Fact Checked by Editorial Staff
Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in New Jersey. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in New Jersey. Before you start New Jersey LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.
If you are confused with New Jersey LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in New Jersey.
LLC vs. S-Corp: Definition
While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-
What is an LLC in New Jersey?
A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.
Forming an LLC in New Jersey gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.
What is an S-Corp in New Jersey?
An S-Corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-Corporation is similar to LLC, except that the IRS treats it as a corporation for tax purposes.
S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.
LLC Vs. S-Corporation: Which is More Preferable in New Jersey?
In New Jersey, forming a business is crucial since you need to be adequate in your decision, especially when you think if New Jersey LLC or an S-Corporation in New Jersey is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in New Jersey doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.
It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.
– LLCBuddy Editorial Team
Tax Difference Between New Jersey LLC and S-Corp in New Jersey
There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in New Jersey is suitable for your business.
Federal Taxes: There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in New Jersey. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.
Pass-Through Taxes: LLC and S-Corporation in New Jersey are the same in terms of pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners are required to pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in New Jersey are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
Self-Employment Taxes: Most LLC owners choose S-corporation taxation in New Jersey to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes.
Consider the scenario where you are the only owner of an LLC in New Jersey with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a New Jersey S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.
New Jersey State Taxes: At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in New Jersey, it costs $75 that can be paid to the NM Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $125 (by mail and online).
On the other hand, you also need to pay taxes if you form an S-Corporation in New Jersey; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the NM Secretary of State to pay this.
How do New Jersey LLCs and S-Corporations Handle Liability Protection?
In New Jersey, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.
LLC Vs. S Corporation Ownership Requirements Comparison
Strict ownership requirements exist for LLCs and S-Corporations in New Jersey. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.
The following are the reasons why some cannot be shareholders in the S-Corporation in New Jersey.
- Insurance business
- Domestic and International sales corporations
- Partnerships
- Corporations
- Unauthorized Immigrants
- Certain financial institutions
Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your New Jersey LLC or New Jersey S-Corp.
Which is Easier to File in New Jersey: LLCs or S-Corporations?
Filing an LLC or S-Corporation in New Jersey takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by New Jersey Registered Agent. However, in order to establish an LLC in New Jersey, you must submit a Certificate of Formation to the New Jersey Division of Revenue and Enterprise Services. Your Certificate of Formation must contain information for your LLC, along with payment of the associated filing fee.
In addition, you need to submit more papers to make the New Jersey S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.
Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.
Important Information
Who Pays More Taxes, an LLC or S-Corporation?
Taxes differ for LLC and S-Corporation in New Jersey because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.
On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.
Should I Convert an LLC to S-Corporation?
Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.
How to Structure an LLC to S-Corporation?
To structure an LLC to S-Corporation in New Jersey, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 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, in order 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.
FAQs
Also Read
- LLC vs S-Corp in Alabama
- LLC vs S-Corp in Alaska
- LLC vs S-Corp in Arizona
- LLC vs S-Corp in Arkansas
- LLC vs S-Corp in California
- LLC vs S-Corp in Colorado
- LLC vs S-Corp in Connecticut
- LLC vs S-Corp in DC
- LLC vs S-Corp in Delaware
- LLC vs S-Corp in Florida
- LLC vs S-Corp in Georgia
- LLC vs S-Corp in Hawaii
- LLC vs S-Corp in Idaho
- LLC vs S-Corp in Illinois
- LLC vs S-Corp in Indiana
- LLC vs S-Corp in Iowa
- LLC vs S-Corp in Kansas
- LLC vs S-Corp in Kentucky
- LLC vs S-Corp in Louisiana
- LLC vs S-Corp in Maine
- LLC vs S-Corp in Maryland
- LLC vs S-Corp in Massachusetts
- LLC vs S-Corp in Michigan
- LLC vs S-Corp in Minnesota
- LLC vs S-Corp in Mississippi
- LLC vs S-Corp in Missouri
- LLC vs S-Corp in Montana
- LLC vs S-Corp in Nebraska
- LLC vs S-Corp in Nevada
- LLC vs S-Corp in New Hampshire
- LLC vs S-Corp in New Jersey
- LLC vs S-Corp in New Mexico
- LLC vs S-Corp in New York
- LLC vs S-Corp in North Carolina
- LLC vs S-Corp in North Dakota
- LLC vs S-Corp in Ohio
- LLC vs S-Corp in Oklahoma
- LLC vs S-Corp in Oregon
- LLC vs S-Corp in Pennsylvania
- LLC vs S-Corp in Rhode Island
- LLC vs S-Corp in South Carolina
- LLC vs S-Corp in South Dakota
- LLC vs S-Corp in Tennessee
- LLC vs S-Corp in Texas
- LLC vs S-Corp in Utah
- LLC vs S-Corp in Vermont
- LLC vs S-Corp in Virginia
- LLC vs S-Corp in Washington
- LLC vs S-Corp in West Virginia
- LLC vs S-Corp in Wisconsin
- LLC vs S-Corp in Wyoming
Why New Jersey LLC Vs S Corp is So Important
One of the main reasons why the choice between an LLC and an S Corp is so important is the level of flexibility and simplicity each structure offers. LLCs are known for their flexible management structure, allowing owners to choose how the business is run and operated. This flexibility extends to tax options as well, as LLCs can elect to be taxed as a partnership, corporation, or sole proprietorship. On the other hand, S Corps have more rigid rules regarding ownership and management, requiring a board of directors, officers, and regular shareholder meetings.
Another key consideration when deciding between an LLC and an S Corp is the level of liability protection each structure provides. Both structures offer limited liability for owners, meaning that their personal assets are protected from business debts and lawsuits. However, LLCs typically provide greater protection against personal liability, as owners are only responsible for the debts and liabilities of the business up to the amount of their investment. In contrast, S Corps may have more limitations on who can be shareholders and can face potential double taxation.
Tax implications also play a significant role in the decision-making process when choosing between an LLC and an S Corp. LLCs are known for their pass-through taxation, meaning that profits and losses flow through to the owners’ personal tax returns. This can be beneficial for owners, as they only pay taxes once on the business profits. In comparison, S Corps also have pass-through taxation but may be subject to corporate taxes on certain income, leading to the potential for double taxation.
Furthermore, the overall cost and administrative burden of maintaining an LLC or an S Corp must be taken into consideration. LLCs are typically more cost-effective to form and maintain, with fewer formalities and less paperwork required. S Corps, on the other hand, have more regulations and obligations to adhere to, such as holding regular meetings, maintaining corporate records, and filing separate tax returns.
In conclusion, the decision between forming a New Jersey LLC or an S Corp is a crucial one that requires careful consideration of the business’s priorities and goals. While both structures offer liability protection and pass-through taxation, they differ in flexibility, simplicity, liability protection, tax implications, and administrative burdens. Business owners should thoroughly research and consult with legal and financial professionals to make an informed decision that aligns with their business objectives.
Conclusion
Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in New Jersey, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a New Jersey LLC and S-Corp in New Jersey, read our other business guides.