Hello my name is Steven Jayson. I’m the managing attorney of the Jayson Law Group LLC a law firm in Union, New Jersey. Welcome to the seventh video in our series on the legal aspects of starting a small business in New Jersey. In this video we’re going to take a broad look at corporations, but before I begin I would just like to start with a brief disclaimer:
This video is for educational purposes only. Any statements made by me during the course this video do not constitute legal advice nor is it a solicitation for business. Furthermore no attorney-client relationship is created through the course this video and I recommend that you seek the advice legal counsel before forming your business.
Forming a corporation
As I said earlier today we’re going to take a look generally at corporations and what is a Corporation. New Jersey defines a corporation as a business entity that can issue shares owned by shareholders and is governed by a Board of Directors. There are three types of corporations in New Jersey. There are S corporations C corporations and professional corporations. Later we will take a look at S and C corporations and we won’t be looking at professional corporations because they’re just limited to a certain number of professions.
Why are they called S and C corporations? Well that’s because of the subsection of the tax code that regulates those types of corporations. But in order to form a corporation you must filing articles of incorporation with the state of New Jersey you also must register with the IRS for an employer identification number and you can give that like the Social Security number for your business. You must draft bylaws up the corporation and which essentially is the way that the corporation will be governed. You can think of it as the corporation’s constitution.
Benefits of a corporation
So what are some of the benefits of a corporation? It is to offer the maximum amount of protection for the owners have the business. It allows for ease in raising capital, as you can think of the IPO declaring on a stock exchange, they’re usually going to be corporations. Obviously not every corporation is raising capital by declaring an IPO, but this was just to give you an example of the ease of raising capital.
They last in perpetuity which, I know sound silly but it’s true, if you recall from our video on limited liability companies you used to have to say the limited liability company was going to last in perpetuity. You don’t have to do that with the corporation — it’s assumed that that is the case.
You can have multiple owners in a corporation and depending on the type of corporation there are some limitations, but as with some corporations you can have a million shareholders and that’s not going to be an issue at least from a legal standpoint. From practical standpoint there may be some issues. It allows for formal corporate structure and governance which means that you can have spinoffs. You can do subsidiaries mergers and acquisitions under corporations.
You can also distinguish between the different types of shareholders you can have shareholders Class A shareholders Class B shareholders which is nice because you may want to treat certain classes or shareholders differently.
So if the corporation has excess money at the end of the year that wants to pay to its shareholders. It can and that’s known as a dividend. You can amend the bylaws just like you can the Constitution, but the way to amend the bylaws is actually found in the bylaws themselves so depending on how you draft bylaws, would define how you can amend the bylaws at a later date
Drawbacks of a corporation
Well some corporations are double taxed which means if the corporation makes a profit it pays income tax on the profits and then when it pays money to you, you also pay income tax on the money that the corporation pays to you. It’s a very rigid structure. Case in point, in New Jersey you must have a Board of
Directors meeting at least once a year and you must have minutes from the meeting so just keep that in mind if you’re thinking of forming a corporation. They’re expensive to form and maintain you must file an annual report with the state of New Jersey. When I say they’re expensive I don’t mean that there are thousands upon thousands of dollars, I mean compared to something like a partnership for sole proprietorship they’re more expensive the so just keep that in mind as well.
You cannot always create different classes of stock. There are some limitations but again we’ll talk about that when we talk about S corporations and C corporations. Each class of stock must be treated the same so all Class A shareholders must be treated the same, all Class B shareholders must be treated the same, All C shareholders must be treated the same — unlike in an LLC or limited liability company where you can have different units, meaning different things for different members.
Well that concludes our look at abroad overview of corporations. I look forward to continuing our exploration of corporations by looking more closely at C corporations and S corporations. Until then, good luck.