For the NJ S corp election, a company must meet federal and state requirements to operate as an S corporation within the state of New Jersey. New Jersey is one of only five U.S. states that require businesses to make this election at both the federal and state levels.

A business can elect to become an S corporation in New Jersey after a unanimous vote by all shareholders to request special state tax treatments. This request is made by submitting an Election by a Small Business Corporation form (Form CBT-2553) to the New Jersey Division of Revenue. Once accepted, the corporation remains an S corporation within the state as long as it qualifies for a federal S corporation status.

What Is an S Corporation?

An S corporation is the most common type of a corporation formed by small businesses. They offer several advantages that aren't available to other businesses, such as protecting shareholders from liability and avoiding double taxation.

Like most other types of corporations, S corporations are owned by shareholders, managed by a board of directors, and run by officers appointed by the board. A business must keep minutes to document any meetings of the shareholders or board of directors.

From a legal standpoint, an S corporation is separate from its shareholders, providing the shareholdings with limited liability for the business's debts and obligations. This limited liability also protects the shareholders' personal assets if the business goes bankrupt or loses a major lawsuit.

Unlike other corporations, S corporations aren't subject to double taxation. These corporations must pay taxes on their business income, and their shareholders must pay personal taxes on any dividends they receive. However, an S corporation is a pass-through taxation entity, so it can pass all profits directly to shareholders, who then pay taxes on any income they receive. The business itself doesn't pay taxes. Instead, it files an informational tax return with the IRS and the state. Without filing for S corporation status with the state of New Jersey, the business is subject to the same state tax rates as other corporations.

What Businesses Qualify for S Corp Status?

Businesses must meet many requirements to file as an S corporation with the Internal Revenue Service (IRS), such as:

  • The corporation must be based within the United States.
  • The corporation cannot have more than 100 shareholders.
  • Shareholders can only be individuals, estates, certain trusts or partnerships, or tax-exempt charity groups. They cannot be other corporations, limited liability companies (LLCs), other trusts or partnerships, or non-resident aliens.
  • The corporation can only issue common stock. If the business has issued both common and preferred stock, it isn't eligible for S corporation election.
  • The corporation's tax year must end on December 31.

How to Form an S Corporation in New Jersey

An S corporation requires that its board of directors and its shareholders unanimously elect to become an S corporation. Once everyone has voted, the business must perform the following steps to apply for S corp status in New Jersey:

  1. Apply for federal S corporation status with the IRS.
  2. Register the corporation's name by reserving it with the New Jersey Department of the Treasury. Before reserving the name, the state will verify that the desired name isn't currently in use by any other businesses in the state.
  3. File the corporation's Certificate of Incorporation or a Certificate of Authority with the New Jersey Division of Revenue.
  4. Designate a registered agent for the corporation. This person must live within the state and will receive all legal correspondence on behalf of the organization.
  5. Complete a New Jersey S Corporation Election Form CBT-2553 (Election by a Small Business Corporation) and mail it to the New Jersey Division of Revenue.

Obtaining New Shareholders

If an S corporation obtains any new shareholders after filing the initial election, the business must show that the new shareholders also consent to the election by completing the required sections of Form CBT-2553 and submitting it to the state Division of Revenue. If a new shareholder doesn't consent to the election, the corporation must make payments of gross income tax on behalf of the nonconsenting shareholder.

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