Business Formation and Planning
Forming a business is the first crucial step of any venture. It sets the tone of the business, determines the tax consequences, establishes the rules governing relations among the owners, and either allows or prevents the owners from being personally liable for the company’s debts. Its importance cannot be overstated.
Our New Jersey attorneys help people and businesses start new ventures. We advise investors on how to structure a new venture and on agreements governing relations between the owners. We assist in negotiating financing agreements and closing loans, leasing or purchasing the property, and negotiating and drafting the contracts which the business needs to operate. We also work with existing businesses to achieve their goals by changing business structures.
While our attorneys are extremely experienced in business formation and planning, we don’t do it alone. We believe that we are partners with the owners, and our goal is to ensure that they structure their business to meet their specific needs. We therefore work closely with the owners throughout the process.
Choice of Entity & Business Planning
Our attorneys are experienced at examining the needs of individual owners and helping them plan for their venture and determine the structure which best suits their needs, such as tax consequences, limiting liability, and classes and percentages of ownership, for example. Indeed, in addition to being an accomplished attorney, Frank Nardi is both a certified public accountant and a certified financial planner, which gives him invaluable insight in planning new businesses.
- Limited Liability Companies. Limited liability companies, or “LLCs,” are often the best structure, since they combine the advantages of corporations, which shield owners from personal liability, and partnerships, which eliminate income tax at the business level. LLCs have less formalities than corporations, as well; for instance there is no requirement for a board of directors. They may have different classes of ownership. LLC’s may have an unlimited number of owners, who may be people or other businesses.
- C Corporations. C corporations have limited liability – the “corporate veil” protects owners from being personally liable for the corporation’s debts unless they gave personal guarantees. However, C corps have “double taxation,” meaning that the business is taxed on its income, and when the rest is paid to the owners, they owe personal income tax on it, too. Additionally, there are formalities which must be observed, such as annual shareholders meetings, regular directors meetings, minutes and other records, and filing of annual reports with New Jersey Secretary of State. They may have more than one class of stock. C corps may have an unlimited number of owners, who may be people or other businesses.
- S Corporations. Like C corporations, they have limited liability. However, they are treated as partnerships and escape double taxation. However, some states, such as New York, tax S corps at the business level even though the IRS does not. Also, S corps have limitations on loss deductions on the shareholder level. To maintain this freedom from double taxation, they must maintain the same formalities as C corps, plus additional restrictions which make it difficult to maintain and not as attractive as a limited liability company. S corps may have more than one class of stock. They can have no more than 100 owners, all of whom must be people.
- Partnerships. This form is flexible and avoid income tax at the business level, but the partners are personally liable for the partnership’s debts.
- Sole Proprietorships. These are simple, and require none of the formalities of the other entities, and income at the business level is eliminated, but the owner is essentially “flying without a net” because all liability falls personally on the shoulders of the owner.
Forming the Business
After the type of entity is chosen, formation documents must be drafted (such as the articles of incorporation, by-laws, operating agreements, partnership agreements, employment contracts, shareholder agreements, restrictive covenants, resolutions, etc.), alternate name or “DBA” registrations filed, designation of a registered agent filed, and the business must be registered with the Secretary of State. Our business formation attorneys handle all these issues for the owners.
Agreements Between the Owners
Regardless of the form of business entity Agreements between the owners, are among the most important items of business for any new entity. Partnership agreements, shareholder agreements for corporations, operating agreements for limited liability companies set the rules governing the relations among the owners. They will determine how the owners are paid, what the owners’ functions will be, how the business is managed, how ownership interests can be transferred or purchased, and indemnification of owners. Most importantly, the agreement will govern what will happen should there be a dispute between the owners. While every business owner starts with optimism both about the business itself and her “partners,” the reality is that many business owners have disputes. The best way to work through the disputes is if the mechanisms to resolve them are there before they occur.
New businesses generally need contracts either to be drafted or negotiated. For example, it may be wise to have employment agreements with key employees. Customer contracts often need to be drafted, and their regulatory requirements may be complicated; for example, home improvement contractors, fitness centers, automobile dealerships, and many other businesses must have language required by the Department of Community Affairs’ regulations implementing New Jersey’s Consumer Fraud Act. Vendors may require contracts whose terms should either be negotiated or rejected.
McLaughlin & Nardi’s New Jersey Business Formation Attorneys
To schedule a consultation with McLaughlin & Nardi’s New Jersey business formation attorneys, e-mail us or call (973) 890-0004.