Key Takeaways

  • In New Jersey, both LLCs and S corporations provide liability protection but differ in taxation, ownership rules, and compliance requirements.
  • An LLC in NJ generally offers greater operational flexibility, simpler compliance, and no restrictions on the number or type of members.
  • An S corporation election can help avoid self-employment taxes on distributions but comes with ownership limits and stricter IRS filing requirements.
  • NJ-specific rules require filing separate state forms for S corporation election, and state tax rates differ depending on whether S status is elected.
  • Revoking S corporation status requires majority shareholder consent and a five-year wait before re-election.

A New Jersey S corporation is a company that has elected S corporation taxation with the IRS. This means that the individual shareholders will be taxed on business income instead of the corporation.

New Jersey S Corporation Introduction

Corporations in New Jersey can be treated as an S corporation based on Chapter 173, P.L. 1993. S corporation status has been available since July 7, 1993.

Form CBT-2553 will be used to:

  • Be treated as an S corporation in New Jersey.
  • Be treated as a New Jersey QSSS.
  • Report changes in your corporation's shareholders.

Besides New Jersey, states that require both IRS and state level filing for S corporation status include:

  • Arkansas
  • New York
  • Ohio
  • Wisconsin

LLC vs S Corp in New Jersey: Key Differences

When evaluating LLC vs S Corp in NJ, business owners should consider the practical and tax-related distinctions between these two structures. Both entities protect owners from personal liability for business debts and obligations, but their differences can significantly affect long-term operations and costs:

  • Formation and Flexibility – An LLC is formed by filing a Public Records Filing with the NJ Division of Revenue, and its structure can be customized through an operating agreement. An S corporation is a tax election for a corporation or LLC (if eligible) and requires following corporate formalities such as issuing stock and holding annual meetings.
  • Ownership Restrictions – S corporations are limited to 100 shareholders, all of whom must be U.S. citizens or resident aliens, and cannot be other corporations or most types of trusts. LLCs have no such restrictions and can have unlimited members, including other business entities.
  • Tax Treatment – By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership, with income passing through to members’ personal returns. An S corporation passes income through to shareholders, but only salaries are subject to self-employment tax, potentially reducing overall tax liability.
  • Self-Employment Taxes – LLC members generally pay self-employment taxes on their share of profits. In an S corporation, only wages paid to shareholder-employees are subject to payroll taxes, while distributions may not be.
  • Compliance Requirements – LLCs have fewer ongoing state compliance obligations, while S corporations must adhere to corporate governance rules and maintain more formal records.

For NJ residents seeking lower administrative burdens, an LLC may be preferable, while those aiming to minimize self-employment taxes might consider S corporation status if eligible.

S Corporation Filing Dates and Forms

The filing date for electing S corporation status in New Jersey is a month after the federal due date. All shareholders must agree to elect S corporation status before the election will be considered valid.

After filing Form CBT-2553, you will be notified within 30 days whether your S corporation election has been approved. After your election has been approved, your company will retain its New Jersey S corporation status as long as it is an S corporation at the federal level.

If your company was not required to acquire a Certificate of Authority before doing business in New Jersey, you will need to complete and submit both a New Jersey S Corporation Certification Form and a CBT-2553 form to elect S corporation status. By filing the Certification Form, you are stating that you are not doing any business that requires a Certificate of Authority.

Electing small business trusts (ESBT) that are federal S corporation shareholders can elect S corporation status in New Jersey by submitting the Subchapter S Election Form after having the form signed by a trustee.

NJ-Specific Election and Compliance for LLCs Electing S Status

An LLC in New Jersey can elect to be taxed as an S corporation by first filing IRS Form 2553 and then submitting Form CBT-2553 to the NJ Division of Taxation. This allows the LLC to retain its flexible structure while benefiting from S corporation tax treatment. Key NJ-specific points include:

  • Separate State Election – Even if your LLC has elected S corporation status with the IRS, you must also file Form CBT-2553 with NJ to be recognized as an S corporation for state tax purposes.
  • Qualified Subchapter S Subsidiary (QSSS) – LLCs that own other eligible entities can elect to treat them as QSSSs for tax purposes.
  • Non-Certificate Businesses – If your LLC is not required to obtain a Certificate of Authority before operating in NJ, you must still file a New Jersey S Corporation Certification Form with your CBT-2553.
  • Deadlines – The NJ filing deadline is generally one month after the federal due date, and timely filing ensures pass-through treatment for state taxes as well.

Tax Rates

If your corporation is a federal S corporation but you choose not to elect New Jersey S corporation status, you would need to pay ordinary corporate tax rates, which can be 6.5 percent, 7.5 percent, or 9 percent. The net share of S corporation income of resident shareholders will be taxed.

Before the S corporation election can be valid, all shareholders of the corporation must agree to the State requirements for this type of corporation. For every shareholder that doesn't consent to New Jersey rules, the corporation will pay the highest marginal tax rate on New Jersey allocated S corporation income.

Comparing NJ LLC and S Corporation Taxation

Tax obligations differ significantly when comparing an LLC and an S corporation in NJ:

  • LLC Taxation – Profits pass through to members, who pay NJ Gross Income Tax on their share. There is no separate NJ entity-level income tax unless the LLC elects corporate tax treatment.
  • S Corporation Taxation – NJ imposes a separate S corporation tax rate on income allocated to non-consenting shareholders. Rates vary based on income brackets (currently 6.5%, 7.5%, or 9%).
  • Self-Employment Tax Savings – An S corporation structure can reduce self-employment taxes since only shareholder salaries (which must be reasonable) are subject to FICA and Medicare taxes.
  • Franchise and Annual Fees – Both LLCs and S corporations must pay annual report fees in NJ, but LLCs typically face a simpler calculation and payment process.

Revoking an S Corporation Status

After electing S corporation status, you can revoke this election for a limited period of time, generally in the first tax year where you would be taxed as an S corporation.

If you want to revoke your S corporation election, you will need your shareholders to sign a letter of revocation. These shareholders must own at least 50 percent of your corporation's shares on the day the letter is filed or on the last day of the first year where you will be taxed as an S corporation.

With the letter of revocation, you should include a copy of your initial S corporation election. After revoking your S corporation election, you are required to wait five years before you can attempt to elect this status again.

Your corporation's undistributed earnings will not be taxed at this point. However, any earnings your corporation possessed before your S corporation election effective date will be considered New Jersey income, meaning the dividends can be taxed after they are allocated to shareholders. Net pro rata share of S corporation income includes income and losses.

Switching Between LLC and S Corporation in NJ

Business owners in NJ can change from an LLC taxed as an S corporation back to standard LLC taxation or vice versa. However, switching requires careful timing:

  • Revocation Process – To revoke S status, majority shareholder consent is required.
  • Five-Year Waiting Rule – Once revoked, you cannot re-elect S status for five years unless you obtain IRS consent.
  • Tax Implications – Transitioning between tax statuses can trigger built-in gains tax or alter self-employment tax liabilities.
  • Operational Continuity – The underlying LLC entity remains in place even if tax status changes, preserving contracts and licenses.

Reporting Gains

If an S corporation has a net loss, they cannot deduct this loss against other types of incomes. This practice is prevented by the Gross Income Tax Act. On their NJ-1040, resident shareholders must report their pro rata share of federal corporate income that is not being allocated to New Jersey.

S corporations do not need to report built-in gains from years before electing this tax status. Shareholders who are not residents of New Jersey do not have losses or gains.

Selling S corporation stock is considered an intangible asset transaction, and nonresidents will not be taxed for this type of transaction for the purpose of gross income tax. If any of your S corporation's shareholders are resident aliens, they are liable for New Jersey personal income taxes.

Frequently Asked Questions

  1. Can an LLC in NJ elect to be taxed as an S corporation?
    Yes. An LLC can file IRS Form 2553 and NJ Form CBT-2553 to elect S corporation tax status while retaining its LLC structure.
  2. Which is better for NJ small business owners, LLC or S corporation?
    It depends on priorities—LLCs offer more flexibility and fewer compliance requirements, while S corporations can reduce self-employment taxes if structured correctly.
  3. Do both LLCs and S corporations pay annual fees in NJ?
    Yes, both must file annual reports and pay fees, but the process is generally simpler for LLCs.
  4. Are there ownership restrictions for S corporations in NJ?
    Yes. S corporations are limited to 100 shareholders, all of whom must be U.S. citizens or resident aliens, and cannot be other corporations or most trusts.
  5. What happens if an NJ S corporation revokes its status?
    The business reverts to corporate tax treatment (or LLC tax treatment if applicable) and must wait five years before re-electing S status, unless the IRS grants an exception.

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