New Jersey S Corporation Advantages Disadvantages

New Jersey S Corporation Advantages Disadvantages

S Corporation Definition-A corporation with 75 or fewer shareholders,that has elected and qualified for a special tax status with the Internal Revenue Service (IRS).

The main advantage associated with the S Corporation is that the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.

New Jersey S Corporation Advantages Disadvantages

Should I form a New Jersey S Corporation?

S Corporation:

An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958 and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).

New Jersey S Corporation Advantages Disadvantages

New Jersey S Corporation Advantages Disadvantages

Advantages of the S Corporation:

  • The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.

  • Fractional ownership shares are easily accommodated in the initial offering of stock.

  • The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.

  • The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.

  • With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.

  • To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.

  • The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.

  • Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.

  • Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.

New Jersey S Corporation Advantages Disadvantages

Disadvantages of the S Corporation:

  • Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.

  • Conflicts or disagreements among the stockholders may immobilize decision making.

  • Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.

  • Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.

  • Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.

  • Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.

  • If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

New Jersey S Corporation Advantages Disadvantages

New Jersey's 2012 Business Tax Climate Ranks Last

New Jersey ranks last in the Tax State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

New Jersey's State and Local Tax Burden Highest in Nation

New Jersey's and local tax burden percentage has consistently ranked among the nation's highest, this year being no exception, taking the top stop, currently estimated at 12.2% of income (1st nationally), above the current national average of 9.8%. Compared to the 1977 data, New Jersey had a rate of 12.4% (3rd nationally), decreasing 0.2% overall. Currently residents pay $6,751 per capita in state and local taxes.

New Jersey's Individual Income Tax System

New Jersey's personal income tax system consists of six brackets and a top rate of 8.97% kicking in at an income level of $500,000. Among states levying personal income taxes, New Jersey's top rate ranks 6th highest nationally. New Jersey's 2008 state-level individual income tax collections were $1,457 per person, which ranked 6th highest nationally.

New Jersey's Corporate Income Tax System

New Jersey's corporate tax structure consists of a flat 9% on corporate income. However, corporations with total net income of $100,000 or less pay 7.5% and corporations with total net income of $50,000 or under pay 6.5%. Among states levying corporate income taxes, New Jersey's top tax rate ranks 5th highest nationally. In 2008, state-level corporate tax collections (excluding local taxes) were $326 per capita, ranking the state 5th highest nationally.

New Jersey Sales and Excise Taxes

New Jersey levies a 7% general sales or use tax on consumers, which is above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $1,424 per person, ranking 22nd highest nationally. New Jersey's gasoline tax stands at 14.5 cents per gallon and ranks 47th highest nationally. New Jersey's cigarette tax stands at $2.70 per pack of twenty, which is the 5th highest cigarette tax in the nation. The sales tax was adopted in 1966, the gasoline tax in 1927 and the cigarette tax in 1948.

New Jersey Property Taxes: Highest Per Capita in the Nation

New Jersey is one of the 37 states that collect property taxes at both the state and local levels. As in most states, local governments collect far more. New Jersey's localities collected $2,372.03 per capita in property taxes in fiscal year 2006, which is the latest year the Census Bureau published state-by-state property tax collections. At the state level, New Jersey collected $0.40 in property taxes during FY 2006, making its combined state/local property taxes $2,372.43 per capita, New Jersey's combined per capita collections were the highest in the nation.


Tax Foundation

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