Corporation Law Questions
By Fredrick P. Niemann, Esq. of Hanlon Niemann, Freehold, New Jersey Corporate Law Attorney. (Read more about Mr. Niemann here)
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
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.
I’ve heard about corporations but what is a corporation and how do I incorporate in New Jersey?
A corporation is a distinct legal entity formed under the laws of New Jersey that can own property, borrow money, pay taxes, hire employees, operate a business, sue or be sued. The shareholders are the owners of the corporation and reserve corporate profits through the payment of dividends and share price appreciation. The shareholders are not personally liable for the actions of the corporation.
Can you explain the advantages and disadvantages of being a corporation in NJ when compared to other forms of business entities?
The biggest advantage of incorporation in this state is the limited liability it offers its shareholders. Under NJ law, a corporation is considered to be a distinct legal person that is separate from the shareholders who own it. This means that the individual shareholders of the corporation are not personally liable for the debts and obligations of the corporation, as a general rule. If a corporation goes out of business, then the shareholders will lose their investment, that’s it. One disadvantage of a “C” corporation (vs. an “S” corporation) is that income is taxed at two levels: first on income for the corporate entity, and then at the shareholder level where shareholders pay income tax on any dividends they have received.
Exactly how do I incorporate in New Jersey?
To incorporate you must first file the Articles of Incorporation with the Office of the New Jersey Secretary of State. Additional forms are required such as the Resident Agent Acceptance. After the initial filing, an annual report or Statement of Information is required. In addition, a name search is required to ensure that your corporate name will not be confused with any company already doing business in the state.
What purpose does the Articles of Incorporation serve?
The Articles of Incorporation is a document that is filed with the Secretary of State by the individuals organizing and creating the corporation. The Secretary of State then issues a Certificate of Incorporation that legally entitles a corporation to operate as a business within the state. The Articles of Incorporation describe the purpose of the corporation as well as its ownership structure. The Articles will also list the names of the individuals who are acting as incorporators for the corporation and may but are not required to list the names of the individuals acting as initial directors for the corporation. The actual rules governing the management of the corporation are found in a document called the Bylaws. Bylaws are adopted by the shareholders at their initial meeting but are not filed with the Secretary of State because bylaws are for the internal use of the corporation only.
Do the officers have to file an annual report?
All corporations in NJ must file an annual report. This report is filed with the Secretary of State and informs the public and interested parties about changes in officers, directors and addresses.
What or who is an Incorporator? It sounds difficult!
An incorporator is the person(s) who create the corporation by filing the Articles of Incorporation with the Secretary of State. Once the filing is complete the incorporator's role is finished. After that the management of the corporation is assumed by the corporate officers under the direction of the Board of Directors subject to ratification by the shareholders.
Is it true that all I have to do to form a corporation in NJ is file the Articles of Incorporation?
No. NJ requires further documentation. The state will send the appropriate forms to you. For example, an initial annual report and tax filing form. These must be filled out and returned promptly with any required fees. Pay attention to any deadlines that are indicated. The corporation will thereafter need to file a tax return and report any income.
Other organizational tasks include obtaining a Federal Tax ID number and if selected, a Sub Chapter-S Filing with the IRS.
How do I secure an S-corporation status for my NJ corporation?
S-corporation status is a federal application to the IRS and is not part of the Articles of Incorporation filing that you send to the New Jersey Secretary of State. If you meet certain eligibility requirements you may apply for federal S-corporation status. For more detailed instructions review the following links on the IRS website:
Types of Corporations
What is a Close Corporation and how does it differ from a Private Corporation?
A “Private Corporation” is really the same thing as a “Close Corporation”. It is owned by a small number of people through a limited authorization and issuance of shares in the corporation. The shareholders almost always are involved in the operation and management and participation in the corporation. There is no public issue of shares and there is no public market to trade these types of shares.
What is a Closed Corporation under NJ law?
See discussion on a Private Corporation above. A Closed Corporation is owned by a small number of people, often 2-5 persons. All or most of the shareholders collectively participate in the management of the corporation. There are no outside investors (as a general rule). As a result, there is no public market for the exchange of shares. A Close Corporation may also be referred to as a Private Corporation or a Privately-Held Corporation.
What is a Publicly Held Corporation?
A Publicly Held Corporation is owned and freely traded by many persons including the general public. A Publicly Held Corporation will also have to comply with additional securities laws and regulations.
What is a Registered Agent?
New Jersey requires that each corporation be represented by a registered agent. A registered agent allows for reliable communication between the corporation and the state, generally tax filings and service of process (ie., lawsuits). An agent must have a physical office within the state. The registered agent is the designated person to act as an Agent for Service of Process.
What is the registered office of a corporation?
The registered office is the physical street address within the state of NJ where the registered agent can be contacted during normal business hours for service of process.
How do I change my Resident/Registered Agent?
The NJ Secretary of State has a standard form for this purpose. It is important to report any change in the designated agent or the address of the registered agent promptly.
What are the bylaws of a corporation under NJ business law?
The bylaws of the corporation describe the details for the internal rules and procedures which govern the operation, conduct and management of the Corporation. Bylaws are not filed with the NJ Secretary of State and do not form a part of the Articles of Incorporation. Bylaws are for the internal use only and can vary from company to company depending upon the agreement reached among the shareholders.
Meetings and Minutes
What must be done at the first organizational meeting of a NJ corporation?
Once the Articles of Incorporation are filed with the Secretary of State and a certified true copy of the Certificate of Incorporation has been received from the Secretary of State, the corporation should then conduct its first organizational meeting. If directors have not yet been elected, then the incorporators should hold an organizational meeting for the purpose of appointing directors and completing the formation of the corporation including drafting and adopting bylaws subject to ratification by the shareholders. If directors have been named in the Articles of Incorporation then the directors should hold an organizational meeting and complete the formation of the corporation again subject to ratification by the shareholders.
The shareholders can then hold an organizational meeting to ratify any action taken by the incorporators or directors including adopting the articles of incorporation, adopting the corporate bylaws, electing or adopting the appointment officers and electing or adopting the appointment of directors.
What are corporate resolutions? Do you need to prepare them?
A corporate resolution is a written document describing the action taken by the directors of a corporation. Resolutions may describe action taken during a board meeting or may have been generated by agreement of the directors without a meeting.
Is it true that shares of stock in a corporation evidence ownership?
Yes. A share of stock is proof of an ownership interest in a corporation. Shares are sold by the corporation for cash or other considerations in order to raise capital to start or expand the corporation. There must be at least one class shares issued. Different classes of shares may be assigned different privileges such as right to vote on management issues as well as the right to participate in the sale of assets if the corporation is dissolved.
What is a shareholder compared to a business partner or LLC member?
A shareholder is a person, business entity or institution that owns at least one share in a corporation. Shareholders are the actual owners of the corporation. As an owner, the shareholder has the potential to profit if the corporation is doing well but also has the potential to lose their investment if the corporation goes broke. A shareholder is not personally liable for the debts and obligations of the corporation. If a corporation goes broke (worst case) the shareholder may get little or nothing as an equity holder in the corporation. Other secured creditors such as banks and bond holders would be paid first in the event of the liquidation of the assets of the corporation.
What are issued shares?
Issued shares are the authorized shares that have actually been issued or sold to shareholders. Un-issued shares do not represent an equity holding in the corporation. A shareholder's equity will be determined based on the total number of issued shares and will not include the remaining authorized but un-issued shares. Note also that a corporation may own or purchase its own shares but that this is different from un-issued shares.
What are authorized shares?
Authorized shares are the total number of shares that the corporation may distribute or issue. There is no requirement that all authorized shares must be issued. Authorized but un-issued shares are not included in any calculation corporate or shareholder equity.
What is par value?
Par value is the nominal or face value assigned to a stock. Par value is often no longer required and does not necessarily reflect the amount paid for stock nor its market value. Par value does not represent the redemption amount for redeemable shares. It is still used by some states however as a method to calculate the capitalization (Par Value multiplied by number of shares issued) of the corporation.
What is an accredited investor?
An accredited investor is a sophisticated investor who has less need for the protection provided by regulation or statute. If all shareholders can be classified as accredited investors then it may not be necessary to register the corporate securities with the SEC. To qualify as an accredited investor an individual must have a sustained income over $200,000, or a net worth over $1 million, or hold a senior position such as director or officer for the company that is issuing securities.
What is a Restricted Security under Federal and State law?
Restricted securities are purchased with investment intent and have transfer restrictions attached. Restricted securities should bear a restrictive legend detailing the transfer restrictions.
Officers of a New Jersey Corporation
What does a president do?
The president is a chief executive officer of the corporation (the “boss”) and is generally held responsible for the day-to-day operations and execution of the decisions by the Board of Directors on behalf of the corporation. The president will report to the board of directors as mandated by the Board.
What does a treasurer do?
The treasurer is the principal executive financial officer of the corporation responsible for supervising the accounting functions of the corporation and for keeping accurate and current financial records for the corporation. The treasurer creates bill paying and revenue collection systems for the company and generally signs the corporation checks. The treasurer reports to the president.
What does a secretary do?
The corporate secretary is an executive officer of the corporation responsible for maintaining the administrative records of the corporation such as minutes of meetings of directors, shareholders, officers, etc. as mandated by the corporate by-laws or the Board of Directors.
What is an Employer Identification Number (EIN)?
The EIN (also known as the Federal ID number or FID) is a number assigned to businesses for tax reporting purposes. The EIN is issued by the Internal Revenue Service after the filing of a required EIN application.
A Federal ID number (FID) (also known as the Employer Identification Number (EIN))
The Employer Identification Number (EIN) is a number assigned to businesses for federal tax reporting purposes.
What is meant by principal business offices for the corporation?
Principal Business Office for the corporation is the main location where the corporation performs its primary business purpose.
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 email@example.com. We're here for you.
Fredrick P. Niemann, Esq.
NJ Corporation Attorney
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