When starting a small business in New Jersey, deciding which business entity to form is your first port of call. That decision affects several things, including your company’s structure and how the Internal Revenue Service (IRS) treats your company.
For many, an S corporation in New Jersey is the way to go. This article digs into what an S corporation is and why it may work for you.
S Corporation in New Jersey: Key Points
An S corporation is a tax classification available to existing LLCs and C corporations.
S corps avoid double taxation as all income passes through to shareholders without being taxed at the corporate level.
You must file Form 2553, Election by a Small Business Corporation, to transform your business entity into an S corp.
What Is an S Corporation?
The New Jersey government website defines an S corporation (S corp) as being similar to a C corporation (C corp), with the main difference being that S corporations avoid double taxation.[1]
In a traditional C corp, the business pays corporation taxes on its income, losses, and dividends. After that, the company’s owners pay their income tax rate on the money they pull from the business.
With an S corp, all income passes through to the owners and employees without being taxed at the corporate level. As a result, S corp status means you only pay taxes at the personal income tax level, which can result in you paying fewer taxes on your company’s income.
Strictly speaking, an S corp isn’t a business entity. Instead, it’s a tax classification in the eyes of the IRS. You can create an S corp from a New Jersey limited liability company (LLC) or a C corp.
Tax Considerations for an S Corporation in New Jersey
As filing to become a New Jersey S corporation affects your tax status, it’s essential to understand precisely how the IRS and the state of New Jersey will treat your business.
New Jersey Tax Treatment of S Corporations
In a standard C corp, you must pay a state corporate tax rate between 6.5% and 9%, depending on your company’s income. From there, you pay additional personal income tax, with the rate determined by how much you earn.[2]
With an S corp, you don’t have to pay any corporation taxes, meaning you can avoid the 6.5-9% rates charged at the company level.
However, an election to S corp status on the federal level doesn’t pass on to the state level, meaning companies also have to elect to operate as an S corp in New Jersey. This creates a situation where your business could be a “New Jersey Electing S corporation” or a “Non-Electing Federal S corporation.”
In the case of the former, resident shareholders must declare all income they receive in their New Jersey income tax return, regardless of where that income originates. Owners of non-electing S corps must only report the income not allocated to New Jersey, as they pay corporation tax on any income allocated to the state.[3]
New Jersey Franchise Tax for S Corporations
The state of New Jersey doesn’t charge a franchise tax to corporation owners. However, S corps have to pay a minimum tax subject to their New Jersey Gross Receipts. This tax ranges from $375 per year when Gross Receipts are less than $100,000 to $1,500 if your business has Gross Receipts totaling $1 million or over.[2]
Pass-Through Taxation
S corps are considered pass-through tax entities in the state of New Jersey. In tax treatment terms, this means that all of the income the S corp generates passes through to the company’s owners, who pay taxes on that income at their personal rates.
New Jersey requires you to register your business as an S corp on federal and state levels. If you only elect to be an S corp on the federal level, any income you generate in New Jersey won’t pass through to the S corp owners. It’s subject to corporation tax first, as it would be in a C corp.
Furthermore, having S corp status doesn’t make you immune from other business-related taxes. For example, you may have to pay self-employment tax on your personal income, depending on your company structure.[4]
Requirements for Forming an S Corporation in New Jersey
To turn your business into an S corporation in New Jersey, you must elect the status at both the federal and state levels.
Starting with the federal level, the following are the IRS’s requirements for you to create an S corp:[5]
Own a domestic corporation based in the United States
Offer a single class of stock to shareholders
Have no more than 100 S corporation shareholders
Ensure that all shareholders are allowable: individuals, estates, and some types of trusts are allowable, while corporations, partnerships, and non-resident aliens are not
Furthermore, your business can’t be a domestic international sales corporation or insurance company. Some types of financial institutions are also barred from becoming S corps.
Once you have approval on the federal level, you have a “Non-Electing Federal S corporation.” To turn that S corp into a “New Jersey Electing S corporation,” you must complete three more steps:[6]
Register with the New Jersey Division of Revenue and Enterprise Services
Have either a Certificate of Authority or Certificate of Incorporation that proves you can transact in New Jersey
File for a New Jersey S corporation election
With that, you’ll have S corp status at the federal and state-wide levels.
Filing as an S Corp in New Jersey
Filing for an S corporation in New Jersey requires you to have your Certificate of Authority or Certificate of Incorporation. That means you need to form your business before you can apply for S corp status.
These six steps take you from choosing a name to completing the S corp election.
Step 1: Choose a Business Name
In the state of New Jersey, your business name can’t be the same or similar to any other New Jersey business name registered with the state.[7] So, you must check any name against businesses already operating in the state. You can check yours today with our free business name search.
Assuming your desired name is available, you can reserve the business name for up to six months with the New Jersey Treasury. Name reservation isn’t a legal requirement, though it’s recommended if you need extra time to file your formation documents.[8]
You can also register and reserve “Doing Business As (DBA)” names, which are referred to as “Alternate Names” in New Jersey.[9] An alternate name is like a pseudonym for your business, allowing you to operate publicly under a different name than your official company moniker.
Finally, applying for a trademark on your name is a good idea. Failure to do so can lead to others using the name for their own businesses. Though you can take legal action to prevent this, that action is far simpler to take when you have a trademark that proves the name belongs to your S corporation in New Jersey.
Step 2: Appoint Directors and a Registered Agent
As S corp status essentially leads to you forming a corporation, you must follow corporate structuring for your business. This means hiring S corp directors who oversee the company’s progress and manage its bylaws. These directors typically come from your pool of S corporation shareholders.
With at least one director in place, move on to electing a registered agent.
Registered agents can be individuals or business entities that are based in New Jersey and will commit to receiving important documents on your company’s behalf. Every New Jersey S corporation needs to have a registered agent who’ll be responsible for the following tasks:
Receiving legal documents, such as service of process, and ensuring those documents reach you
Maintaining normal business hours
Operating a registered office at a physical New Jersey address (a P.O. box or mailing service is not acceptable)
You can serve as your own New Jersey registered agent, assuming you’re willing to take on the role's responsibilities. However, many choose to use a third-party agent service for the following reasons:
You don’t have to maintain a physical address or keep regular hours when you use a third-party service
Though you save money by acting as your own agent, you commit to tedious admin work that pulls your attention away from your business
A third-party registered agent service ensures privacy and prevents documents from arriving at your address during inopportune moments
Get in touch with Swyft Filings to learn about our registered agent service.
Step 3: File Articles of Organization
With your name chosen, directors assigned, and registered agent in place, you’re ready to form your New Jersey business.
The specific form you complete depends on the type of business you create. Prospective LLC owners must file a Certificate of Formation, with those who want to form a corporation filing a Certificate of Incorporation.[10, 11] Both documents ask for general details about the business, such as its name, what it does, and details about the owners.
You can submit either form online, along with a filing fee of $125, or via mail to the following address:
New Jersey Division of Revenue
P.O. Box 308
Trenton, NJ 08646
You don’t have to pay a franchise tax to create a company in New Jersey. However, you must file an annual report each year confirming that your registered agent and address are up to date. The report costs $75 to file.[12]
Step 4: Create an S Corp Operating Agreement
New Jersey law doesn’t require LLCs to create operating agreements. However, an operating agreement is crucial for business owners who want to establish their company’s bylaws.
An operating agreement is a legally binding document you can use to outline the bylaws under which your LLC operates and the roles and responsibilities of each of its members. It’s worth creating this document for the following reasons:
Ensure fewer disputes
Outline procedures for when an LLC member leaves
Ensure you’re not beholden to the state’s default rules for LLCs
Solidify the limited liability protection that comes with LLC status
Step 5: Apply for an Employer Identification Number
Now that you’ve officially formed your New Jersey business, you have the issue of employees to consider. If you aim to employ anybody, either now or in the future, your business must have an Employer Identification Number (EIN).
Think of an EIN as a Social Security Number for your S corp. It’s a unique nine-digit code that the IRS uses to check that you’re paying the appropriate employment taxes and any income tax related to your employees.
It’s worth getting an EIN even if you don’t intend to hire employees for several reasons:
Most banks won’t allow you to open business banking accounts unless you have an EIN
Applying for an EIN now means you have the number ready if you choose to hire people in the future
Having an EIN legitimizes your business in the eyes of clients and other companies
We’ll obtain an EIN for you, or you can complete the IRS online application.[13]
Step 6: File Form 2553 for S Corporation Election
Finally, you’re ready to start the S corporation election process. In New Jersey, you must do this on the federal and state levels to achieve full S corp status.
Starting with the federal level, you must file Form 2553, Election by a Small Business Corporation, to transform your business entity into an S corp. You have until two months and 15 days into the current tax year to submit this form.[14]
If you miss this deadline, you can still apply for S corp status as long as you have an LLC. By submitting Form 8832, Entity Classification Election, and Form 2553, you can create a corporate business entity with S corp status regardless of the deadline.[15]
With federal S corp status acquired, switch your attention to the state-level filing. Complete the New Jersey S corp Filings process online within three months and 15 days of the current tax year to achieve New Jersey S corp status.[16]
New Jersey S Corp vs. New Jersey LLC
S corp status offers numerous tax benefits compared to C corp status. But if you have a New Jersey LLC, you may wonder if it’s worth the hassle of going through the election process. After all, a limited liability company is a pass-through tax entity, too. Why elect S corp status if you already receive pass-through tax treatment?
You can answer that question for your business by checking out the pros and cons of each structure.
Advantages of Starting an LLC in New Jersey
Form and manage your LLC with ease
Get complete control over your leadership structure with an LLC
Benefit from many of the same pass-through tax treatments as S corps
Disadvantages of Starting an LLC in New Jersey
Liability protection doesn’t extend as far as what you receive with S corp status
Often have to dissolve if a member leaves or goes bankrupt
Can find it hard to attract outside investment with an LLC than you would with an S corp
Advantages of Forming an S Corporation in New Jersey
Offer enhanced personal liability protection due to their corporate structure
Pay lower self-employment taxes than LLC owners
Find it easier to attract an investor with an S corp
Disadvantages of Forming an S Corporation in New Jersey
Handle a lot of paperwork when forming an S corp.
Grow only to a certain level due to the requirement to have no more than 100 shareholders
Ready to File for S Corp Status in New Jersey?
Passing S corporation income to individual taxpayers is an attractive benefit, allowing business owners to avoid double taxation on profits and distributions. But you need to contend with various S corp limitations to access those benefits.
If you’re a small business owner interested in forming an S corporation in New Jersey, our team can take you through each step of the process. We’ll work with you to form your LLC or corporation, ensuring you can elect S corp status. And when you’re ready, we’ll handle the S corp filing process on your behalf, meaning you save time and energy that you can devote to your business.
Frequently Asked Questions
What is an S corporation in New Jersey?
An S corporation is a pass-through tax classification. Shareholders of the corporation pay taxes on personal income, with the company itself paying no corporate taxes.
Does New Jersey recognize S corporations?
Yes, New Jersey recognizes S corporations. However, you must complete an additional filing process beyond the one created by the IRS to form an S corp in New Jersey.
What is the turnaround time for filing for S corp status with the IRS?
It can take up to 60 days for the IRS to approve your S corp election.
What is the difference between an S corp and an LLC?
S corps and LLCs are similar for tax purposes. However, S corps offer more liability protection.
What are the requirements for an S corporation in New Jersey?
Business owners in New Jersey must file with the IRS and the state to attain S corp status.
Are taxes for LLCs and S corps the same?
Taxes for LLCs and S corps are similar but not the same. For example, LLC owners often pay higher self-employment taxes than S corp owners.
What is the S corp tax rate?
S corp shareholders pay taxes at their personal income tax rate, with the business itself paying no corporate taxes.
How do I dissolve an S corporation in New Jersey?
You must complete a Certificate of Dissolution, which you submit to the New Jersey Division of Revenue.
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Bibliography
Business.NJ.Gov. “S-Corporation (S-Corp).” Accessed April 11, 2023.
Official Site of the State of New Jersey. “Corporation Business Tax Overview.” Accessed April 11, 2023.
Official Site of the State of New Jersey. “Income From S Corporations.” Accessed April 11, 2023.
Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes).” Accessed April 11, 2023.
Internal Revenue Service. “S Corporations.” Accessed April 11, 2023.
Official Site of the State of New Jersey. “S Corporation Status.” Accessed April 11, 2023.
Official Site of the State of New Jersey. “Check Business Name Availability.” Accessed April 12, 2023.
NJ Department of the Treasury. “Business Charter Amendment Service.” Accessed April 12, 2023.
Official Site of the State of New Jersey. “Alternate Names.” Accessed April 12, 2023.
NJ Department of the Treasury. “Business Registration Forms and Information.” Accessed April 12, 2023.
NJ Department of the Treasury. “New Jersey’s Online Business Formation.” Accessed April 12, 2023.
Business.NJ.gov. “Taxes and Annual Report.” Accessed April 12, 2023.
Internal Revenue Service. “How to Apply for an EIN.” Accessed April 12, 2023.
Internal Revenue Service. “About Form 2553, Election by a Small Business corporation.” Accessed April 12, 2023.
Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed April 12, 2023.
Official Site of the State of New Jersey. “S Corporation Election.” Accessed April 12, 2023.
