Shielding Your Assets: Liability Implications for Business Owners in New Jersey
Posted January 18, 2024
When it comes to structuring your business in New Jersey, understanding the liability implications of the proper corporate structure is important. Choosing between a Limited Liability Company (“LLC”) and a Subchapter S Corporation (“S-Corp”) significantly impacts how business owners shield their personal assets from potential liabilities.
Limited Liability Company (LLC)
One of the primary draws of an LLC is in its name – limited liability. Small business owners operating as an LLC in New Jersey enjoy personal asset protection against business debts and legal claims. In the event of lawsuits or financial troubles, the owners’ personal assets, such as homes and savings, are typically shielded. This separation of personal and business assets is a crucial aspect of risk management.
However, it’s important to note that while an LLC protects against most business debts, members may still be held personally liable for their actions or negligence. For instance, if a member personally guarantees a business loan or engages in wrongful conduct, their personal assets could be at risk.
Subchapter S Corporation (S-Corp)
Similarly, an S-Corp offers limited liability to its shareholders. Shareholders’ personal assets are generally protected from the company’s liabilities. This protection extends to business debts and legal claims, providing a crucial layer of security.
S-Corps come with a unique feature that may impact liability, a requirement of strict adherence to corporate formalities. Failure to follow these formalities, such as holding regular meetings, keeping detailed records, and electing officers, may potentially expose shareholders to personal liability. In certain circumstances, courts may “pierce the corporate veil” if these formalities are not maintained, leading to increased risk and potential personal liability to shareholders.
Choosing the Right Structure:
The decision between an LLC and an S-Corp in New Jersey boils down to the level of formality and the desired balance between personal asset protection and administrative requirements. Both structures offer a shield against personal liability, but the nuances in their formalities require careful consideration.
Before making a decision, consult with legal professionals to ensure you fully understand the liability implications associated with each structure. For more information about choosing the proper business structure for your small business please contact me.
About the Author:
Nick Sullivan defends corporations and nonprofits in civil investigations and litigations, drafts and negotiates corporate documents including purchase and sale agreements, asset purchase agreements, stock sales agreements, and merger and acquisition agreements. Additionally, Nick assists corporate clients through the New Jersey administrative process including liquor license applications, real property transfers, incorporation, governmental investigations, and State and federal procurement. Nick has a particular interest in helping entrepreneurs start a business and working with them to achieve success over the life of the business.
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