Business Formation

Sole Proprietorships

The sole proprietorship is the simplest and most common form of business entity. A sole proprietorship is a business that is conducted by a single individual owner )the "sole proprietor"). Sole proprietors can conduct businesses under their own names by simply doing business, for example, as "John Q. Public." A sole proprietor can also do business under a trade name (sometimes called a "fictitious name") as "Dot Doughnuts" or "Dire Skates." If a sole proprietor operates under a trade name or a fictitious name, the sole proprietor is required to file a form (a "trade name certificate") in the city, county, or state where the business is located. A sole proprietorship may have employees and is permitted to carry on most businesses.

Partnership

A partnership is a business enterprise entered into by two or more persons who do not form a corporation or any other type of business entity to operate a business. If two or more individuals start a business together withy the understanding that each will share in the profits of the enterprise, they are considered a general partnership even if they did not specifically intent to start a general partnership. A business venture is usually considered a general partnership if it does not form some other kind of business entity such as a corporation. Both very large and very small businesses can operate as general partnerships. Like the sole proprietorship, partnerships are not required to file any certificates or other organizational documents with local, county, or state authorities; but they usually must file a "trade name certificate". The rights and duties of the partners and partnership may be governed by a partnership agreement if the partners choose to have one prepared Z(this is usually highly recommended).

Corporations

A corporation is a legal entity wholly separate and apart from its owners (the shareholders or "stockholders"). Corporations are formed by filing "Articles of Incorporation" with the Secretary of State. Once articles are filed, the information is part of the public record and can be obtained by anyone for a small search fee. Bylaws are a separate set of rules governing how a corporation is to be run. Bylaws are adopted by the shareholders who formed the corporation. They can later be changed by a vote of the shareholders or directors. Corporations are governed at three levels: Shareholders elect Directors. Shareholders do not, other than through the election of directors, typically exercise any control over the overall plans, goals, or day-to-day operations of the corporation. Directors are re4sponsible for the management and exercise the rights and power of the corporation. Directors elect officers such as president, vice president, treasurer and secretary to carry out the policies of the board and to run the corporation on a day-to-day basis. Corporations enjoy many advantages as a business form. Perhaps the most important advantage is that a corporation's stockholders, directors, and officers are not liable for the debts or other obligations of the corporation. Usually they are liable only for any debts or other obligations which they personally guaranteed or result from their own negligence or misconduct. Because it is a separate entity, a corporation is not terminated or dissolved upon the death or departure of any shareholder. Shares can be purchased on a national stock exchange such as the New York Exchange, NASDAQ National Market System, or the American Stock Exchange. Professional corporations are corporations formed by doctors, lawyers, accountants, engineers, architects, and other professionals to do business in their respective professions. Under New Jersey law, only licensed professionals can be shareholders and directors of professional corporations. The same rule usually applies to partnerships, limited liability companies, and other entities formed by professionals to practice their professions. In most states, a professional will not be liable for the negligence or misconduct of other professionals working for the corporation, except those directly supervised by such professional. Of course, professionals will be liable for their own negligence or misconduct.

Limited Liability Companies

A Limited Liability Company, or "LL.C.", is an unincorporated business entity that is similar to both corporations and partnerships. Like a corporation, the formation of an LL.C. shields its members from personal liability for the debts and obligations of the company. Like a partnership, an LL.C. is typically formed by the filing of a "certificate of formation" or similar certificate with the Secretary of State. Also like a partnership, the members of LL.C.s typically enter into an operating agreement that establishes how the LL.C. is governed. LL.C.s may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. New Jersey requires that an LL.C. have more than one class of equity interest, as well as wholly owned subsidiaries whose assets, liabilities, and operating results will be treated independently from those of its LL.C. parent. One advantage of an LL.C. over a corporation is that there is more flexibility in management. For example, an LL.C. may be managed in the following ways: Solely by its members By its members and a management committee serving in a function similar to the board of directors of a corporation By its members, a management committee, and officers Further, an LL.C., unlike an "S" corporation, may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LL.C. Because an LL.C. combines the insulation from personal liability of a corporation with the tax advantages and managerial flexibility of a partnership, it will, in most cases, be the entity of choic3e for new businesses.

Limited Partnerships

A limited partnership is a partnership in which the duties and obligations of the partnership are divided between "general partners" and "limited partners." A "general partner" is a partner who is responsible for managing the partnership and its operations. A "limited partner" is one who is prohibited from taking part in the partnership's management and day-to-day operations. Unlike the "general partner", the limited partner is usually not personally liable for the partnership debts and other obligations. A limited partner participating in management of the limited partnership may become personally liable, however, for the partnership debts and obligations. The advantage of limited partnerships is that limited partners are not personally responsible for the partnership's debts and other obligations. As a result, it is far easier to market limited partnership interests as an investment, particularly with respect to discrete prospects such as real estate development.