Frequently Asked New Jersey

Corporation Law Questions

What is a corporation?  Is a corporation in NJ different than a corporation in another state?

What makes a corporation in NJ different from other types of businesses is that a corporation is an independent legal entity, separate from the people who own, control, and manage it. In other words, corporation and tax laws view the corporation as a distinct legal "person," meaning that the corporation can enter into contracts, incur debts, and pay taxes apart from its owners. And there are other important characteristics that result from the corporation's separate existence: A corporation in New Jersey does not end when its owners (shareholders) change or die, and the owners of a corporation are not personally responsible for the corporation's debts; this is called limited liability.

Who should form a corporation in New Jersey?

Forming a corporation in NJ requires some expense and formality in setting it up and issuing stock (shares in the corporation).  You should form a corporation if you have good reason to do so. If you merely want to limit your personal liability for business debts, forming a limited liability company (LLC) or a subchapter "S” corporation is probably smarter and less costly, because LLCs and "sub-S” corporations are both less expensive to form and less complex to run. But there are some situations in which incorporating your business instead of forming an LLC or sub-S corporations may not make sense:

Does running a New Jersey corporation involve more paperwork than running other types of businesses?

Yes. Corporations in NJ must comply with statutory rules and regulations that an unincorporated business, such as a partnership, and sole proprietorship, do not. For instance, corporations must observe corporate formalities such as holding and taking minutes of annual shareholder and director meetings and documenting important directors' decisions. Also, corporations in New Jersey must file and pay taxes on a separate NJ corporate tax return and must set up a double-entry bookkeeping system to record business transactions, complete with daily journals and a general ledger.

Do directors and shareholders of closely held corporations in NJ have any legal responsibilities to each other?

Yes.  NJ corporate law imposes a fiduciary duty on business directors.  They must act in the best interests of the company's shareholders. For closely held corporations in New Jersey, there may be a fiduciary responsibility between shareholders in some instances.

In closely held corporate businesses, however, majority shareholders have potential to damage the interests of small shareholders. Since most investors do not want to buy closely held shares, minority shareholders have few options when their interests are adversely affected. In response, New Jersey and its courts have recognized fiduciary duties among shareholders of closely held corporations.  These duties depend on the state and the particular circumstances of the case.

Can closely held businesses and corporations in NJ be bought and sold?

Individuals and other businesses can acquire closely held NJ corporations as long as the current shareholders are willing to sell. Since many closely held businesses involve family relationships, things like divorce, retirement, disability or death may precipitate the business sale. Needless to say, these circumstances may complicate any business.

One difficulty in purchasing or selling a closely held business in NJ involves valuation. Since shares in closely held businesses are not commonly traded, sellers and buyers may find it nearly impossible to agree on a fair price for the business.

Another common issue involves the transferability of the business interest. Some transfers cause no complications whatsoever. For sole proprietorships, the buyer purchases the company's assets and takes over operations. Partnerships and limited liability companies do not transfer as easily. When a partner or limited liability company owner sells his or her interest, the buyer cannot participate in the business without the remaining owners' consent. Corporate ownership interests cause the fewest problems because corporate shareholders may sell their entire interests.

Purchasers of closely held NJ corporations should consider having the sellers sign non-compete agreements. These agreements prevent sellers from using their experience and market knowledge to compete against the purchaser in his or her new venture. Courts generally uphold these agreements so long as they are properly written and do not go too far geographically or chronologically.

What are the possible consequences of personal liability for corporate debts and obligations?  "Piercing the corporate veil in NJ”

Personal liability for a corporate mistake can devastate you financially and put you at risk. This form of liability opens the individual to claims for a wide range of corporate obligations. Most people realize they can lose money in a corporate venture, but do not realize other obligations and liabilities may also reach them, including:

     Damage awards in lawsuits;

     Tax deficiencies and penalties; and

     Back wages and benefit payments.

Limited liability protection to business owners by incorporating which shelters corporate owners from personal liability can be accomplished, but not under all circumstances. Certain types of insurance can also help protect business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

What are the differences between C and S corporations?

The Tax Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes.

Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders' individual returns.

Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. To receive subchapter S treatment, corporations:

     Must be domestic;

     Must not be affiliated with a larger corporate group;

     Must have no more than one hundred shareholders;

     Must have only one class of stock;

     Must not have any corporate or partnership shareholders; and

     Must not have any nonresident alien shareholders.

Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service. The limitations imposed by the subchapter may affect the transferability and marketability of corporate shares.

What types of legal procedures and formalities should corporations maintain?

Once incorporators establish a new business, the directors must ensure that it retains its legal status. Certain legal formalities must be followed for this purpose. Once incorporated, ongoing business' obligations include:

     Obtaining federal and state tax identification numbers for

        the business and filing tax returns annually;

     Issuing shares of stock as mandated by the articles of incorporation

        and, if applicable, federal securities law;

     Establishing and maintaining corporate books and records, including

        accounting ledgers, shareholder records, and corporate minutes;

     Conducting an initial meeting of the board of directors or

        shareholders, as required in the articles of incorporation;

     Holding future meetings at least as often as required by applicable

        business laws;

     Conforming all decisions and internal procedures set forth by the

        articles of incorporation;

     Recording all actions and decisions of the board of directors in the

        corporate minutes; and

     Maintaining annual registration with the NJ Secretary of State as

        required by law.

Additionally, NJ corporations must comply with state and local NJ municipal licensing requirements to preserve their status. These companies may need to maintain further records for their specific industries.

Often, a failure to abide by corporate obligations can result in personal liability for directors, officers, or shareholders for business obligations and debts. Because of these harsh consequences and because the specific legal requirements vary depending on the business's location and form, businesses should seek professional legal advice.

If you need legal advice on a NJ corporation matter, face a lawsuit or would just like to speak to an attorney you can feel at ease and comfortable with, call Fredrick P. Niemann, toll-free at (855) 376-5291 or e-mail him at fniemann@hnlawfirm.com. We're here for you.

CONTACT an experienced New Jersey

Corporation Law Attorney Today.

Contact:

Fredrick P. Niemann, Esq.

toll-free (855) 376-5291

fniemann@hnlawfirm.com

Corporate Law Attorney serving these New Jersey Counties:

Monmouth County, Ocean County, Essex County, Cape May County, Camden

County, Mercer County, Middlesex County, Bergen County, Morris County,

Burlington County, Union County, Somerset County, Hudson County, Passaic County