Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In New Jersey, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. A corporation provides limited liability protection to its owners but may lead to double taxation, as income is taxed at the corporate level and again when distributed as dividends. However, an S corporation election can avoid this. General partnerships offer simplicity but do not protect personal assets from business liabilities, while limited partnerships provide limited liability for limited partners. A Limited Liability Company (LLC) combines the liability protection of a corporation with the tax benefits of a partnership, allowing for pass-through taxation. Sole proprietorships are the simplest form, with no distinction between the business and the owner, leading to personal liability for business debts. Each entity type has different implications for attracting investors and offering equity incentives to employees. Costs for forming and maintaining these entities vary, with corporations and LLCs typically requiring more formalities, such as annual reports and fees. New Jersey law requires proper registration and maintenance of these entities, including filing documents with the New Jersey Division of Revenue and Enterprise Services.