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It only takes a spark for an idea to form into what you hope to be a lucrative new small business. However, businesses are built on more than just inspiration. New business owners in New Jersey will have to decide what business structure is right for their enterprise.

Sole proprietorships

Sole proprietorships are a basic business structure in which a single individual owns the business and has complete control over it. If no other business entity is chosen or registered, the business will be considered a sole proprietorship by default.

However, it is important to note that a sole proprietorship offers the business owner no protection against liability. This is because a sole proprietorship is not considered a separate business entity, meaning that the business’s assets and debts are not separate from the owner’s personal ones and the business owner could be held personally liable for any debts or obligations the business may have.

That being said, sole proprietorships may be an attractive option for businesses that are low risk, or for business owners who are just starting up and want time for their business to develop before moving to a more formal business structure.

Partnerships

Some entrepreneurs will combine forces to create a new business. When two or more individuals own a single business together, they can do so as partners. A partnership may be a limited partnership (LP) or a limited liability partnership (LLP).

In a LP, one partner — called the general partner — has unlimited liability and the rest of the partners have limited liability and limited control over the business. Control of the business is laid out in a partnership agreement. Profits are included on the partners’ personal income tax returns, but the general partner will have to pay self-employment taxes.

In a LLP all partners have limited liability, meaning they are not personally responsible for business debts or the actions of the other partners. Like partnerships, LPs and LLPs are good for businesses with multiple owners to test out their business before deciding on a formal business structure.

Limited liability company

In a limited liability company (LLC), a business can be owned by multiple individuals. They will not be personally liable for the debts or actions of the LLC, even if the LLC is sued or goes bankrupt.

Like a partnership, profits and losses of the LLC are listed on the owners’ personal income taxes, although all owners of the LLC must pay quarterly self-employment taxes. LLCs are not responsible for paying corporate taxes. LLCs may be an attractive option for riskier businesses, owners who want to protect their personal assets and those who want the lower tax rates of an LLC.

Choose the business structure that’s right for you

These are three common structures new businesses owners in starting out in New Jersey may consider. Forming a new business takes careful thought, as a business that starts off on the right foot may see more success than one rushed into. For more information on how to form a new business, please visit our law firm’s business law webpage.