LLC or Corporate Formation

I usually recommend that clients form an LLC (Limited Liability Company) over a Corporation. LLC's have no limit on the number of Shareholders. The Shareholders of an LLC can be foreigners, corporations, as well as partnerships. Some states require an LLC to have at least two partners but New Jersey is not one of those states. In New Jersey you can be a single member LLC. New this year is that a husband and wife can also be treated as a Single member LLC. The advantage of this is that you can report all your Income and expenses on Schedule "C" which is an integral part of your personal tax return instead of having to file a separate Partnership Tax Return with the Income or Loss from it flowing thru to your personal tax return. This saves time and expense.

Also with an LLC you can make an "S" election which means that your partnership tax return will effectively be treated as a Corporation for Federal and New Jersey Income Tax purposes while remaining a LLC for everything else. Making the "S" election allows you to be an employee of your own LLC and will save you money in Self Employment Taxes in most cases. For example if your business makes $100,000 in profit you could pay yourself a reasonable salary of $50,000 dollars, that salary will be the basis of making tax deductible retirement plan contributions, and the other $50,000 dollars will be K-1 income which will be taxable but will not be subject to the Self Employment tax. Self Employment taxes on $50,000 dollars amounts to about $7,500 dollars and that is what your savings are.

If you already are a Corporation, I may or may not recommend that you dissolve the Corporation and form an LLC depending on my analysis of all pertinent facts pertaining to your situation. In most cases if you are a "C" Corporation, I would recommend just making an "S" election. This will save time and money.