The Types of Business Entities

Welcome to The Jayson Law Group LLC’s series on The Legal Aspects of Starting a Small Business in New Jersey.  In our second video, we will examine the four different types of business entities in New Jersey, taking a specific look at sole proprietorships.  Tune in to more videos to assist you in starting a business.

What Are the Types of Business Structures?

There are four basic types of business entities:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Companies (LLCs)
  • Corporations

Some of these overarching groups are subdivided into more specific categories: for example, corporations can be S-Corporations or C-Corporations.  Sole proprietorships, which we’ll be looking at in this article, are fairly straightforward because they strictly limit the number of owners and employees involved.

Sole Proprietorship Registration Requirements

Sole proprietorships take their name from the fact that there is one “sole” owner.  Therefore, sole proprietors are self-employed.

These types of entities are unincorporated, which means that as a sole proprietor, you are not required to file any incorporation papers with the state of New Jersey.  But if you don’t file papers, how will people know that your business exists?  The answer is simple: you must register with the county where you conduct your business.

Pros and Cons of Sole Proprietorships

Like all commercial structures, sole proprietorships come with their own unique set of advantages and drawbacks.  Before you commit to starting this (or any) type of business, you should weigh the pros and cons carefully to determine if this structure is appropriate for your goals and needs.

What Are the Positives?

  • Because these businesses are unincorporated, you don’t have to file a corporate tax return.  Instead, losses and profits are reported on your personal income tax return.
  • You won’t have any employees to pay, train, or oversee.  If the do-it-yourself approach appeals to you, a sole proprietorship might be perfect.
  • Since you’re operating the business on your own, no complicated formal operating agreements are required.

What Are the Negatives?

  • The major drawback of sole proprietorships is that they do not offer any protection from personal liability. What does that mean for you?  Imagine, for example, that a customer comes into your store, slips, injures themselves, and sues you for financial damages, like their hospital bills.  If they win a judgment against you, your personal assets — including the contents of your bank account — can be levied upon. In order to avoid this sort of situation, you’ll need to put a clause into your contracts which specifies a damage cap.
  • Even though these structures are unincorporated, sole proprietorships still need to be registered for taxes, which might include sales tax, use tax, or excise tax.
  • Sole proprietorships are restricted to one owner, so if you wish to add any co-owners later down the road or draw up corporate governance documents, you’ll need to dissolve the business.
  • It is more difficult to hire employees as a sole proprietor than it is in other business structures.

To set up a legal consultation with an experienced New Jersey business attorney, call The Jayson Law Group LLC at (908) 258-0621 today.