends or salaries. Dividends aren’t subject to self-employment tax. LLCs, on the other hand, must pay self-employment taxes on their entire profits.
S Corporations also have the advantage of using the self-employment tax deduction and Qualified Business Income (QBI) deduction.
Forming and maintaining an S Corporation can be expensive and time-consuming. There are very strict stock ownership requirements imposed by the IRS to qualify as an S Corporation. There’s also plenty of room for error when meeting the tax qualification obligations, such as making the actual election, getting everyone’s consent, providing notification, and meeting the filing requirements.
So if you make this election, know that the IRS closely scrutinizes S Corporations because of their ability to classify distributions as either dividends or salaries. Also, keep in mind that S Corporations are only allowed one class of stock. Therefore, they don’t have much flexibility when it comes to allocating income and loss.
When you set up a business entity, there are default elections and tax treatments. S Corporation status isn’t the default status, but something you must intentionally elect. For corporations, the default is C Corporation election and double taxation (i.e., income is taxed at both the personal and corporate level when distributions are made). LLCs are automatically treated as disregarded entities and subject to pass-through taxation (i.e., all income passes through to the LLC owners, which they report on their personal income tax returns).
S corporations are entities that meet the IRS’s requirements and elect to pass income, losses, deductions, and credits through to the corporate shareholders or LLC members. S Corporations and LLCs share some similarities in terms of tax treatment and liability protection, but there are significant differences between the two.
In New Jersey, S Corporations aren’t completely exempt from corporation business tax. Rather, they’re taxed at a reduced corporate tax rate.
The main difference between S Corporations and C Corporations is their tax treatment. C Corporations are separate taxable entities that pay federal income tax at the corporate level, whereas S Corporations tax their income at the individual level when either shareholders or LLC members receive distributions.
To create an S Corporation, you must first create an underlying entity, such as an LLC or corporation. Next, you have to file Form 2553 with the IRS to make the S Corporation election. Your entity must meet the IRS’s requirements, which are listed above, to qualify as an S Corporation.
New Jersey has an additional requirement that any entity making an S Corp election also file an application with the Division of Revenue and Enterprise Services.
Yes. LLCs can make an S Corporation election by filing Form 2553. LLCs typically do this for tax purposes, particularly for self-employment tax benefits. Check out our article on Tax Information for LLCs for more details.
If you’re ready to start your business today, we’re here to help. With our S Corporation Formation Service, we can create your S Corporation in minutes. Our experts are available to guide you through the process and get your business up and running quickly.
From forming your business to writing your business plan and maintaining it for years to come, we have the products, services, and tools you need to succeed.
Disclaimer: The content on this page is for information 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.
By creating an S Corporation, your business benefits in the following ways:
Although S Corporations have many advantages, they might not be the right fit for your business. Be sure to compare all business entity options.
Your S Corporation will have the same name as the underlying entity that you form. Keep in mind, New Jersey has strict name requirements for any business entity and prohibits the use of certain words. We can help you do a name search to see if the name you want is available.
This answer depends on the individual LLC. Keep in mind, not all LLCs meet the IRS’s requirements for S Corporations. There’s also extra administrative work and expenses, and the IRS closely monitors S Corporations. If you’re unsure whether an S Corporation election is right for you, contact a business lawyer or tax professional for guidance.
For federal income tax purposes, S corporations aren’t taxed at the corporate level. The corporation’s income passes through to the individual shareholders or LLC members, who report that income on their individual returns. For a New Jersey S Corp, it must still pay corporation business tax, but at a reduced rate.
For more information, check out our article on how to Calculate Your S Corporation Taxes. You might also consider hiring a tax professional to assist you in correctly calculating your S Corporation’s taxes in New Jersey.