ORGANIZATIONAL FORM CHOICES FOR (N.J.) CONSULTANTS
Information that follows was prepared for a half-hour segment of a full-day educational program at Fairleigh Dickinson University, Madison, NJ. Participants in the seminar either had experience consulting (i.e., providing advice, information and services for a fee) and wanted to learn how to improve their business or were trying to decide whether they wanted to try it. This segment of the program provided participants information about different types of legal entities that they might organize to do consulting business. The information is not legal advice; a competent attorney should advise how to apply this information for optimum benefit in a particular business situation.
In the oral presentation there was more detail about the characteristics of different legal entities and practical considerations like cost and time required for organizing the different business entities. This information is offered as background for consultants or prospective consultants to use in working with their own advisors.
There are three basic choices of form for a consultant’s business:
Corporation (Business, Professional or “Sub-Chapter S”)
Variations on the basic forms:
Limited Liability Partnership
Limited Liability Company
The SBA has a general discussion of factors to be considered (in conjunction with professional assistance) in choosing a business form. The New York discussion (found under the title “Types of Business Organizations”) may be accessed on the World Wide Web at: http://www.sba.gov/regions/states/ny/ny/nydo.startup.html.
In New Jersey, the ranking of relative formation cost of these basic choices, from least costly to most costly, is: Proprietorship (0 to $50, depending on whether an assumed name is registered with the County); Corporation (+/- $200 plus professional fees); Partnership (+/- $200 plus professional fees).
And approximate minimum times for organization, from concept to business bank account opened, are 3 hours for a Proprietorship; 48 hours for a Corporation; 10 days for a General Partnership; and 2 weeks for a Limited Partnership or Limited Liability Company.
The attached table compares characteristics and suggests questions that may help in planning what form to choose for a New Jersey consulting business. The details of characteristics in other States may be different, this table suggests questions but cannot provide detailed specific advice, in any event.
Characteristics of Different Forms for New Jersey Businesses
|Characteristic||Proprietorship||C S Corp.||General Partnership||Limited Partnership||Limited Liability Company|
|Document of Formation||—||Certificate of Incorporation||Partnership Agreement||Certificate of Ltd. Partnership||Certificate of Formation|
|Document(s) establishing relative roles of Owners & Managers||—||Certificate of Incorporation, Bylaws, Shareholders’ Agreement||Partnership Agreement||Partnership Agreement||Operating Agreement|
|Perpetual life?||No||Yes Yes||Yes||Yes1||Yes1|
|Minimum No. of Owners?||1||1 1||2||2||1|
|Units of Ownership||— (No separate entity)||Shares of Common Stock||Partnership Interests||Limited Partnership Interests||Membership Interests|
|Limited Liability for Owners?||No||Yes Yes||No||Yes for LPs||Yes|
|Limited Liability for GP or Managers?||No||Yes Yes||No||No2||Yes|
|Management||Owner||Directors/ Officers||Partners||General Partner(s)||Members or Managers|
|One level of Tax?||Yes||No Yes||Yes||Yes||Yes|
|Maximum Federal Tax Rate||39.5%||35%3 39.5%||39.5%||39.5%||39.5%|
|Can Owners Deduct Losses?||Yes||No Yes4||Yes4||Yes4||Yes4|
|Convert Tax-Free to an LLC?||Yes||No No||Yes||Yes||—|
|Convert Tax-Free to a Corporation?||Yes||— —||Yes||Yes||Yes|
1May, however, be dissolved upon certain events specified in the Agreement, such as death or bankruptcy of the general partner (or LLC manager), unless the limited partners (or LLC members) consent to continuation of the partnership (or LLC).
2Partners of a “limited liability partnership” are not personally liable for debts or liabilities of such partnership not caused or incurred by reason of the particular partner’s own acts or negligence. (Perhaps only of academic interest, partners of a pre-1988 “Limited Partnership Association” that has fully paid up capital subscriptions also are not personally liable for any debts or liabilities of the entity.)
3 Assuming a maximum rate of 35% and that remaining income distributions to shareholders are taxed at a maximum rate of 39.5%, the combined maximum federal effective rate is about 60%.
4To the extent of tax basis.