Choose a Business Structure

Explore each business structure for more information about the advantages and drawbacks of each business structure (also referred to as legal structures).

Sole Proprietorship

Sole Proprietorship is the most basic type of business to establish. You are the only owner of the company and are responsible for its assets and liabilities.

Advantages

• Simple and inexpensive to create
• Report profits or losses on your personal tax return

Disadvantages

• Personally liable for business debts
• Cannot give/share equity, limiting funding opportunities and potential partners

General Partnership

A General Partnership is 2 or more people sharing ownership of a single business. The partners manage the business and are responsible for all debts and obligations. The details of this agreement should be written out formally to define the roles of each partner.

Advantages

• Simple and inexpensive to create and operate
• Partners report profit or loss on their personal tax returns

Disadvantages

• Partners are personally liable for business debts
• Owner is personally liable for partners' or employees' actions

Limited Liability Company (LLC)

A ‍Limited Liability Company (LLC) is a hybrid between a corporation and a partnership. Business owners in an LLC are not responsible for the debt of the company. Unlike a corporation, the business does not file separate taxes. Each partner (called a member) includes their profits on their personal tax return.

Advantages

• Limited personal liability for business debts even if you take part in management
• Profit and loss can be allocated differently than ownership interests
• IRS rules allow LLCs to choose between being taxed as a partnership or a corporation

Disadvantages

• More expensive to create than a partnership or sole proprietorship
• State laws for creating LLCs may not reflect the latest federal tax changes
• Cannot obtain venture capital funding
• Cannot provide employees with stock options

C-Corporation (C-Corp)

A C-Corp is more complex than other business structures and is suggested for larger companies with many employees. It is a separate entity from those who own it, meaning it can be taxed (or sued) independently from its owners, known as shareholders. They elect a board of directors to oversee major policies and decisions and appoint officers who carry out the daily operations of the business.

Advantages

• Limited liability for business debts
• Fringe benefits, such as an employer-paid insurance premium, can be deducted as a business expense
• Shareholders can split corporate profit among owners and corporation

Disadvantages

• More expensive to create than a partnership or sole proprietorship
• Paperwork can seem burdensome to some shareholders
• Separate taxable entity

S-Corporation (S-Corp)

S-Corporation is similar to a C-Corp except the business is not taxed separately from the owners. S-Corps are also very similar to Limited Liability Companies (LLCs), but with more limitations. The owners, called shareholders, avoid the double taxation of a C-Corp, but the business is limited to 100 shareholders and has only 1 class of stock.

Advantages

• Limited liability for business debts
• Shareholders report their share of corporate profit or loss on their personal tax returns
• Shareholders can use a corporate loss to offset income from other sources

Disadvantages

• More expensive to create than a partnership or sole proprietorship
• More paperwork than for a limited liability company, which offers similar advantages
• Venture capitals aren't willing to fund S-Corps or any other pass-through entity
• Income must be allocated to owners according to their ownership interests
• Fringe benefits are limited for owners who own more than 2% of shares

Nonprofit

Nonprofits are a type of C-corp. Unlike for-profits, they have a mission to benefit the public rather than generating profit, including religious, charitable, educational, scientific, or social welfare causes. Because a nonprofit organization serves the public good, it can qualify for tax-exempt status with the IRS.

Advantages

• Personal liability protection 
• No federal or state corporate income tax for 501(c)(3) organizations

Disadvantages

• Fundraising can be challenging and is impacted by changes in the economy
• Members of the board of trustees can't be paid for their service
• You must manage a lot of paperwork and record keeping to remain compliant with the IRS and ensure that you are transparent about business operations

Limited Partnership (LP)

Limited Partnerships have both limited and general partners. The general partners own and operate the business. Limited partners invest in the business but have limited liability and limited input in its management. These business types are not usually used for retail or service businesses.

Advantages

• No mandatory corporate formalities, such as annual meetings or corporate filings
• Personal liability of limited partners is limited to capital contributions
• Limited partners don’t have to pay self-employment tax as general partners do

Disadvantages

• General partners are responsible for their liability as well as the liabilities of any of the limited partners
• Limited partners are silent partners and cannot participate in management
• Limited partners can lose their status and be held personally responsible for business liabilities if they’re found to be actively involved in the management of the business

Limited Liability Partnership (LLP)

Limited liability partnerships are similar to limited partnerships, but in an LLP even the general partners have limited liability. They are not responsible for the malpractice of the other partners. These business types are not usually used for retail or service businesses.

Advantages

• The personal liability in an LLP is limited to your capital contribution
• An LLP is not required to maintain corporate formalities, such as annual meetings or corporate filings 
• All partners can conduct business for the LLP and participate in management duties
• LLPs are pass-through entities, meaning the LLP doesn’t pay taxes for the business entity, and all profits are “passed” to the partners and taxed as personal income

Disadvantages

• Any partner in the LLP that is actively involved in the management of the business can lose their limited liability status

‍B-Corporation (Benefit Corporation or B-Corp)

‍B-Corporation is a business structure in the United States set up to both benefit society and generate money for its shareholders. Directors are required to consider the impact of their decisions on shareholders as well as workers, the community, and the environment. Shareholders in a benefit corporation determine if the company has achieved a material positive impact, which the organization defines beforehand.

Advantages

• Build trust with consumers, communities, and suppliers
• Attract and retain employees
• Attract investors who back the mission

Disadvantages

• No tax benefits over traditional business structures
• Scrutinized for policies and practices to ensure you uphold the businesses ethical standards

Visit the IRS website or contact the Business Action Center for more information on business structures.

New Jersey legislation now allows businesses to convert to another business structure without closing and reopening their business. This applies to all structures except sole proprietorships and businesses that have gone through a merger. 

Common advantages of converting business structures can be tax benefits, liability protection, and attracting investments. You should carefully evaluate the specific advantages and potential drawbacks of converting to another business structure.

Filing forms are available for this process:

• If you are a New Jersey business wishing to convert your business structure, please file using form CD-100.
• If you are an out-of-state business wishing to convert your business structure and become a New Jersey Business, please use CD-100.
• If you are an out-of-state business wishing to convert your business structure only, please use form CD-101.