How to Start a Business in New Jersey [1 ed.] 9781281824776, 9781572484481

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SPHINX LEGAL

SPHINX LEGAL TAKING THE MYSTERY OUT OF THE LAW ™

✪

Financing Your Business

✪

Choosing the Right Form of Business Forming a Board of Directors

✪

Registering Your Business Name

✪

Interviewing Potential Employees

Ready-to-Use Forms with Instructions: ✔

✔

Business Registration Application Certificate of Incorporation

✔

New Hire Reporting Form

✔

Public Records Filing for New Business Entity

✔

how to

Start a Business in New Jersey

✪

The Complete Guide to Forming Your Own New Jersey Business

Opening your own business can be difficult and even frightening. How to Start a Business in New Jersey makes the process seem easier and much less intimidating. How to Start a Business in New Jersey will guide you through successfully forming and running your own new business. This book will help you understand state laws and statues so you can avoid legal hassles along the way. There is an explanation of the various kinds of business you may want to form, along with an explanation of the benefits and problems that accompany each. Written by attorneys, this book contains all the information you need to start your new dream business with little hassle or headache. •

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•

•

•

F. Clifford Gibbons received his J.D. from Penn State University, Dickinson School of Law. Mr. Gibbons is licensed to practice in New Jersey, where he also lectures on numerous legal topics, including family law.

and many more…

✪ Business registration

application checklists Jersey statutes

instructions

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✪ Plain-English

✪ Ready-to-use,

blank forms

Sphinx® Publishing An Imprint of Sourcebooks, Inc.® w w w. Sp h i n x Le g a l . c o m

EAN

glossary of terms

Gibbons DeSimone

✪ Legal

for

✪ New

Rebecca A. DeSimone received her J.D. from Case Western Reserve University Law School. Ms. DeSimone is currently in private practice in Erie, Pennsylvania, and an adjunct professor in English and law at several area universities.

SPHINX LEGAL Written by Attorneys

TAKING THE MYSTERY OUT OF THE LAW ™

A Simple English Explanation of the Law

“Easy to understand guides—an excellent source for readers.”

Ready-to-Use Forms with Detailed Instructions

—Library Journal

how to

Start Business

a

in

New Jersey

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Start-up Procedures

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Tax Requirements

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Record-Keeping Tips

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Copyright, Trademarks and Service Marks

F. Clifford Gibbons Rebecca A. DeSimone Attorneys at Law

How to Start a Business in New Jersey

F. Clifford Gibbons Rebecca A. DeSimone Attorneys at Law

SPHINX PUBLISHING ®

AN IMPRINT OF SOURCEBOOKS, INC.® NAPERVILLE, ILLINOIS

www.SphinxLegal.com

Copyright © 2004 by F. Clifford Gibbons and Rebecca A. DeSimone Cover and internal design © 2004 by Sourcebooks, Inc® All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems—except in the case of brief quotations embodied in critical articles or reviews—without permission in writing from its publisher, Sourcebooks, Inc.® Purchasers of the book are granted a license to use the forms contained herein for their own personal use. No claim of copyright is made to any official government forms reproduced herein.

First Edition, 2004 Published by: Sphinx® Publishing, An Imprint of Sourcebooks, Inc.® Naperville Office P.O. Box 4410 Naperville, Illinois 60567-4410 630-961-3900 Fax: 630-961-2168 www.sourcebooks.com www.SphinxLegal.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

This product is not a substitute for legal advice. Disclaimer required by Texas statutes.

Library of Congress Cataloging-in-Publication Data

Gibbons, F. Clifford. How to start a business in New Jersey / by F. Clifford Gibbons and Rebecca A. DeSimone.-- 1st ed. p. cm. Includes index. ISBN 1-57248-448-9 (pbk. : alk. paper) 1. New business enterprises--Law and legislation--New Jersey. 2. Business law--New Jersey. I. DeSimone, Rebecca A., 1963- II. Title. KFN2005.Z9G53 2004 346.749'065--dc22 2004009852

Printed and bound in the United States of America. .

VHG — 10 9 8 7 6 5 4 3 2 1

Acknowledgments

This book is dedicated to my father, James T. Gibbons, Sr. a distinguished and visionary leader in New Jersey banking for many years, and in memory of my mother, Geraldine Clifford Gibbons. I also wish to express my sincere thanks for the unwavering support and encouragement of Rebecca A. DeSimone, Esq., an outstanding professional and cherished friend. F. Clifford Gibbons I wish to extend an enormous debt of gratitude to my parents for their unshakable constancy, to F. Clifford Gibbons, Esquire for his ever-present faith and guidance, and to Marya Kopacz and Becky Moran for their unwavering support and encouragement. Rebecca A. DeSimone

Contents

Using Self-Help Law Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Chapter 1: Business Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Becoming an Entrepreneur Sole Proprietorships Partnerships Corporations Limited Liability Companies Registered Agents Chapter 2: Partners and Partnerships . . . . . . . . . . . . . . . . . . . . 21 Partnership Agreements Partner Authority Partner Accounts Fiduciary Duties of a Partner Resolution of Differences between Partners Disassociation Limited Liability Partnerships

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Chapter 3: Corporate Directors, Officers, and Committees . . 29 Board of Directors Board of Directors’ Committees Officers Shareholders Chapter 4: Starting Your New Jersey Business . . . . . . . . . . . . . 37 Business Name Intellectual Property Insurance Chapter 5: Employment Concerns . . . . . . . . . . . . . . . . . . . . . . . . . 43 Proper Job Description Application Interview Lawsuits Chapter 6: Business Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Records and Reports Storage Chapter 7: Tax Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Taxpayer Identification Numbers Federal Income Tax Filings State Tax Requirements Using an Accountant Chapter 8: Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Sources of Financing Small Business Administration Chapter 9: Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Telephone Directory Advertising Direct Mail Advertising Internet Advertising Radio and Television Bulletins and Billboards Trade Magazines, Journals, or Newsletters

contents

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Chapter 10: Training and Counseling Tools . . . . . . . . . . . . . . . . 69 Business Development Assistance Service Corps of Retired Executives Small Business Institutes Small Business Innovation and Research Program Procurement Automated Source System Minority Business Assistance International Trade Assistance Chapter 11: Special Problems Confronting Businesses . . . . . 79 Collecting Debts Misuse of Apparent Authority Criminal Misconduct Corporate Ultra Vires Act Chapter 12: Economically Distressed Corporations . . . . . . . . 85 Out-of-Court Workout Rehabilitation Chapter 11 Rehabilitation Chapter 7 Liquidation New Jersey Remedies Chapter 13: Hiring an Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Costs Advantages and Disadvantages to Hiring a Lawyer Selecting a Lawyer Evaluating Lawyers Working with a Lawyer Legal Payments Firing Your Lawyer Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Appendix A: Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Appendix B: Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Appendix C: Business Registration Application Packet . . . . . 141 Appendix D: Blank Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

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Using Self-Help Law Books

Before using a self-help law book, you should realize the advantages and disadvantages of doing your own legal work and understand the challenges and diligence that this requires. The Growing Trend

Rest assured that you won’t be the first or only person handling your own legal matter. For example, in some states, more than seventy-five percent of the people in divorces and other cases represent themselves. Because of the high cost of legal services, this is a major trend and many courts are struggling to make it easier for people to represent themselves. However, some courts are not happy with people who do not use attorneys and refuse to help them in any way. For some, the attitude is, “Go to the law library and figure it out for yourself.” We write and publish self-help law books to give people an alternative to the often complicated and confusing legal books found in most law libraries. We have made the explanations of the law as simple and easy to understand as possible. Of course, unlike an attorney advising an individual client, we cannot cover every conceivable possibility.

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Cost/Value Analysis

Whenever you shop for a product or service, you are faced with various levels of quality and price. In deciding what product or service to buy, you make a cost/value analysis on the basis of your willingness to pay and the quality you desire. When buying a car, you decide whether you want transportation, comfort, status, or sex appeal. Accordingly, you decide among such choices as a Neon, a Lincoln, a Rolls Royce, or a Porsche. Before making a decision, you usually weigh the merits of each option against the cost. When you get a headache, you can take a pain reliever (such as aspirin) or visit a medical specialist for a neurological examination. Given this choice, most people, of course, take a pain reliever, since it costs only pennies; whereas a medical examination costs hundreds of dollars and takes a lot of time. This is usually a logical choice because it is rare to need anything more than a pain reliever for a headache. But in some cases, a headache may indicate a brain tumor and failing to see a specialist right away can result in complications. Should everyone with a headache go to a specialist? Of course not, but people treating their own illnesses must realize that they are betting on the basis of their cost/value analysis of the situation. They are taking the most logical option. The same cost/value analysis must be made when deciding to do one’s own legal work. Many legal situations are very straight forward, requiring a simple form and no complicated analysis. Anyone with a little intelligence and a book of instructions can handle the matter without outside help. But there is always the chance that complications are involved that only an attorney would notice. To simplify the law into a book like this, several legal cases often must be condensed into a single sentence or paragraph. Otherwise, the book would be several hundred pages long and too complicated for most people. However, this simplification necessarily leaves out many details and nuances that would apply to special or unusual situations. Also, there are many ways to interpret most legal questions. Your case may come before a judge who disagrees with the analysis of our authors. Therefore, in deciding to use a self-help law book and to do your own legal work, you must realize that you are making a cost/value analysis. You have decided that the money you will save in doing it yourself outweighs the chance that your case will not turn out to your satisfaction. Most people handling their own simple legal matters never have a problem, but occasionally people find

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that it ended up costing them more to have an attorney straighten out the situation than it would have if they had hired an attorney in the beginning. Keep this in mind while handling your case, and be sure to consult an attorney if you feel you might need further guidance. Local Rules

The next thing to remember is that a book which covers the law for the entire nation, or even for an entire state, cannot possibly include every procedural difference of every jurisdiction. Whenever possible, we provide the exact form needed; however, in some areas, each county, or even each judge, may require unique forms and procedures. In our state books, our forms usually cover the majority of counties in the state, or provide examples of the type of form which will be required. In our national books, our forms are sometimes even more general in nature but are designed to give a good idea of the type of form that will be needed in most locations. Nonetheless, keep in mind that your state, county, or judge may have a requirement, or use a form, that is not included in this book. You should not necessarily expect to be able to get all of the information and resources you need solely from within the pages of this book. This book will serve as your guide, giving you specific information whenever possible and helping you to find out what else you will need to know. This is just like if you decided to build your own backyard deck. You might purchase a book on how to build decks. However, such a book would not include the building codes and permit requirements of every city, town, county, and township in the nation; nor would it include the lumber, nails, saws, hammers, and other materials and tools you would need to actually build the deck. You would use the book as your guide, and then do some work and research involving such matters as whether you need a permit of some kind, what type and grade of wood are available in your area, whether to use hand tools or power tools, and how to use those tools. Before using the forms in a book like this, you should check with your court clerk to see if there are any local rules of which you should be aware, or local forms you will need to use. Often, such forms will require the same information as the forms in the book but are merely laid out differently or use slightly different language. They will sometimes require additional information.

Changes in the Law

Besides being subject to local rules and practices, the law is subject to change at any time. The courts and the legislatures of all fifty states are constantly revising the laws. It is possible that while you are reading this book, some aspect of the law is being changed.

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In most cases, the change will be of minimal significance. A form will be redesigned, additional information will be required, or a waiting period will be extended. As a result, you might need to revise a form, file an extra form, or wait out a longer time period; these types of changes will not usually affect the outcome of your case. On the other hand, sometimes a major part of the law is changed, the entire law in a particular area is rewritten, or a case that was the basis of a central legal point is overruled. In such instances, your entire ability to pursue your case may be impaired. Again, you should weigh the value of your case against the cost of an attorney and make a decision as to what you believe is in your best interest.

Introduction

Setting up a business entity can be among the most stressful events in a person's life. Most individuals enter into business plans with optimism and justifiable hope. No one enters into a business anticipating that it will fail. However, to achieve success, careful planning and an understanding of the issues facing a new business are crucial. This book is designed to aid in making your business venture the success that you hope it becomes. This guide is intended to provide an answer to basic questions and help you work with your attorney. For those who choose not to hire an attorney, this book contains forms and explanations to assist you in preparing the necessary documentation yourself. The early chapters in this book outline the process of the setting up a business entity, while later chapters examine specific issues that affect new businesses. Appendices are provided that contain selected statutes for those wanting to read the actual law behind certain business formats and forms to get you started.

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Business Entities

New Jersey prides itself on being a pro-business state. With its proximity to the world’s center of banking and commerce in New York City, it has long provided a fertile location for the development of businesses large and small. Consistent with this public policy, New Jersey law offers great flexibility in the types of business entities that may legally be formed and operated within its borders. You (or your attorney) should have no difficulty selecting an entity that fits your present needs and permits future growth and development. The type and composition of the business entity that you will establish depends upon multiple considerations. The following text sets forth some of the salient features of the most common business entities—sole proprietorships, partnerships, corporations, and limited liability companies. Your attention to these features will help you select the entity most appropriate for your needs. In addition, as you make your selection, give thoughtful consideration to the following issues. ✪

How will the owners of the business be compensated?

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Are instant financial gains necessary or is your business willing to wait for cash to insure more positive tax results?

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Will your business have employees?

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Do you wish to have tax advantages as perks or benefits to your employees?

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How will you finance your business?

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Will investors in the business receive or share in gains from the business?

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Should the business lose money or fail, will you be protected from tax consequences from the losses that will follow?

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If you realize a profit, how and to whom will the profit be paid and taxed?

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Do you require flexibility to alter the nature of your business as it develops?

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Will the owners or principals be responsible for the obligations and conduct of the business entity?

Each answer to the above questions has its own unique impact on the type of entity you select.

Becoming an Entrepreneur Owning a business is the dream of many Americans. Starting that business converts your dreams into reality. However, there is a gap between dreams and reality. Your dreams can only be achieved with careful planning. As an entrepreneur, you will need a plan to avoid pitfalls, to achieve your goals, and to build a profitable business. In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business, but you can improve your chances of success with good planning, preparation, and insight. Start by evaluating your strengths and weaknesses as a potential owner and manager of a small business. Carefully consider each of the following questions. Are you a self-starter? It will be entirely up to you to develop projects, organize your time, and follow through on details.

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How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people, including customers, vendors, staff, and professionals such as bankers, lawyers, accountants, or consultants. You must be able to deal with a demanding client, an unreliable vendor, or a cranky receptionist when your business interests demand it. How good are you at making decisions? Small business owners are required to make decisions constantly—often quickly, independently, and under pressure. Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it's also a lot of work. You may have to face six or seven 12-hour work days every week. How well do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization of financials, inventory, schedules, and production can help you avoid many pitfalls. Is your drive strong enough? Running a business can wear you down emotionally. Some business owners burn out quickly from having to carry all the responsibility for the success of their business on their own shoulders. Strong motivation will help you survive slowdowns and periods of burnout. How will the business affect your family? The first few years of business start-up can be hard on family life. It’s important for family members to know what to expect and for you to be able to trust that they will support you during this time. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living.

Sole Proprietorships Ownership of a business entity by an individual person is called a sole proprietorship. Though sole proprietorship is the most common business entity, as well as the easiest to establish, it has significant drawbacks. Sole proprietorship is the most restrictive business entity in terms of use and administration of funds. In addition, a proprietor cannot be insulated from legal liability.

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Sole Proprietorship Features

A sole proprietorship has the following features: ✪

loose organization and composition;

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full responsibility of the business holder for sums unpaid by the business, as well as liabilities incurred by the business;

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all proceeds taxable to and assessable against the business holder;

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accessibility of resources restricted by funds of the business holder, including those of the business;

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administration abilities often constrained to those of the business holder; and,

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termination of business entity upon death (or disability) of the business holder.

Start-Up

Start-up of a sole proprietorship is relatively simple and low in cost. Recordkeeping is minimal. A name for the business operation can be secured through use of relevant fictitious name statutes. The nature and features of the proprietorship’s taxable assets can be maintained on the proprietor’s tax return.

Taxation Issues

A sole proprietorship is not a separate taxable entity. Complete income from all related supplies, deductions, growth, losses, debits, and credits are displayed upon the proprietor’s income tax return. The proprietor will be responsible for all self-employment taxes and for estimated quarterly payments of personal withholding and self-employment taxes.

Handling of Funds and Assets

There is no conveyance of funds from the sole proprietorship owner to the sole proprietorship entity since they exist as one and are inextricably intertwined. Personal files and documentation establish which funds and related assets should be categorized as business funds and assets or designated as strictly personal resources.

Related Issues

There is no necessity for the proprietor to secure a tax identification number unless the proprietor maintains a 401(k) plan or maintains a business in which an employment, excise, or alcohol, tobacco, and firearms tax return is required to be filed. Individual tax identification numbers are needed to eliminate misunderstanding if the proprietor controls more than one business.

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Partnerships A partnership establishes a relationship between two or more persons (which may include individuals, partnerships, corporations and other associations) as co-owners of a for-profit business venture. Particular proportions of profits and/or losses, administration privileges and liabilities, as well as further issues affecting the partnership, are often established by written contract between or among the partners. (see Chapter 2.) Formation

A structure of a partnership can vary extensively depending upon the number of partners involved, type of business, the asset necessities of the business entity, or the governmental regulations imposed upon the business. Notwithstanding the structure, the association of two or more persons to carry on a business for a profit forms a partnership, whether or not the persons intend to form a partnership. (N.J.S.A. 42:1A-10.) Conversely, New Jersey courts have held that a person may be associated in a commercial enterprise and openly participating in the business of that enterprise, yet the alliance between the persons may not possess the necessary elements to create a partnership. A partnership agreement should be prepared and executed prior to the start of business. Most partnerships are formed to operate for a definite term or particular undertaking. However, a partnership at will can also be formed in which the partners do not agree to remain partners until the expiration of a definite term or the completion of a project. (N.J.S.A. 42:1A-2.) A partnership is regulated by New Jersey’s Uniform Partnership Act. (N.J.S.A. 42:1A-1 et. seq.) (see Appendix A.) Registration. A statement of partnership should be filed with the Division of Commercial Recording in the New Jersey Department of the Treasury and recorded in the office of the recording officer in the county where the business is located. Said statement and any amendment thereto, or other statement filed by a partnership, must be executed by at least two partners. (N.J.S.A. 42:1A-6.)

Liability of Partners and Partnership

Each partner is an agent of the partnership for the purpose of its business. (N.J.S.A. 42:1A-13a.) A partner may sue and be sued in the name of the partnership. (N.J.S.A. 42:1A-19.) All partners are liable jointly and severally (i.e., liability is not divided) for the obligations of the partnership unless otherwise agreed to by the claimant or provided by law. (N.J.S.A. 42:1A-18a.) A person

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admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner. (N.J.S.A. 42:1A-18b.) Disabled Partner. One of the most critical aspects a business entity can undertake is to protect itself financially by addressing, in its partnership agreement, contingencies occurring should one or more partners die or become disabled. The partnership agreement should carefully define terms, such as disability and illness, and set forth the duties of the remaining partners to the disabled partner(s). Ownership of Partnership Property

Partnership property is the property acquired by the partnership and not by the partners individually. (N.J.S.A. 42:1A-11.) Property is partnership property if it is acquired in the name of the partnership or by one or more partners with an indication in the instrument transferring title in the property of the partnership. (N.J.S.A. 42:1A-12a.) A partner is not a co-owner of partnership property and has no ownership interest in partnership property. (N.J.S.A. 42:1A-27.) Transfer of Partnership Property. Pursuant to N.J.S.A. 42:1A-14, partnership property may be transferred as follows.

Transfer of a Partnership Interest

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Subject to the effect of a statement of partnership authority, partnership property held in the name of the partnership may be transferred by an instrument of transfer executed by a partner in the partnership name.

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Partnership property held in the name of one or more partners, with an indication in the instrument transferring the property to those partners of their capacity as partners or of the existence of a partnership of the existence of a partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held.

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Partnership property held in the name of one or more persons other than the partnership, without an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held.

The only transferable interest of a partner in the partnership is the partner’s share of the profits and losses of the partner’s right to receive distributions. That interest is personal property. (N.J.S.A. 42:1A-28.)

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Dissolution is the closing and distribution of the business and property of a partnership. A partnership can be dissolved and its business wound up only upon the occurrence of the following events: ✪

in a partnership at will—the partnership’s having notice from a partner of that partner’s express will to withdraw as a partner;

NOTE: A partner may elect to discontinue his or her association with the business by withdrawing as a participant in the business. Such an act may entail the partner's adhering to the requirements that were established when the business was formed that indicate specifically the manner of withdrawing from the business. If provided in the set-up provisions of the business, a partner may be permitted to retain his or her portion of the business assets. Other provisions may provide that the partner must return portions of the business assets if he or she should withdraw form the entity. The rights and specific options of the partner are very fluid and can be adjusted at the start of the entity. ✪

in a partnership for a definite term or particular undertaking— •

after the expiration of 90 days after a partner’s death or rightful or wrongful disassociation, unless before that time a majority in interest of the remaining partners agree to continue the partnership;

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the express will of all the partners to wind up the partnership business;

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the expiration of the term of the partnership or the completion of the partnership’s undertaking;

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an event agreed to in the partnership agreement resulting in the winding up of the partnership business;

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an event that makes it unlawful for the partnership’s business to be continued (though a cure of the illegality within 90 days after notice to the partnership of the event is effective retroactively to the date of the event);

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on application by a partner, a judicial determination that— •

the economic purpose of the partnership is likely to be unreasonably frustrated;

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•

another partners has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with that partner;

•

it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement;

on application by a transferee (recipient) of a partner’s transferable interest—a judicial determination that it is equitable to wind up the partnership business.

A partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of the business is completed. (N.J.S.A. 42:1A-40.) Doing Business outside New Jersey

A great deal of vagueness exists with respect to the process that must be taken by a partnership to meet the requirements to conduct business in states other than the state in which it was created. A majority of partners in business transactions may elect to file a certified copy of the statement of partnership in the bureau of the foreign jurisdiction where partnership statements or certificates are recorded. Partnerships are bound by compulsory registration in virtually every state.

Tax Issues

A partnership is not considered taxable for federal income tax purposes. The term partnership includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of the United States Internal Revenue Code (I.R.C.), a corporation or a trust or estate. (I.R.C. Sec. 761(a).) Taxable partnership income or loss is passed through to the partners and is replicated and clearly noted upon a partner’s individual income tax return. Income, gains, losses, deductions, and credits preserve the character and makeup they possessed in the partnership and are passed through to the individual partners. For example, a capital gain associated with a partnership upon sale of a partnership asset must be considered a capital gain by each of the partners and must be disclosed upon each partner’s income tax return.

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However, certain elections related to taxation are made by the partnership rather than the individual partners, including: ✪

setting the tax year;

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which accounting system is used;

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the means of taking inventory, if applicable; and,

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the method of taking depreciation, if applicable.

Property and funding are permitted to pass between the partnership and the individual partners throughout the tax year. I.R.C. Sec. 721(a) provides that no gain or loss is recognized by the partnership as a result of a contribution of assets or property to the partnership. However, cash paid from the partnership entity to an individual partner in excess of the partner’s basis in his or her partnership interest is considered a constructive disposal of unrealized receivables and should not be undertaken. Funds paid to an individual partner in excess of his or her actual portion of the business may be perceived as an attempt to hide business assets and should not be done. I.R.C. Sec. 722 provides that a partner’s basis in a partnership interest equals the amount of funding supplied, the adjusted basis of property contributed, and any gain the partner recognized upon the contribution. A partner’s holding period for his or her partnership interest attained for funding begins on the date such interest was attained. A partner’s holding period for his or her partnership interest acquired in exchange for a capital asset includes his or her holding period for such asset. Organizational Expenses. Organizational expenses are collateral to the set up of the partnership and are chargeable to the capital account. I.R.C. Sec. 709 provides that a partnership sustaining organizational or administration expenses may elect to amortize those expenses over a period of not less than sixty months beginning with the month it began doing business. The choice to amortize is set forth by a written statement fastened to the federal tax return of the partnership for the year it commenced its business. The statement sets forth the date, description, and amount of expenditures, along with the month the partnership began business and the number of months in the amortization period. Where organizational and administrative costs are not amortized or where the partnership is wholly liquidated prior to close of the amortization period, the

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unamortized organizational and administrative costs will be considered a partnership deduction in the final year of the partnership to the extent permitted by I.R.C. Sec. 165. Limited Partnerships

Limited partnerships offer the advantage of limited liability. Limited partnerships have two classes of partners—general partners and limited partners. The general partners in a limited partnership are fully liable for the debts and obligations of the partnership, whereas the limited partners enjoy limited liability. However, in order to receive the benefit of limited liability, the limited partner must sacrifice control in the management of the partnership. In other words, limited partners are required to be passive investors. They may not actively participate in the management of the partnership and are limited to an advisory role only. If a limited partner should take part in controlling the business, he or she loses limited liability status and becomes liable for the debts and obligations of the partnership.

Corporations A New Jersey business entity is a corporation when it is formed and operated pursuant to the New Jersey Business Corporation Act. (N.J.S.A. 14A:1-1 et seq.) A corporation differs from a person or sole proprietorship as a legal entity in that a corporation is a right (franchise) granted by the state to those persons who seek to exercise the right to do business in a corporate form. Though there are many different descriptions of the differences between persons and corporations, the chief difference is that a person or sole proprietorship may do whatever is not forbidden by law, but a corporation may do only what is authorized by the Act and the corporation’s charter. New Jersey Business Corporation Act

The New Jersey Business Corporation Act is comprehensive, controlling every corporation organized thereunder, as well as foreign corporations to the extent provided therein. (N.J.S.A. 14A:1-3.) Powers are provided to corporations pursuant to N.J.S.A. 14A:3-1. Those powers include the following: ✪

to have perpetual duration unless limited by the corporation’s certificate of incorporation;

✪

to sue and be sued and be a party to any legal proceeding in its corporate name;

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✪

to have and use a corporate seal;

✪

to purchase, lease, own, improve, and use real or personal property, or any interest therein, wherever situated;

✪

to sell, convey, mortgage, lease, exchange, transfer, and otherwise dispose of the corporation’s property and assets;

✪

to purchase, own, hold, sell, or mortgage shares or interests in other domestic or foreign corporations;

✪

to make contracts and guarantees, borrow money, issue bonds, and secure obligations by mortgage in all or any of its properties, franchises, and income;

✪

to lend money;

✪

to conduct its business and carry on its operations anywhere in the universe;

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to elect, appoint, and compensate officers, employees, and agents of the corporation;

✪

to make and alter Bylaws;

✪

to pay pensions and establish pension, profit-sharing, stock option, stock purchase, and deferred compensation plans;

✪

to participate with others in any corporation, partnership, limited partnership, joint venture, or other association of any kind;

✪

to transact lawful business in time of war;

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to provide for its benefit life insurance and other insurance for its employees, officers, and directors; and,

✪

all other powers necessary or convenient to effect the purposes for which the corporation is organized.

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These powers are liberally construed and judicial interpretation of the powers is flexible. (N.J.S.A. 14A:1-1(2).) In addition, the corporation is considered to have broad powers of an implied nature under the foregoing statute. Setting Up the Corporation

Formation of a corporation begins with the filing of a Certificate of Incorporation (form 1, p.190.) Pursuant to statute, this certificate must set forth: ✪

the name of the corporation;

✪

the purpose(s) for which the corporation is organized;

✪

the aggregate number of shares that the corporation shall have authority to issue;

✪

the number of shares in each class and series, if any, and a statement of the relative rights, preferences, and limitations of the shares of each class and series;

✪

a statement of any authority vested in the board of the corporation to divide the shares into classes or series or both;

✪

any provision not inconsistent with the Business Corporation Act or other New Jersey statute that the incorporators wish to set forth for the management of the business and the conduct of the affairs of the corporation;

✪

the address of the corporation’s initial registered office and the name of the corporation’s initial registered agent at such address;

✪

the number of directors constituting the first board and the names and addresses of the persons who are to serve as such directors;

✪

the names and addresses of the incorporators;

✪

the duration of the corporation if other than perpetual; and,

✪

if the certificate is to be effective on a date subsequent to the date of filing, the effective date of the certificate. (N.J.S.A. 14A:2-7.)

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Bylaws

The Certificate of Incorporation is filed with the state and acts as the legal document creating the corporation. However, it is the Bylaws that generally outline how the corporation will run. It outlines the powers of the offices and describes how corporate business (as opposed to business of the corporation) will be conducted. A sample Bylaws form is included in Appendix D (form 2, p.191).

Liability of the Corporation

Corporations are liable for their acts in compensatory damages and, in very limited instances, may also be liable for punitive damages. Though compensatory damages of a corporation are governed by the common law, punitive damages assessable to a corporation are governed by New Jersey’s Punitive Damages Act. (N.J.S.A. 2A:15-5.9 et seq.) Pursuant to N.J.S.A. 14A:3-5, directors, officers and employees of the corporation are not personally liable for corporate actions if those agents have performed for the corporation in good faith.

C Corporations

A general corporation, also known as a C corporation, is the most common corporate type, but is generally used by larger corporations. A C corporation may have an unlimited number of stockholders and is normally chosen by those businesses that are planning to have more than thirty shareholders or planning a large public stock offering. The C corporation usually pays taxes at two levels. First, the corporation is required to pay taxes based on the corporation’s profits. Additionally, the owner or shareholder is taxed when the corporation distributes profits, known as dividends, to the individual. Smaller businesses can form as a C corporation. In fact, if they fail to take additional steps in their formation process, they will be classified as C corporations. However, smaller businesses usually are formed under S corporation status, a term that is often used interchangeably with the term close corporation.

S Corporations

A close corporation or closely held corporation usually limits the number of shareholders or owners to no more than thirty. Additionally, the transfer of ownership or shares of stock are restricted and most of the shareholders are actively involved in the management of the business. Shares of a close corporation (S corporation) are therefore not normally traded on a stock exchange.

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Most readers of this book will choose to make the “S” election when forming their corporation. (see Appendix D for IRS Form 2553 (form 6, p.201) and Appendix C for New Jersey S Corporation & QSSS Election Form.) The desirability of selecting S corporation standing is highly-regarded among business organizers. Some advantages of electing S corporation status are as follows: ✪

limited liability is preserved to shareholders because of the corporate form;

✪

avoidance of double taxation is achieved, allowing monies to be withdrawn by owners with payment of tax once, instead of twice at the corporate and individual levels;

✪

cash basis method of accounting is permitted;

✪

S corporation status allows a start-up company to pass initial losses through to its shareholders to the extent of its losses;

✪

corporations are exempt from accumulated earnings tax; and,

✪

corporation status tends to eliminate unreasonable compensation problems for executive officers.

However, there are some limitations that should be considered before electing “S” status. Some of the limitations include: ✪

only one class of stock is permitted;

✪

the number of shareholders is limited as well as the types of entities eligible to become shareholders;

✪

the possible forms of debt financing are restricted, since certain kinds of debt of an S corporation can be considered equity, thus creating two classes of stock and threatening termination of S corporation status;

✪

S corporation status restricts choosing a non-December 31 ending tax year; and,

✪

an S corporation can easily and inadvertently terminate its favorable tax status.

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Tax Advantages. One of the main reasons for making the “S” election is the favorable tax advantages the owners of this type of corporation receive. Generally, a non-S corporation is taxed on its earnings by both the federal and state governments, while its shareholders are basically taxed on any profits distributed to them, usually in the form of dividends. A corporation electing S corporation status is treated for income tax purposes similarly to a partnership, but retains the corporate advantage of limited liability relative to its shareholders. The principal tax advantage for S corporation election is to escape double taxation and to gain overall lower taxation. An S corporation pays no tax on its earnings and files annually an informational return. The individual shareholders are subject only to the individual tax rates. In essence, the S corporation is viewed as a pass-through entity like a partnership. This means it passes through income and losses separately to its shareholders. The S corporation generally is not subject to any corporate tax on these items. Tax disadvantages. There are a few potential problems that you should analyze if an S corporation is planned. Internal Revenue Service auditors look very closely at the salary that the business owners of the S corporation pay or fail to pay themselves. Often, S corporation income, losses, deductions, credits, and the like pass through the business to the actual business owners and must be reported upon their own individual income tax returns. Corporation distributions are not subject to FICA withholding taxes, however, the S corporation business owner is required to withhold taxes for FICA. Such taxes are considerable and can amount to approximately 7.65 percent on a current $87,000 salary. It is problematic that some S corporation owners may be inappropriately tempted to issue themselves an unnaturally low salary and thus lessen the amount they owe in Social Security and Medicare payroll taxes. To steer clear of this problem with the IRS, it is critical to be honest and forthright on all documentation. Take pay that is reasonable and check with other firms or businesses in the industry as to the salaries that they utilize. Bear in mind that salaries are more justifiable if they are approved by the corporate Board of Directors. Professional Corporations

This corporate form has only become available to practicing professionals within the last twenty years. Traditionally, professional practitioners have not been permitted to avail themselves of the use of the corporate form because their

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professional skills are considered personal; the relationship of clients or patients is confidential; and, professional qualities are required that cannot be attributed to a corporation. Now, most states have adopted special acts permitting professionals to incorporate. Professional Corporation Defined. A profession includes the performance of any type of personal service to the public that requires a license, admission to practice, or other legal authorization. These are regulated professions in which a professional relationship is established between the professional and his or her client that requires confidentiality and where a potential liability can arise out of the professional services rendered. In preserving that relationship, the corporate form will not shield the professional against personal liability that may arise from the performance of services. Restrictions. In professional corporations, only a person who holds a license to practice his or her profession may serve as a shareholder, officer, or director and shares may be issued or voluntarily transferred only to a licensed persons. Employees who render professional services must also be licensed. The corporate form of practice does not in any way affect any laws applicable to the relationship between the professional and his or her client or patient, including laws on confidentiality and liability for negligence. Shareholders of professional corporations may not enter into voting trust agreements or any other type of agreement granting any person other than the shareholder the right to exercise voting rights of shares issued by the professional corporation. A professional corporation may be formed only for the purpose of rendering the particular professional services and may not engage in any business other than the rendering of these professional services. It may, however, invest its funds in real estate, mortgages, stocks, bonds, and other types of investments and may own real estate or personal property necessary or appropriate for rendering its professional services. Not-for-Profit Corporations

Not-for-profit organizations fall outside the general business setup in that they possess very specific and decidedly unique requirements that must conform to government regulations and policies. Not-for-profit corporations are usually formed for charitable purposes. Specific filing requirements establish that the business entity exists as a nonprofit or not-for-profit organization. That is not to say that the owners, officers, and directors go without financial compensation. Those individuals are generally well rewarded in the form of a regular salary paid from the corporate account. The critical and distinguishing aspect between a

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not-for-profit corporation and a for-profit corporation is that the profits (or proceeds) generated by the not-for-profit business are not shared by the owners, officers, and/or directors as they can be in a for-profit business entity. Foreign Corporations

Foreign corporations are business entities established in one state, but doing business in another state. For the purposes of this book, foreign corporations will not be explored in-depth.

Limited Liability Companies Limited Liability Companies (LLCs) are a relatively new entity in New Jersey and are governed by the New Jersey Limited Liability Company Act. (N.J.S.A. 42:2B-1 et seq.) (See Appendix A for a copy of the Limited Liability Act.) Formation

An LLC is commenced at the time of the filing of a certificate of formation or at any later date or time specified in that certificate (analogous to a corporation’s certificate of incorporation). Pursuant to N.J.S.A. 42:2B-11, the certificate of formation must be filed with the New Jersey Secretary of State and must set forth: ✪

the name of the LLC (which must contain the words “Limited Liability Company” or the abbreviation “L.L.C.”);

✪

the address of the LLC’s registered office and the name and address of the registered agent for service of process;

✪

the timeliness of the LLC’s existence (if the LLC is to have perpetual existence, the word “perpetual” must be on the certificate; if it has a specific date of dissolution, the latest date on which the dissolution is to occur must be stated); and,

✪

any other matters the LLC’s members determine should be included.

Errors in the certificate of formation can be corrected by the filing of a certificate of correction executed by an person authorized to make the corrections as indicated in the corporate records. (N.J.S.A. 42:2B-12.) Powers and Privileges of an LLC

By statute, an LLC may carry on any lawful business, purpose, or activity. An LLC shall possess and may exercise all the powers and privileges granted by the New Jersey Limited Liability Company Act, by any other law, or by its operating

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agreement, so far as such powers and privileges are necessary or convenient to the conduct, promotion, or attainment of the LLC’s business, purposes, or activities. (N.J.S.A. 42:2B-8.) Since 1998, amendments to the New Jersey Limited Liability Company Act allow the formation of single-member limited liability companies (LLCs) in New Jersey. The law also allows existing New Jersey LLCs to change to a single-member setup. New Jersey stands among the great majority of states in allowing single-member LLCs. Coupled with recent federal tax law changes, the single-member provision benefits closely-held businesses. Single-member LLCs combine the protection of limited liability with the benefits of pass-through taxation. While a multiplemember LLC is generally taxed under the complex web of federal and state partnership tax law, a single-member LLC is generally disregarded for federal and New Jersey tax purposes. Thus, the single-member LLC generally does not file annual tax returns. Instead, the member is taxed on the company's income at the member's own tax rate. (Some states and jurisdictions, such as New York City, do impose entity-level taxation on single-member LLCs and thus require a separate tax return from those LLCs.) Before this change, New Jersey persons wishing to form single-member LLCs typically either added a family member or other individual as a minority member or formed a Delaware single-member LLC and had it registered as a foreign LLC in New Jersey. Both of those options were saddled with unnecessary complexity and expense because they either added an unwanted member or required the LLC to accept the jurisdiction of another state. Such LLCs now may wish to consider converting to single-member New Jersey LLCs. It should be noted that the conversion of a multiple-member LLC to a single-member LLC may have significant tax consequences. As a result, careful analysis by a tax professional is warranted before undertaking such a conversion. It is also important to note that adding a second member to a single-member LLC will have a dramatic impact on the structure and the costs of operating that company. The move from untaxed to partnership status for tax purposes brings with it legal and accounting complexities. Further, the LLC's operating agreement (the written agreement as to the affairs of the company and the conduct of its business) will likely require significant revision immediately prior to the addition of a second member to account for management, allocation and distribution, taxation, and other issues.

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Operating Agreements

A New Jersey LLC’s operating agreement is a written agreement among the LLC’s members. If the LLC is comprised of only one member, in lieu of an agreement, a written declaration must be executed by that member. This has the legal status of an agreement between the sole member and the LLC. Fundamentally, the operating agreement may provide for classes or groups of members having certain relative rights, powers, and duties (such as member rights and eligibility to vote on any matter affecting the LLC). The agreement may also provide for the taking of an action (including the amendment of the operating agreement) without the vote or approval of any member or class or group of members. Where the agreement provides a right to vote, the agreement may set forth provisions relating to notice of the time, place, or purpose of a meeting where any matter is to be voted upon. (N.J.S.A. 42:2B-22.)

Contributions by Members

Contributions may be made to an LLC by its members in the form of cash, property, services rendered, promissory note, or other obligation to contribute. (N.J.S.A. 42:2B-32.) A member’s interest in an LLC is owned as personal property. It is distinguishable from the specific property of the LLC itself, in which the member has no ownership interest. (N.J.S.A. 42:2B-43.)

Allocation of Profits, Losses, and Distributions

The profits, losses, cash, or asset distributions of an LLC shall be allocated among its members or among classes or groups of members, in the manner provided for by the LLC’s operating agreement. If the operating agreement does not provide for such allocation, profits, losses, or distributions, they shall be allocated on the basis of the agreed value of the contributions made by each member. (N.J.S.A. 42:2B-34, 35.) An LLC manager who is not an LLC member may also make contributions to the LLC and share in the profits, losses, and distributions. (N.J.S.A. 42:2B-28.)

Debts, Obligations, and Liabilities

The debts, obligations, and liabilities of an LLC, whether arising through a contract, a judgment from a lawsuit, the LLC’s accounts payable, or otherwise, are solely the debts, obligations, and liabilities of the LLC. No member, manager, employee, or agent shall be obligated personally for such debt, obligation, or liability. (N.J.S.A. 42:2B-23.)

Registered Agents Virtually all states, including New Jersey, require business entities to appoint a registered agent in the state where the company is formed. The registered agent is responsible for receiving important legal and tax documents including:

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✪

notice of litigation (service of process);

✪

franchise tax forms; and,

✪

annual report forms.

The registered agent may be an individual able to act as agent, located at a street address in the state where the company is formed. The registered agent’s name and address are included in the initial formation documents filed with the state and this information becomes a matter of public record. Your registered agent allows your company the assurance that important services are handled correctly and efficiently. The agent may: ✪

accept any legal service of process (notice of litigation) document;

✪

record the service in your company file; and,

✪

forward any official documents and tax notices from the Secretary of State.

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Partners and Partnerships

While basic issues pertaining to partnerships and their formation were addressed in Chapter 1, New Jersey partnerships present many other administrative and operational concerns that require attention after formation. When in doubt, you should be guided by the New Jersey Uniform Partnership Act. (see Appendix A.) As many of the following items discussed are fact-sensitive and legally complex, it is strongly suggested to consult with legal counsel to ensure proper compliance with legal and procedural requirements.

Partnership Agreements In instances where a partnership is established, most relationships between partners are controlled by the partnership agreement. To the extent that a partnership agreement does not address such relationships, the New Jersey Uniform Partnership Act provides the controlling authority. By law, a partnership agreement shall not: ✪

unreasonably restrict a partner’s right of access to books and records;

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✪

reduce a partner’s duty of loyalty to permit a partner to engage in conduct that is intentionally injurious to the partnership;

✪

reduce a partner’s duty of care;

✪

vary or limit the right of a court to expel a partner;

✪

vary any statutory requirement to wind up or terminate the partnership;

✪

vary the law applicable to a limited liability partnership; or,

✪

restrict rights of third parties.

Partner Authority Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of a document, contract, or other instrument in the name of the partnership, will bind the partnership. Exceptions to this general rule include: ✪

when the matter is beyond the ordinary course of partnership business and

✪

when the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.

If a partner takes action that is not in the ordinary course of partnership business, the partnership will be bound only if the act was authorized by the other partners. (N.J.S.A. 42:1A-13.) Statement of Partnership Authority

A partnership may file a statement of partnership authority. It includes: ✪

the name of the partnership;

✪

the street address of its chief executive office (and of one office in New Jersey, if one exists);

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✪

the names and mailing addresses of all partners or of an agent appointed and maintained by the partnership; and,

✪

a list of those partners authorized to execute an instrument transferring real property held in the name of the partnership.

The statement of authority may also define, supplement, or limit the authority of some or all of the partners to enter into other transactions on behalf of the partnership or to undertake other actions on behalf of the partnership. (N.J.S.A. 42:1A-15.)

Partner Accounts Each partner is considered to have an account that is credited with an amount equal to the money plus the value of any other property, less any liabilities, that the partner contributes to the partnership. It also includes any amount distributed to the partner and his or her share of any partnership profits. If the partnership is operating at a loss, the account will reflect the partner’s share of the partnership losses. Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership’s losses in proportion to the partner’s share of the profits. A partnership must reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property. In addition, the partnership is obligated to reimburse a partner for an advance to the partnership in excess of the amount of capital that the partner agreed to contribute. Such a payment or advance is considered a loan to the partnership, upon which interest accrues from the date of the payment or advance. (N.J.S.A. 42:1A-21a-e.) Partnership Information

A partnership must keep its books and records at its chief executive office and must provide partners (and their agents and attorneys) access for the period during which they were partners. (N.J.S.A. 42:1A-23.)

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Fiduciary Duties of a Partner A person may become a partner only with the consent of all partners. (N.J.S.A. 42:1A-21i.) The fiduciary duties owed by a partner to the partnership and to the other partners are the duties of loyalty and care. Loyalty

A partner’s duty of loyalty is limited as follows: ✪

to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;

✪

to refrain from knowingly dealing with the partnership in the conduct or winding up of the partnership business as, or on behalf of, a party having an interest materially adverse to the partnership; and,

✪

to refrain from actions intended to cause material injury to the partnership in the conduct of the partnership business before the dissolution of the partnership. (N.J.S.A. 42:1A-24b.)

Care

A partner’s duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. (N.J.S.A. 42:1A-24c.)

Management and Conduct

Each partner has equal rights in the management and conduct of the partnership business. (N.J.S.A. 42:1A-21f.) However, a partner is not entitled to payment for services performed for the partnership, except for reasonable compensation earned in winding up the partnership. (N.J.S.A. 42:1A-21h.)

Resolution of Differences between Partners Any differences arising in the ordinary course of business of a partnership shall be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement shall be undertaken only with the consent of all partners. (N.J.S.A. 42:1A-21j.)

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Pursuant to N.J.S.A. 42:1A-25, a partnership may sue a partner for a breach of the partnership agreement or for a violation of a duty to the partnership that causes harm to the partnership. A partner may sue the partnership or another partner for legal or equitable relief as follows: ✪

to enforce the partner’s rights under the partnership agreement;

✪

to enforce the partner’s rights under the Uniform Partnership Act; and,

✪

to enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.

Disassociation A partner has the authority to disassociate from a partnership at any time, rightfully or wrongfully, by express will. An example of a voluntary disassociation is the retirement of a partner for reasons of age. The effect of disassociation will be to terminate the partner’s right to participate in the management of the partnership. (N.J.S.A. 42:1A-33.) Wrongful Disassociation

The partner’s disassociation will be legally wrongful only if: ✪

the disassociation takes place in breach of an express provision of a partnership agreement or

✪

in the case a partnership for a definite term or particular undertaking— if the partner withdraws, is expelled by order of a court, files a bankruptcy petition, or dissolves or terminates prior to the expiration of the term or the completion of the undertaking.

A partner wrongfully disassociating from a partnership is liable to the partnership and to the other partners for damages caused by the dissociation. (N.J.S.A. 42:1A-32.)

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Involuntary Disassociation

Statement of Disassociation

A partner’s involuntary disassociation or separation from a partnership can be highly problematic. Under N.J.S.A. 42:1A-31, a partner shall be considered to be disassociated from a partnership: ✪

upon provision to the partnership notice of the partner’s desire to withdraw from the partnership;

✪

if an event set forth in the partnership agreement causes the partner’s disassociation;

✪

by expulsion of the partner pursuant to the terms of the partnership agreement; or,

✪

by expulsion of the partner by unanimous vote of the other partners (under certain conditions).

A disassociated partner or the partnership may file a statement of disassociation stating the name of the partnership and separation of the partner there from. (N.J.S.A. 42:1A-37.)

Limited Liability Partnerships The Limited Liability Partnership (LLP) is an increasingly popular entity for business set-ups. Many New Jersey entrepeneurial organizations are using the LLP to create their business entity. The following text provides a sound overview of the pros and cons of a LLP set-up and introduces you to some limited liability issues for your consideration in forming your business entity. Annual Reports

N.J.S.A. 42:1A-49 requires limited liability partnerships to file an annual report with the New Jersey Department of Treasury’s Division of Commercial Recording. This report must contain the following: ✪

the name of the limited liability partnership and the state or other jurisdiction under whose laws the limited liability partnership is formed;

✪

the street address of the partnership’s chief executive office and, if different, the street address of a New Jersey office of the partnership, if one exists; and,

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if the partnership does not have a New Jersey office, the name and street address of the partnership’s current agent for service of process.

Failure to file an annual report shall result in sanctions by the Department of Treasury. Foreign Limited Liability

In most instances, a foreign limited liability partnership is a partnership formed in a state other than New Jersey, though the term is also applied to partnerships formed in other jurisdictions or countries. The law that a foreign limited liability partnership is formed under governs relations among the partners and between the partners and the partnership, as well as the liability of the partners for obligations of the partnership. (N.J.S.A. 42:1A-50.) For example, a partnership formed in Pennsylvania but doing business in New Jersey will be governed by Pennsylvania law. Statement of Foreign Qualification. Before transacting business in New Jersey, a foreign limited liability partnership shall file a statement of foreign qualification with the New Jersey Department of Treasury’s Division of Commercial Recording. The statement must contain the following information: ✪

the name of the foreign limited liability partnership that must satisfy the requirements of the state or jurisdiction under whose law it is formed;

✪

the street address of the partnership’s chief executive office and, if different, the street address of a New Jersey office of the partnership, if one exists; and,

✪

the name and street address of the partnership’s agent for service of process in New Jersey.

The statement must also include the effective date of the partnership or a deferred effective date, if any. (N.J.S.A. 42:1A-51.) A failure to file the statement will bar the foreign limited liability partnership from commencing or conducting a lawsuit or other action in the courts or administrative agencies of New Jersey. However, a failure to file a statement of qualification does not protect the partnership from being prosecuted or sued. (N.J.S.A. 42:1A-52.) The New Jersey Attorney General has the exclusive authority to take action to restrain a foreign limited liability partnership from transacting business in New Jersey due to its violation of law. (N.J.S.A. 42:1A-54.)

3

Corporate Directors, Officers, and Committees

Regardless of its size, a corporation has a designated individual(s) known as directors who control its operation. One or more of these directors may also own all or part of the shares of stock issued by the corporation. In many instances, the corporation may be owned by many individuals or entities, known as shareholders. This chapter describes the fundamental attributes of directors and shareholders, along with their powers and duties.

Board of Directors Pursuant to N.J.S.A. 14A:6-1, the business and affairs of a corporation shall be managed by or under the direction of its directors as a collective board of directors, except as statute or the Certificate of Incorporation (form 1, p.190) may otherwise provide. The board of directors shall consist of one or more members. (N.J.S.A. 14A:6-2.) The board of directors is the official governing body of the business entity. They offer business decisions, conduct meetings, and direct the overall functions and goals of the business entity.

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Credentials

A director of a business entity must be an individual who is at least 18 years old. Corporate directors are not required to be stock owners in their corporate business. (N.J.S.A. 14AQ:6-1(1).)

Choice of Directors

Directors are usually selected by virtue of a shareholder election process. Sometimes the primary board of directors can be set forth in the Certificate of Incorporation documentation or they can be chosen by the business incorporators. Openings that come up in the board may be filled by a vote of the majority of the serving directors.

Number

Generally, the number of directors is stated within the corporate Bylaws or within the Certificate of Incorporation. The board of directors must contain at least one director. If the bylaws and/or the Certificate of Incorporation fail to establish the quantity of directors, it is customary to set three as the operating amount. Often, the number of directors is specifically set in the Bylaws as opposed to the Certificate of Incorporation since amendment of the Bylaws may be made more simply and without delay. The Bylaws can be written to provide that the exact number of directors be established on a yearly basis by the board. Directors may indicate that the board may consist of not less than a definite minimum number of directors or not more than another specific maximum number of directors. Such indication is set forth in the Bylaws. Such documentation should be written at least sixty days before the annual meeting of the shareholders. (N.J.S.A. 14A:6-2.)

Term

The directors named in the certificate of incorporation shall hold office until the first annual meeting of shareholders and until their successors have been selected and qualified. (N.J.S.A. 14A:6-3.) Corporate directors act for the specific term set forth within the bylaws. This term is usually one year or until the successor has been selected and qualified.

Majority and Quorum

Generally, a majority of the board of directors in office is required to comprise a quorum. Rulings of the majority of the quorum present and voting shall constitute an act of the board. Unless constrained by writing within the Bylaws, any conduct permitted to be undertaken at a meeting of the board of directors may be undertaken without a board meeting, if all directors file with the corporate secretary a consent in writing. (N.J.S.A. 14A6-7.1.)

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Authority

Generally, the corporate board of directors assigns authority to its officers and agents unless provided specifically by statute or in a bylaw adopted by the shareholders. Corporate controls set forth by statute are implemented by a board of directors.

Duties

Directors possess a fiduciary responsibility to the corporation. The board of directors must conduct themselves in good faith and in a way reasonably thought to be in the paramount business interest of the corporation. Directors must conduct themselves with evident concern, proficiency, and due diligence, in a manner that a reasonable person would deem appropriate if put in the situation. In discharging those duties, a director and or the board may, in addition to considering the effects of any action(s) on corporate shareholders, consider: ✪

the effects of the action on the corporation’s employees, suppliers, creditors, and customers;

✪

the effects of the action on the community in which the corporation operates; and,

✪

the long-term and the short-term interests of the corporation and its shareholders. (N.J.S.A. 14A:6-1.)

Pursuant to N.J.S.A. 14A:6-14, good faith acts of the board of directors include acting upon judgments, news, information, or accounts assembled and/or put forth by the following: ✪

attorneys;

✪

CPAs/public accountants;

✪

experts;

✪

corporate officers;

✪

business employees; and,

✪

any board-established committee.

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Business Judgment Rule

Generally, an act of the board of directors is assumed to be made in the best interest of the corporation. Such an act must be undertaken absent a breach of corporate fiduciary duty, self-dealing, or lack of good faith. Good faith is a legal term of art that entails conducting business transactions utilizing earnest, honest, and fair dealing. It is a term used frequently in various enterprises to connote the level of effort and integrity in business transactions that often effect the outcome of contractual agreements and business relationships.

Directors’ Personal Liability

New Jersey law imposes personal liability upon those directors who vote for, or concur in, any of the following corporate actions. ✪

The declaration of any dividend or other distribution of assets to the shareholders contrary to the provisions of this Act or contrary to the restrictions contained in the Certificate of Incorporation.

✪

The purchase of shares of the corporation contrary to the provisions of this Act or contrary to any restrictions contained in the Certificate of Incorporation.

✪

The distribution of assets to shareholders during or after dissolution of the corporation without paying, or adequately providing for, all known debts, obligations, and liabilities of the corporation, except that the directors shall be liable only to the extent that such debts, obligations, and liabilities of the corporation are not thereafter paid, discharged, barred by statute, or otherwise.

✪

The complete liquidation of the corporation and distribution of all its assets to the shareholders without dissolving or providing for the dissolution of the corporation and the payment of all fees, taxes, and other incidental expenses. The directors shall be liable only to the extent of the value of the assets so distributed and to the extent that such fees, taxes, and other expenses incidental to distribution are not thereafter paid.

✪

The making of any loan to an officer, director, or employee of the corporation or any subsidiary thereof contrary to the provisions of the New Jersey Business Corporation Act. (N.J.S.A. 14A:6-12 (1).)

Corporations may offer protection for directors either through the bylaws, an agreement, or an independent vote of the shareholders or directors. No protection may be made in cases where the director’s conduct is determined by a court to have constituted willful misconduct or recklessness.

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Board of Directors’ Committees The board of directors or the Bylaws of a corporation may set up certain committees comprised of one or more corporate directors. Committees may possess the authority of the full board of directors, but committees shall not have any authority to carry out the following: ✪

submissions to shareholders of any action requiring approval of shareholders;

✪

establishment or filling of openings on the board of directors;

✪

adoption, modification, or rescinding of the bylaws; or,

✪

amendment or repeal of any resolution of the board that, by its terms, is amendable or rescindable only by the board itself.

Committees are utilized to effect special objectives or missions of the business entity. For example, a committee may be established to evaluate employee work habits to seek more corporate efficiency. Often, committees (or collaborating groups) are needed to aid the proper and effective functioning of the business entity. Such committees may be established by a vote of the board of directors or may be established more decisively in the corporate bylaws. Committees are typically formed to address specific or developing goals of the business entity. A common example of a committee used in the regular course of a business entity is that of a hiring committee. A committee of such nature will review and assess the qualifications of the potential employees. Standing committees may be described and enumerated in the bylaws to address routinely needed committee functions.

Officers Corporations must possess a president, a secretary, and a treasurer. The president and secretary must be actual individuals, but the treasurer may be a corporation. Any number of offices may be held by the same person. However, in order to avoid the appearance of impropriety, it is recommended that the president not

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be the same person as the treasurer. A corporation does not want any suggestion of the possibility of monetary comingling or access to corporate funds, making it good policy that the president and treasurer positions must be occupied by different individuals. Though two or more offices may be held by the same person, no officer may execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law or the bylaws to be executed, acknowledged, or verified by two or more officers. (N.J.S.A. 14A:6-15.) Roles

The president directs the overall goals, objectives, and mission of the business entity. The vice president assists in this objective. There may be multiple vice president positions to advance the goals of the president. The secretary of the business entity keeps all corporate or business records, maintains the minutes of meetings, and documents correspondences made on the part of the business entity. The treasurer keeps records of all finances associated with the business and tracks profits and losses.

Term, Removal, and Salary

The usual term of office is for a period of one year, unless specifically provided in the bylaws. An officer of a corporation may be removed with or without cause. Salaries vary and can be set by the board of directors (by vote) or established in the bylaws of the business entity.

Duty of Care

An officer shall perform his or her corporate duties in good faith, in a method reasonably believed to be in the best interest of the corporation, and with such care, including reasonable inquiry, skill, and diligence, as a person of ordinary prudence would use under similar circumstances.

Shareholders A shareholder is the owner of any number or any class of shares authorized to be created and issued by the business entity. (N.J.S.A. 14A:7-1 et seq.) Meetings of shareholders of every corporation organized under any general or special law of New Jersey may, unless otherwise provided by law, meet at such place, in or outside of New Jersey, as may be provided in the bylaws or as may be fixed by the board pursuant to authority granted by the bylaws. In the absence of any such provision in the bylaws, all meetings shall be held at the registered office of the corporation. (N.J.S.A. 14A:5-1.)

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Regular shareholder meetings are established in the Bylaws and they set the number of meetings to be held each year and the time at which those meetings will occur. At least one shareholder meeting must be held in each calendar year. (N.J.S.A. 14A:5-2.) Special Shareholder Meetings. At any meeting electing directors, the adjournment may be only on a day-to-day basis or for longer periods not exceeding fifteen days each, as the shareholders present and entitled to vote shall direct. Additional shareholder meetings may be convened at any time: ✪

as called by the corporate board of directors;

✪

by such corporate officers as provided in the corporate bylaws;

✪

as called by the shareholders entitled to cast at least 20% of the votes that all shareholders are entitled to transmit at the certain special meeting; or,

✪

upon successful application to the New Jersey Superior Court of not less than 10% of all the shares entitled to vote at a meeting and a resulting court order directing such a meeting. (N.J.S.A. 14A:5-3.)

Notice of Meetings

For the meetings to be valid, notice of every meeting must be in writing and shall be issued at the command of the corporate secretary to each shareholder permitted to cast a vote at the meeting. Written notice must be given, either personally or by mail, not less than ten days nor more than sixty days before the date of a meeting. (N.J.S.A. 14A:5-4.)

Waiver of Notice Requirements

The notice requirement can be waived. A signed Waiver of Notice executed by the individuals entitled to be served with notice is valid and any such waiver may be executed prior to, or subsequent to, the time of the meeting. Having attended the meeting suggests and establishes waiver of notice. This can be an important exception to the family-run corporations or other corporations with few shareholders. It allows for faster decision making through the meeting process without having to strictly follow the notice requirements. (N.J.S.A. 14A:5-5.)

Quorum

Shareholder meetings shall not be convened to transact corporate business without a quorum. A quorum at a shareholder meeting is established by the

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shareholders present who are entitled to cast at least a majority of the votes. If a quorum is established, the shareholders present at the meeting can transact business until adjournment, despite the fact that the departure of certain shareholders results in less than a quorum. Thus, once a quorum was established, the withdrawing shareholders cannot prevent the remaining shareholders from conducting corporate business. (N.J.S.A. 14A:5-9(1).) Voting Rights

Unless otherwise provided in the Certificate of Incorporation, each shareholder is afforded the right to one vote for every share in the shareholder’s name on the corporation’s books. Cumulative voting is permitted and consists of multiplying the number of votes a shareholder is entitled to vote by the number of directors being elected and entitling the holder to cast all his or her votes for one director candidate or distribute the votes among the several candidates. (N.J.S.A. 14A:5-10.) Shares held by another corporation may be voted by any officer, agent, or proxy appointed unless some other person, by resolution of the holding corporation’s board or pursuant to its bylaws, is appointed to vote such shares. (N.J.S.A. 14A:5-14.)

Proxy

Shareholders who are entitled to vote at a shareholders’ meeting may give permission to another individual to cast his or her vote by proxy. A proxy must be in writing, signed by the shareholder (or by his or her attorney in fact/agent), and properly filed with the corporate secretary. A proxy may be made by telegram, cable, telephonic transmission, or other means of electronic communication. A proxy may be revoked. Revocation may be done despite any provision to the contrary. The revocation of proxy, however, is not valid until notice in writing has been issued to the corporate secretary. No proxy shall be valid for more than eleven months, unless a longer time is expressly provided therein. (N.J.S.A. 14A:5-19.)

Liability of Shareholders

A holder of shares of a corporation shall be under no obligation to the corporation or its creditors to pay for such shares other than the obligation to pay the corporation any unpaid amount due (also called consideration) for which the shares were issued or to be issued. Unless otherwise provided in the Certificate of Incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by reason of his or her own acts or conduct. (N.J.S.A. 14A:5-30.) An in-depth discussion of the full spectrum of director and shareholder rights and responsibilities and the complex issues arising therefrom is beyond the scope of this book. It is suggested that the business owner consult a New Jersey attorney for guidance on such issues.

4

Starting Your New Jersey Business

This chapter discusses the most common requirements that affect small and/or new businesses. The material is by no means exhaustive, as regulations vary by industry. It should provide a solid start to meeting your regulatory requirements. Carefully investigate the additional regulations that affect your industry. Appendix C contains the New Jersey Business Registration Application Packet that all new businesses must complete.

Business Name Businesses that use a name other than the owner’s must register the fictitious name with the county as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name. If you plan to transact business under a fictitious name, you must file a Fictitious Business Name Statement before beginning operation. A name is considered fictitious if it does not contain the business owner’s surname or if it contains words other than those in the owner’s full name.

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Registering your business name protects you from other businesses that might want to use the same name. It also prevents your competitors from using your name. Incorporating

Simply incorporating in New Jersey does not automatically confer name rights. In New Jersey, the filing or issuance of a Certificate of Incorporation or a certificate of authority to do business is not conclusive as to the right to use a particular name. The name of a domestic or foreign corporation doing business in New Jersey must distinguish it from the names of corporations of any type or kind. Thus, incorporation by the State of New Jersey is not a valid defense to trade name, trademark, or servicemark infringement, or unfair competition claims. (N.J.S.A. 14A: 2-2(5).)

Intellectual Property Certain intangibles associated with business entities may be critical to the proper functioning of the business. Intellectual properties such as trademarks, copyrights, patents, trade names, and company secrets may play an important role in the viability of the business entity. Unlike the fictitious name, the trademark denotes a symbol or an insignia of the business entity. Not all businesses choose to possess a trademark, nor is such possession necessary. A business often may seek to copyright certain documents or work produced as a result of the business objective. The copyright procedure is specific to the documents requiring such recording and applicable requirements must be met to facilitate proper copyrighting. The same rule and applicability applies to patents and tradenames as well. (For the purposes of this book, no analysis or study will be presented regarding filings for trademarks, copyrights, patents, and/or tradenames. The absence of this discussion is largely based upon the fact that such intellectual property protections are business-specific and do not necessarily apply to the large majority of start-up ventures.)

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Insurance In the initiation of your business entity, you are well advised to consider properly insuring various aspects of the business. There are critical insurances to consider when establishing your business venture. Since businesses are often viewed as possessing deep-pockets, it is essential to appropriately protect the business from a variety of potentially detrimental and devastating claims. Insurance of all types constitutes a good business investment. Most insurance, in whole or in part, are tax deductible and can be claimed as business expenses. The value received and the peace of mind imparted upon the business owner far outweighs the fiscal outlay in such cases. Liability Insurance

If your business involves allowing patrons or customers onto a property in the course of business (a business invitee), it is critical to invest in liability insurance to protect against injuries that may be sustained on the premise. If your business is incorporated, you may have some protection by virtue of the liability provisions applicable under the business incorporation laws of New Jersey. However, it must be stressed that additional liability insurance is always advisable to cover injuries sustained or damages incurred to the business invitee that may not be covered by any gaps asserted or claimed against the corporate protections.

Business Insurance

In the process of operating a business, it is more than likely that you will require some type of business equipment or apparatus. Business equipment entails computers, software, heavy equipment, furniture, inventory, filing systems, and the like. It is imperative to appropriately and comprehensively cover the potential of loss of these costly items. Thus, adequate business insurance is highly recommended in an amount sufficient for replacement costs.

Professional Liability Insurance

If your business entails a practice or profession that places your personal finances at risk, it is absolutely critical to purchase a complete professional liability package. Attorneys, doctors, chiropractors, dentists, and health care professionals of all sorts should seriously consider coverage amounts in excess of one million dollars. The increasing litigious nature of the modern world has made it incumbent upon practice professionals to protect against the unpredicted lawsuit. Most law suits will attempt to assert a claim higher than the actual damage; therefore, it is necessary to be completely and comprehensively protected against such claims.

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Life Insurance

If you are a sole proprietor or you are involved in a closely held corporation, you may wish to consider investing in life insurance. Life insurance benefits will protect your business heirs and those directly affected by your demise. It is specifically recommended that you consider life insurance if you have a family whose sole source of income is reliant upon your business.

Disability Insurance

The recommendation for disability insurance parallels the recommendation for life insurance. This is so because it is highly suggested that some form of disability insurance be employed to protect against situations in which a sole proprietor or small business owner becomes disabled and cannot effectively manage the business. In such event, the amount of insurance should mirror your monthly net income and should be set up such that you and your family will receive benefits no less than two-thirds of your monthly net income. Applicants who are registering as a new business entity (corporations, limited liability company, limited partnership or a limited liability partnership) must complete the Public Records Filing for New Business Entity. (see Appendix C.)

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The business registration application should contain the following information:


the reason for your filing the application;




name;




trade name;




business location (do not use P.O. Box for location address);




mailing name and address (if different from business address);




beginning date for this business in New Jersey;




type of ownership;




New Jersey business code;




county/municipality code; and,




if this business will operate year round.

The public records filing for new business entity should contain the following information:


business name;




type of business entity;




business purpose;




duration;




registered agent name; and,




registered office (must be a New Jersey street address).

5

Employment Concerns

One of the problems facing the business and corporate industry in this modern age is employee turnover. Recruitment and hiring employees is a critical challenge facing the small and large business ventures. Prepared and savvy business owners and management companies are constantly recruiting employees to ensure that when a staff position becomes available, they possess a roster of qualified applicants ready to fill the openings. Utilization of a clearly defined hiring plan aids in making certain that properties are staffed with motivated and competent employees. Smarter hiring practices reduce employee turnover, and perhaps more importantly, such practices tend to reduce potential costly lawsuits instituted by disgruntled or dissatisfied employees. A broad candidate pool should be analyzed. If your business is searching for qualified employees, a job fair may be recommended. Also, you may wish to post openings at local schools or universities. Employment agencies and even newspaper ads attract applicants as well. Satisfied and content employees with positive attitudes about the company and the property lure others to join them. Successful employees proved to be better in tenant and vendor relations, which leads to tenant retention and reduced operating costs.

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Proper Job Description A good hire commences with a well-crafted job description. The description of the employment position should include the job function, specific as well as broadbased duties, responsibilities, and qualifications. The job description should advise and educate the applicant of the details of the job parameters. Properly setting forth the exact skills and previous experience that are required should be the focus of your job description. Certain positions do not require technical expertise or need prior familiarity. However, certain jobs do require such specific experience. Some skills are essential to every position. Even entry-level office positions require good communication skills. The properly-defined employment posting may aid in avoiding a bad hire or an office worker who is unable to write up a simple sales slip.

Application The goal of the employment application is to avoid legal claims. Job candidates should be asked to complete a standard employment application to set forth certain important information about themselves prior to the applicant interview. The application should seek information about the candidate’s: ✪

education;

✪

employment history;

✪

interests; and,

✪

hobbies.

The application should also require multiple and verifiable references.The employment application should include a portion in which the candidate authorizes the verification of all information and states that the questions have been answered truthfully. It is an unlawful employment practice to discriminate based on race, gender, color, religion, age, and/or sexual orientation. (N.J.S.A. Section 10:5-12.) Thus, questions seeking any of this information are illegal and must be avoided.

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The application process should provide the employer or business owner with further insights into the applicant. Unexplained spaces or missing information in an employment application may be an indicator of deceit, instability, prior troublesome issues, or other problems. A job candidate who does not seem thorough in the interview process or on the application may, if hired, take problematic shortcuts or may not follow instructions well. The unsigned employment application may show a hesitance to have references verified or checked.

Interview The interview should be the most important part of the hiring process. In a limited period of time, the interviewer must determine if the applicant has the skills required to successfully perform the job for which they have applied. The interviewer must ask open-ended questions that both provide information and test the applicant’s ability to communicate. A good interview strategy is one that provides answers to those questions. Americans with Disabilities Act

The Americans with Disabilities Act (ADA) protects people from abusive hiring practices regarding health and fitness. An interviewer must avoid asking candidates if they have filed worker’s compensation claims or how many days they were ill at their previous jobs. Health questions must relate only to the job description. An appropriate question can be—Is there any reason why you would be unable to perform the duties outlined? Talking too much, overselling the company or the position, and reading prepared questions to a candidate instead of asking probing questions will work against the goal of finding a good employee.

After the Interview

At the completion of the interview, an effective interviewer should verify the information on applications for those who might best fill the position. Previous employers and personal references can provide information about the applicant’s attitudes and abilities. Offers should be made to candidates whose experience and training best qualify them for the duties in the job description. Offers may be subject to completion of drug testing, physical, etc., as long as all employees are required to do so.

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Once the new hire begins, an Employment Eligibility Verification (Form I-9) (form 4, p.196) must be completed. Instructions for doing so are included with the form in Appendix D.

Lawsuits The threat of personal and business liability has increased over the years as several federal and state courts have reinforced that business decision makers can be personally responsible for their employment actions. Trends in court decisions underscore a disturbing fact: business supervisors, business owners, and other decision makers are being held personally liable for their actions under several employment laws. The normal corporate veil limiting personal liability does not totally protect you. Several state and federal courts have issued new decisions finding professionals and other managers personally responsible for their employment actions. This liability has been both expensive and time consuming. Some of the cases involved six-figure judgments, and almost all of them have taken years to wind their way through the court system. This exposure cannot be ignored, and business professionals are rightly concerned about the trend. You can make yourself a less attractive target for legal action by taking the following actions. ✪

Keep your policies up-to-date and follow them. Written policies tell your employees how they can expect to be treated and give you guidelines for applying the policies consistently. However, the policies must comply with legal requirements and you must follow them, or they may be used against you as evidence of violations of the law.

✪

Do not make hasty decisions. If you are not sure what the appropriate decision should be, do not feel pressured into taking action. Instead, take time to investigate the situation, check policies and procedures, and consider any applicable laws or regulations before making your decision. In addition, consult with an HR expert or legal counsel when appropriate.

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✪

Explain your decisions. Every time you make a decision that has a negative impact on an employee, you should explain your rationale for the decision. Most employees sue when they feel they have been treated unfairly or illegally and because they do not understand the decisionmaking process.

✪

Document your decisions. Written records help everyone’s memory and can be invaluable in demonstrating and supporting the fairness of your decision-making process, both to the affected employee and, if necessary, in court. The documentation also should help show that you complied with any applicable laws.

6

Business Records

Reports, records, books, and filing issues are analyzed in this chapter. The complexities of record keeping and filing are vast in the business entity world.

Records and Reports Minutes are the written records of meetings held by the business entity. Minutes are generally overseen and administered by a designated individual, usually the corporate secretary in a corporation or a managing partner in a partnership. They typically comprise a fully set forth statement of the events, discussion, votes, and objectives of all meetings held by the business or held in otherwise established meetings critical to the operating of the business. All businesses must retain inclusive and truthful records of bookkeeping and accounting. Corporations

In addition, corporations must retain: ✪

details of events and meetings of the incorporators, shareholders, and board members and

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✪

share lists that set forth general personal information of each of the shareholders, as well as the number and class of shares each holds.

Partnerships must also retain: ✪

current contact information for each partner, including dates of joinder and termination;

✪

a clear copy of all partnership formation and operation documents and amendatory documents, if any;

✪

a clear copy of any power(s) of attorney for execution of partnership or amendment certificates;

✪

a clear copy of the partnership’s federal, state, and local income tax returns for the past three (3) years; and,

✪

a clear copy of the partnership’s financial statements for the past three (3) years.

Absent an agreement by the partners, reports, records, and papers of a partnership must be retained at the principal place of business. Limited Liability Companies

Each member of an LLC has the right, subject to reasonable standards, to obtain information and documents from the LLC. The manager of the LLC should, at a place and in a manner accessible to LLC members, retain originals (true copies) of the following: ✪

certificate of formation;

✪

operating agreement;

✪

tax returns; and,

✪

financial and cash contribution records. (N.J.S.A. 42:2B-25.)

However, the LLC’s manager does have the right to keep confidential from the members, for a period of time the manager believes reasonable, any information in the nature of trade secrets or other information the disclosure of which, in the manager’s opinion, is not in the best interest of the LLC. (N.J.S.A. 42:2B-25(c).)

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Records and filings pertaining to taxes must be kept sufficient to show and to establish income, deductions, and other tax items. Employers must retain precise account of employment taxes or reports sufficient to show and to support exemptions, if applicable. Tax records must be retained in an accessible and secure place and must be on hand for inspection. (Treasury Regulations Sec. 31.6001-1(e)(1).)

Storage In maintaining a New Jersey business entity, it is essential to keep accurate business records. Records of business decisions, reports, books, and papers kept by a business entity must be safely stored and retained for inspection. Storage systems and filing methods may vary for such record preservation. The general rule remains that a system of retrieval and backup must be secured to facilitate access and review by the state and government agencies. Corporate Share Register

A share register must be retained and must be kept at the business office used as the principal place of business, or the office of the registered agent. In an action to enforce a request for inspection, courts may compel any reports, books, papers, and/or business records for review.

Format

Reports, records, books, and papers kept by a corporation may be retained in any format that can be converted into reasonably legible written form within a reasonable time. Tax records must be retained in a format that allows the IRS to determine whether there is responsibility for tax liability and must show the quantity of such tax responsibility. (Treasury Regulations. Sec. 31.6001-1(a).) Retaining information and records in computer format requires caution. Security questions could arise, as well as the possibility of disaster and destruction. Backup copies and emergency procedures need to be put into place. While upkeep and maintenance of computer systems can protect the business entity from these problems, conversion of these vital records to written format remains preferable.

Email

The growing technological burst of activity has led to widespread use of email. However, certain confidential property and intellectual property (copyright, patents, and trade secrets) might not serve as an appropriate subject for email.

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Sending, cataloging, and preserving email raises specific care issues related to confidentiality responsibilities. Further, a propensity exists for emailers to make use of relaxed, chatty, unconstricted tone. Such situations create an unprofessional appearance or may generate certain indistinctness that appear questionable. Small corporations should consider discussing use of email with their associates or employees and perhaps require a condition that an email sender or recipient preserve and maintain hard copies. Lost or Unfiled Documents

Lost, misplaced, unfiled, and/or absent reports, records, and papers may prompt the business owners to attempt to locate a copy from a government agency or other entity involved in the registry of the business that may retain copies of such documents. If a particular regulatory filing was not filed (such as a Certificate of Incorporation or formation or related license), it is suggested that the business entity inquire of the New Jersey Secretary of State’s office whether the filing or registry can be made late. It may be advisable to accept the penalties or other consequences for late filing than to operate in absence of appropriate registry.

Litigation Papers

It is understood that all business entities should maintain clear, accurate, and honest business records, papers, and business-related documents. Steer clear of the appearance of impropriety that may suggest the business information may have been ruined or purged in anticipation of litigation or investigation. A periodic removal of documents can and should take place on a regular course of business schedule. NOTE: Do not destroy documents that are or can potentially become necessary in a litigation matter. Attorney-client confidentiality is usually considered commencing at an initial communication with a clients. Recent case law has held that attorneys may wish to discuss with the business client related concerns that effectuate an unintentional waiver of the privacy or privilege in consultations about operational issues. Historically, courts have held that records and paperwork prepared by attorneys or in anticipation of litigation may be removed from litigation discovery. The complexities of record keeping and filing is extensive in the business entity realm. The more information that is kept and maintained relative to your clear business objectives, the more beneficial the result. Documenting business objectives, financial outlays and income, and overall transaction will serve your business well in the long-term.

7

Tax Requirements

Although this book is not designed to address tax consequences of the business entity structure, there are a few tax issues to consider in your business start-up. It is strongly suggested that you consult with an accountant or tax advisor to protect your tax interests associated with forming and operating your business entity. General tax issues are outlined in this chapter in order to provide insight into some tax consequences and concerns.

Taxpayer Identification Numbers Sole proprietors may use their personal social security number as their taxpayer identification number. However, business owners who must withhold taxes must submit an application for an employer identification number (EIN) as required by the Internal Revenue Code (I.R.C.) Sec. 6109. This is done by filing an Application for Employer Identification Number (IRS form SS-4). (form 3, p.194.)

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Federal Income Tax Filings Individuals file annual federal income tax returns on IRS Form 1040 or 1040-A. Most small partnerships, limited liability companies, and S corporations pass through taxable issues from the business entity to the partners, members, and/or shareholders. They then include and reflect the taxed items on their own personal income tax returns. Corporations file annual federal income tax returns on Form 1120 or 1120-A. Partnerships, LLCs, and S corporations are required to remit taxes only to cover benefits of the timing of payments between the entity and the owners when a special fiscal year is used that is not justifiable; and, in the case of S corporations, on certain passive income. Most S corporations’ taxable issues are passed through the business entity to the partners, members, and/or shareholders who include and reflect the taxed items upon their own personal income tax returns. Quarterly Estimated Taxes

C corporations and individuals are subject to a penalty if estimated income taxes are not paid. (I.R.C. Secs. 6654, 6655.) If subject to income tax as an entity, partnerships, LLCs, and S corporations must remit estimated quarterly tax payments.

FICA

The Federal Insurance Contributions Act (FICA) is set forth in I.R.C. Sec. 3101. Employers and employees each pay 7.65% into the social security fund. Of that amount, 6.2% is established and set aside for Old Age, Survivor, and Disability Insurance and 1.45% is reserved for hospital insurance (Medicare). The tax is assessed up to a maximum amount of annual wages and the business employer must withhold an employees’ segment. The employer is liable for it if not paid.

SICA

Self-Employment Contributions Act (SICA) is established by I.R.C. Sec. 1401. SICA requires that sole proprietors or partners pay 15.3% of net earnings into the Social Security fund. Minimal tax relief is provided from the double burden of paying the equivalent of employee and employer portions in that the business owner is permitted to deduct one-half of the amount paid.

Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA), as set forth by I.R.C. Sec. 3301, provides that unemployment insurance be regulated as a joint federal and state program. Federal tax is assessed upon employers who pay employee wages of $1500 or more in any calendar quarter or employ one or more individuals for

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some portion of a day in each of twenty or more calendar weeks. Employers receive credit for up to 90% of their federal tax liability for payments of state tax. Withholding

The payroll period designates the amount of employee wages employers are required to withhold for income taxes. Exemptions and allowances can be claimed by the employee on Form W-4. (form 5, p.199.) Withholding amounts can be determined by percentage and taxable bracket. FICA and income taxes withheld should be reported quarterly. The total amount of taxes withheld related directly to deposit requirements to be deposited monthly on or before the 15th day of the following month. Employers must supply W-2 forms. The employer submits a summary W-3 form, Transmittal of Income and Tax Statements, with copies of W-2 forms on the last day of February to the Social Security Administration. FUTA is reported annually.

State Tax Requirements There are various tax implications associated with forming a business entity. It is advisable to seek the aid of a qualified tax professional in all matters related to creating your own business entity, as this book is a general guide and it is not designed to supply tax advice. Most New Jersey business entities will be subject to the New Jersey Corporation Business Tax Act. (N.J.S.A. 54:10A-1 et seq.) Pursuant to N.J.S.A. 54:10A-3, the only businesses exempt from the tax imposed by this Act are: ✪

corporations that are taxed upon gross receipts;

✪

corporations operating regular bus service;

✪

railroad and canal corporations;

✪

cemetery corporations;

✪

nonprofit corporations and associations;

✪

sewerage and water corporations;

✪

nonstock corporations that provide mutual ownership of housing under federal law by tenants;

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Corporate Income Tax

✪

nonprofit corporations for provision of housing in a retirement community;

✪

insurance companies licensed under the laws of another state; and,

✪

municipal electric corporations.

Corporate net income tax is a tax on the income of domestic corporations and on foreign corporations that do business, carry on activities, have capital or property employed or used, or own property in the state. The tax is based on federal taxable income with some modifications. S corporations are not taxed as entities. Instead, shareholders are taxed on their share of income and gain. S corporations file an information return due thirty days after its federal tax return. An S corporation as such shall not be subject to the tax imposed by the New Jersey Gross Income Tax Act. (N.J.S.A. 54A:1-1 et seq.) However, the S corporation income, dividends, or gains of a shareholder of an S corporation shall be subject to the tax. The tax shall be imposed on the shareholder’s pro rata share, whether or not distributed, of the S corporation income. (N.J.S.A. 54A:5-9.)

Personal Income Tax

Personal income tax holds that residents and nonresidents who have income from sources within the state, including an individual’s distributive share of S corporation income, are subject to personal income tax.

Withholding

Withholding establishes that an employer who maintains an office or transacts business in New Jersey must withhold personal income tax for each payroll period from compensation payments to a resident individual or to a nonresident individual who performs services on behalf of the employer in the state. The amount withheld must be computed in such a manner as to be substantially equivalent to the tax reasonably estimated to be due, resulting from the inclusion in the employee’s New Jersey income of wages received during the calendar year. (N.J.S.A. 54A:7-1.) The employer is liable for tax not withheld or deposited. An information statement must be furnished to each employee on or before February 15 of the succeeding calendar year. It must reflect: ✪

the amount of wages paid by the employer;

✪

the cost of commuter transportation benefits excludable by the employee;

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✪

the cost of benefits not excludable;

✪

the amount deducted and withheld as tax;

✪

the amount deducted and withheld as worker contributions for unemployment and disability insurance; and,

✪

such other information as may be required by the Director of the New Jersey Division of Taxation. (N.J.S.A. 54A:7-2.)

Unemployment Taxes

Unemployment compensation law holds that business employers are liable for the tax at rates based on their unemployment claims experience up to a certain amount of wages paid to each employee. Employers withhold the employees’ portion of the tax. Reports are due and the tax is paid quarterly.

Sales Tax

Imposition of tax on tangible personal property and certain services, including the labor and services of the same vendor in delivering, installing, and applying a tangible personal property purchase, are taxed at a rate of six (6) percent. (N.J.S.A. 54:32B-3.)

Using an Accountant Corporate directors, officers, partners, and partnerships have fiduciary duties to a business entity. They can reduce or escape liability in the exercise of said duties if they rely upon information garnered from an accountant chosen with good business judgment and care, and review and evaluate such information with care. Sole proprietors may be protected by using due care in hiring an accountant. The retention of an independent and reputable accountant by a business entity is highly recommended.

8

Financing

Every new business needs financing. Whether it is to get started, to make purchases, or for growth and expansion, securing funding is critical. Luckily, resources are available.

Sources of Financing The following are some sources of financing that you may explore to capitalize your business entity. ✪

Family, friends, and employees—ask a friend, relative, or associate to go into business with you.

✪

Personal borrowing—borrow from a bank by obtaining a personal loan.

✪

Employee stock option plan—capitalize your business by asking employees to invest in the business, thereby issuing stock to them in exchange for their investment.

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✪

Private offering—offer your business interest to a limited or exclusive group of investors.

✪

Commercial lending—seek a commercial line of credit as a form of startup capital. Banks are eager to assist small businesses. Check with your local commercial bank and inquire as to any special rates for corporate borrowers.

✪

Small Business Administration Loan Guaranty Program—loans are made to any qualifying small business, independently owned and operated, not dominant in its field, and that meets employment or sales standards developed by the SBA using Standard Industrial Classification Codes.

✪

Venture capitalists—privately-owned organizations that invest in small growth businesses. Investment may be in equity or debt, but will involve substantial protections for the venture capitalist.

Small Business Administration The U.S. Small Business Administration (SBA) is an independent federal agency, created by Congress in 1953, to assist, counsel, and champion the efforts of America’s small businesses. SBA’s Loan Guaranty Programs have helped thousands of small companies get started, expand, and prosper. The goal of this program is to increase the amount of capital available to small business through the commercial banking community and some nonbank lending institutions. Your first step in securing SBA loan guaranty assistance is talking to your banker. Only a participating commercial lender may apply for an SBA loan guaranty. Any new business presents a considerable risk to a potential lender. An SBA guaranty can help the lender reduce the risk and approve a business loan that is based on a solid business plan. Oftentimes, the lender can extend a loan on more favorable terms when an SBA guaranty is given. This improves the cash flow position of the new business and the likelihood of success. SBA guaranteed loans are made by private lenders, usually banks, and guaranteed up to 90% by the SBA. Process

There are three principal parties to a SBA guaranteed loan—the small business loan applicant, the lender, and the SBA. The lender plays the central role in the loan-delivery system. The small business loan applicant submits the loan applica-

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tion to the lender, who makes the initial review, and, if approved for submission to the SBA, forwards the application and analysis to the SBA office with an application for a loan guaranty. If approved by the SBA, the lender closes the loan and disburses the funds. SBA, in essence, becomes an insurance policy for the lender. Eligibility Requirements

The SBA defines a small business as one that is independently owned and operated, not dominant in its field, and meets employment or sales standards developed by the Small Business Administration. In general, the following criteria are used by the SBA in determining if a concern qualifies as a small business. ✪

Wholesale—not more than 100 employees.

✪

Retail or service—annual sales or receipts of not more than $3.5 million. (If the business does not fit the size criteria, it may contact the SBA for a specific ruling.)

✪

Manufacturing—not more than 500 employees (numerous exceptions). (If the business does not fit the size criteria, it may contact the SBA for a specific ruling.)

✪

Construction—annual sales or receipts of not more than $7.0 million. (If the business does not fit the size criteria, it may contact the SBA for a specific ruling.)

The type of business is also a criteria for approval. SBA approval cannot be granted if the applicant is engaged in certain activities, including:

Purpose of Loan

✪

newspaper, book, and magazine publishing (and other opinion-forming media);

✪

gambling or speculation; or,

✪

financing real estate held for sale or investment.

SBA loan guarantees may be granted for one or more of the following business purposes: ✪

to finance the purchase of land or buildings, to cover new construction, as well as expansion or conversion of existing facilities;

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Credit Requirements

Amount and Terms

✪

to finance the purchase of equipment, machinery, supplies, or materials;

✪

to supply working capital; or,

✪

for short term seasonal financing, contract financing, and construction financing.

The Small Business Administration general credit criteria requires that a loan applicant must: ✪

have sufficient capital in the business so that when combined with the items applied for in the loan application, he or she can operate on a sound financial basis;

✪

show that the proposed loan is of sound value;

✪

show that the past earnings records and/or future prospects of the firm indicate ability to repay the loan and other fixed debt, if any, out of profits; and,

✪

be able to provide, from his or her own resources, sufficient funds to have a reasonable amount at stake to withstand possible losses, particularly during the early stages, if the venture is a new business.

The actual amount of the SBA’s guaranty will vary with the intended use of loan proceeds. It cannot exceed 90% or $750,000 (whichever is less) of the bank’s loan to the small business. The SBA expects all loans to be repaid as soon a possible. Generally, the maturity will vary with the proposed purpose of the loan. For example, the maturity date will be up to seven years for working capital, up to ten years for machinery and equipment, and up to twenty years for purchase or construction of plant facilities. Repayment (principal and interest) is usually on a monthly installment basis. Variations may be negotiated to meet seasonal cycles of business activity. The interest rates on SBA guaranteed loans are negotiated between the applicant and lender based on the credit merits of the application. The SBA establishes a maximum that banks may charge depending on the maturity of the loan. For

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loans with a maturity of less than seven years, the maximum rate is the prime rate plus 2.25%. For loans with a maturity of seven years or more, the rate can be up to the prime rate plus 2.75%. The time involved for the SBA to process a loan is directly related to the quality of the application received. If the loan package submitted to the SBA by the bank is complete, the SBA will usually have a decision for the institution within two weeks. Collateral

While collateral is not a prime consideration, the SBA requires that all business assets be pledged to secure the loan. In addition, the personal guarantees of the principals, secured by specific personal assets, may be required.

9

Advertising

In any new business, it is essential and well-advised to set aside a certain portion of your start-up funding for advertising and promotion of the business entity. Most companies, whether small or large, rely heavily upon public awareness to spur use or purchasing. Many enterprises may provide a service to the public. Whatever the business, most of them will find it beneficial, if not entirely necessary, to advertise.

Telephone Directory Advertising Perhaps the most widely utilized method of advertising is the telephone directory. The phone book has become the first place people turn to locate a company or enterprise that provides a service or product. The telephone directory is readily accessible to all. The fact that the books are revised and distributed yearly allows businesses to modify and change its advertising on a regular basis as the business grows or changes. There are many packages available for start-up companies from small one-line ads, to business-card sized ads, to half- or full-page promotions. Often, the telephone directory representative will meet with the business owner or agent of the

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business to discuss the best options and prices to meet the objective of the company. Distribution areas can be highlighted with certain ads being targeted to specific areas of the community or the region. The price paid for an ad may seem costly at the outset, however, any business owner quickly learns that a few good customers who have found the business ad in the telephone directory more than compensate for the up-front capital expenditure.

Direct Mail Advertising Certain types of businesses should consider direct mail advertising. Direct mail advertising involves creating a printed letter, flyer, brochure, or leaflet for a mass mailing to designated geographic mailing areas. Direct mailings target a certain sector and tend to be more suited to peaking the interest of a certain type of customer or consumer. Often, direct mailings are sent to individuals in trades or professions to generate the interest of a particular demographic. Direct mail is costly, since postage and distribution rates must be balanced against the fact that the mailing is a one-time advertisement. Bulk mail rates, which may be obtained through application to the United States Post Office, may assist in reducing the cost of the mailing. The benefit of direct mail involves the ability to target a particular audience with the business ad and to more particularly pin-point the customer with a one-onone form of solicitation. Be advised, however, that certain professions, such as the legal practice, prohibit the use of direct solicitation.

Internet Advertising The technological advances of the late-20th and early-21st centuries have brought the Internet, or World Wide Web, into regular, and for many Americans, daily, use. Over 65% of American homes are now online. With the increasingly busy lifestyles ever burgeoning, many potential customers and consumers find the Internet a useful and welcome method of purchasing. Businesses are taking advantage of this technological boom by often paralleling their actual business entity with a virtual e-business. The e-business ultimately becomes the advertising or ordering arm employed by the company to facilitate interest, purchasing, service, or awareness to the public.

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There are many methods of setting up an e-business or a website to promote your business. The most widely used form for a business set up is to employ the use of a Web master or Web designer to assemble and craft your desired website. The Web designer will confer with the business owner to ascertain the objectives of the site. The designer will then create the Web pages and links that the public will view on the Internet. Websites are becoming much more affordable than they had been in the past. There are even certain Web hosting companies that will allow the individual or business owner to design and create their own website for a fee. Many of these new options for Web design are quite simplified and very user-friendly. Self-designed Web pages are inexpensive and provide a fabulous informational tool to promote your advance a new start-up venture.

Radio and Television The vast majority of the public spends more time watching television or listening to the radio than any other event in their day. For this reason, it may be beneficial to consider television or radio advertising. Local television ads and radio spots are set aside in all markets and are often quite reasonable in price. The television and radio ads will sell a certain time-slot or offer a package of varied time slots. Certain times are more expensive than others. Radio ads are effective and hit a great number of people during drive time, which entails the time during which many people are driving to and from their place of employment. Similarly, TV ads are most watched in prime time or during major events. Those times are typically most expensive. The power of a television advertisement or a radio spot can ignite a flurry of business activity. The fact that an individual hears or sees the ad in the course of their daily life activities serves as a reinforcement of the perceived credibility and power of the business. Many businesses choose to invest their advertising capital in this format.

Bulletins and Billboards Advertising seeks repetitive and oft-seen promotions. The places people frequent most are also most often frequented by advertisers. Church and supermarket bulletins are effective and inexpensive methods of getting the business name into the community.

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Likewise, and on a slightly more expensive note, is the ever-popular and increasingly burgeoning billboard. Though often seen as an eyesore, massive and brightly colored billboards are effective tools for advertising your business. Such ads can be purchased in weekly or monthly advertising periods and the cost varies based upon location and number.

Trade Magazines, Journals, or Newsletters For those businesses that target a specific audience, trade, or clientele, the trade magazine, journal, or newsletter can prove to be invaluable. The business can find a niche in the trade magazine and many interested customers or consumers refer to such journals as the source for their particularized needs. Cost is generally reasonable for small advertisements.

10

Training and Counseling Tools

In addition to providing financial assistance to businesses, the Small Business Administration’s (SBA) Business Development Division manages a statewide network of free small business counseling and low-cost training resources designed to meet the needs of the existing business owner as well as the new business start-up.

Business Development Assistance A complete line of small business management aids and publications is available from the Business Development Division. For a low cost, it provides guidance and insight in the following topical areas: ✪

finance;

✪

management;

✪

general management and planning;

✪

crime prevention;

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✪

marketing;

✪

personnel; and,

✪

new products, ideas, inventions.

A directory and order form for publications and videos can be obtained by calling 412-644-2780.

Service Corps of Retired Executives Perhaps the best known SBA sponsored resource is SCORE, the Service Corps of Retired Executives. SCORE is an independent, national, nonprofit organization of retired businessmen and -women who volunteer their time to provide free counseling and low-cost training to small business owners and prospective entrepreneurs. SCORE’s primary market consists of the thousands of people thinking about starting or who recently started their own business. Through a series of monthly workshops and direct one-on-one counseling, SCORE provides the novice entrepreneur a solid base of knowledge for launching a new business venture. Existing business owners can benefit from the experience of retired business owners who have operated their own successful enterprises and have faced the same problems you face today. Some of the workshop topics presented by SCORE chapters include: ✪

business planning;

✪

business insurance;

✪

record keeping;

✪

business taxes;

training and counseling tools

SCORE Offices

✪

marketing;

✪

financing a new venture;

✪

legal aspects of starting a business; and,

✪

federal taxes.

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Local SCORE offices for your county or region can be found from the list that follows. ATLANTIC COUNTY 5100 Harding Highway Mays Landing, NJ 08330 609-909-5339 BERGEN COUNTY Air Services Development Office Teterboro Airport 90 Moonachie Avenue Teterboro, NJ 07608 973-961-4278 Community Services Bldg. of Bergen County 327 E. Ridgewood Avenue Paramus, NJ 07652 201-599-6090 Women’s Center 108 W. Palisade Avenue Englewood, NJ 07631 201-568-1166 Greater Hackensack Chamber of Commerce 5 University Plaza Drive Hackensack, NJ 07601 201-489-3700

Paramus Chamber of Commerce 58 E. Midland Avenue Paramus, NJ 07652 201-261-3344 BURLINGTON COUNTY Small Business Incubator 900 Briggs Road Mt. Laurel, NJ 08054 856-486-3421 CAMDEN COUNTY Fleet Bank Building 4900 Route 70 Pennsauken, NJ 08109-4792 856-486-3421 SBA, Business Information Center Rutgers Small Business Development Center 325 Cooper Street Camden, NJ 08102-1566 856-225-6634 Camden City Store-Echelon Mall 2nd Floor Somerdale & Burnt Mills Road Voorhees, NJ 08043 856-486-3421

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CAPE MAY COUNTY Main Street Development 3306 Pacific Ave, PO Box 1781 Wildwood, NJ 08260 609-465-1542 Cape May Co Chamber of Comm. Crest Haven & Garden State Parkway Cape May Courthouse, NJ 08210 609-465-1542

North Essex Chamber of Commerce 3 Fairfield Avenue West Caldwell, NJ 973-226-5500 GLOUCESTER COUNTY See Camden County

HUDSON COUNTY New Jersey Economic Development Corporation 30 Montgomery Street CUMBERLAND COUNTY Jersey City, NJ 07302 Newfield Nat’l Bank Bldg., Suite 1 201-333-7797 6 North 6th Street Vineland, NJ 08360 Secaucus Free Public Library 609-909-5339 and Business Resource Center 1379 Paterson Plank Road ESSEX COUNTY Secaucus, NJ 07093 Small Business Administration 201-330-2083 2 Gateway Center, 15th Floor Newark, NJ 07102 Union City Public Library 973-645-3982 324 43rd Street Union City, NJ 07087 Air Services Development Office 201-866-7500 Building 80, 2nd Floor Newark International Airport West New York Public Library Newark, NJ 07102 425 60th Street 973-961-4278 West New York, NJ 07093 201-295-5135 Montclair Economic Development Corporation North Bergen Free Public Library 50 Church Street 8411 Bergenline Avenue Montclair, NJ 07042 North Bergen, NJ 07047 973-783-8003 201-869-4715 HUNTERDON COUNTY See Somerset County

training and counseling tools

MERCER COUNTY Trenton Business & Tech’l Ctr 36 South Broad Street Trenton, NJ 08608 609-520-1776 Princeton Chamber of Commerce 216 Rockingham Row Princeton Forrestal Village Princeton, NJ 08540 609-520-1776 MIDDLESEX COUNTY Sayreville Municipal Building 167 Main Street Sayreville, NJ 08872 609-520-1776

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Eastern Monmouth Area Chamber of Commerce 170 Broad Street Red Bank, NJ 07701 732-741-0055 Monmouth County Library 125 Symmes Drive Manalapan, NJ 07726 732-431-7242 Monmouth County Library Eastern Branch -Hwy 35 Shrewsbury, NJ 07701 732-842-5995

Monroe Twp. Library 4 Municipal Plaza Monroe Twp., NJ 08831 609-520-1776

Southern Monmouth Chamber of Commerce Old Mill Plaza 2100 Highway #35, Suite E-23 Sea Girt, NJ 08750 732-974-1151

PNC Bank Building 555 Cranbury Road Rt 535East Brunswick, NJ 08816 609-520-1776

Wall Township Library 2700 Allaire Road Wall, NJ 07719 732-449-8877

MONMOUTH COUNTY Brookdale Comm. College 765 Newman Springs Road Lincroft, NJ 07738 732-224-2568

Western Monmouth Chamber of Commerce 17 Broad Street Freehold, NJ 07728 732-462-3030

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Northern Monmouth Chamber of Commerce 500 State Highway 36, Suite 204-205 Navesink, NJ 07752 732-291-7870 Brookdale College Learning Center 213 Broadway Long Branch, NJ 07740 732-229-8440, Ext. 3000 MORRIS COUNTY Fairleigh Dickinson University 285 Madison Avenue Madison, NJ 07940 973-443-0440 Morris County Chamber of Commerce 25 Lindsley Drive, Suite 105 Morristown, NJ 07960 973-539-3882 Morris County Public Library 30 E. Hanover Avenue Whippany, NJ 07981 973-442-6400 County College of Morris Route 10 & Center Grove Road Student Center Randolph, NJ 07869 973-328-5187 Picatinny Arsenal Innovation Center 3159 Schrader Road Dover, NJ 07801 973-442-6400

St. Lawrence Parish Center 375 Main Street Chester, NJ 07930 973-443-0440 OCEAN COUNTY Dover Twp. Municipal Bldg. 33 Washington Street Toms River, NJ 08753 732-505-6033 Southern Ocean City Chamber of Commerce 265 West Ninth Street Ship Bottom, NJ 08008 609-494-7211 Brick Chamber of Commerce Civic Plaza, Chambersbridge Road Brick, NJ 08723 732-505-6033 Ocean County Library 2 Jackson Drive Jackson, NJ 08527 732-505-6033 Ocean County Library Manahawkin Branch 120 N. Main Street Manahawkin, NJ 08050 732-505-6033 PASSAIC COUNTY North Jersey Regional Chamber of Commerce 1033 Route 46 East Clifton, NJ 07011 973-470-5956

training and counseling tools

Tri-County Chamber of Commerce 2055 Hamburg Turnpike Wayne, NJ 07470 973-831-7788 Greater Paterson Chamber of Commerce 100 Hamilton Plaza Paterson, NJ 07505 973-881-7300 SALEM COUNTY See Camden County SOMERSET COUNTY Raritan Valley Community College Route 28 & Lamington Road North Branch, NJ 08876 908-526-1200 United Trust Bank 675 Franklin Boulevard Somerset, NJ 08875 732-745-5050 Division of Consumer Affairs 20 Grove Street, 2nd Floor Somerville, NJ 08876 908-526-1200 SUSSEX COUNTY Sussex County Community College The Alliance for Corporate & Community Education One College Hill Newton, NJ 07860 973-300-2140

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UNION COUNTY Suburban Chambers of Commerce 71 Summit Avenue Summit, NJ 07901 908-522-1700 Union Township Chamber of Commerce 355 Chestnut Street Union, NJ 07083 908-688-2777 Greater Elizabeth Chamber of Commerce Independence Community Bank 456 N. Broad Street Elizabeth, NJ 07208 908-355-7600 Plainfield Public Library 8th Street at Park Avenue Plainfield, NJ 07060-2517 908-757-1111 Westfield Area Chamber of Commerce 105 Elm Street Westfield, NJ 07091 908-233-3021 WARREN COUNTY County Community College Skylands SBDC 475 Route 57 West Washington, NJ 07882-9605 908-689-9620

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Small Business Institutes The Small Business Institute program allows the SBA to contract long-term consulting services from area colleges and universities to provide in-depth consulting and technical assistance to small businesses, free of charge. For the existing business owner, this program can provide valuable assistance with business and marketing planning, financial and management analysis, and overall business troubleshooting. A team of students work under the guidance of a faculty coordinator with the client small business for a six to eight week duration. Case assignments are made in coordination with the beginning of the fall semester (August/September) and the spring semester (January).

Small Business Innovation and Research Program The Small Business Innovation Research Program (SBIR) came into existence with the enactment of the Small Business Innovation Development Act of 1982. Under SBIR, agencies of the federal government with the largest research and development budgets are mandated to set aside a legislated percentage each year for the competitive award of SBIR funding agreements to qualified small business concerns. The SBA has unilateral authority and responsibility for coordinating and monitoring the government-wide activities of the SBIR program and reporting on its results annually to Congress. Firms interested in participating in SBIR should contact the SBA Office of Innovation, Research, and Technology in Washington, D.C. at 202-205-7777 to be placed on the mailing list for quarterly presolicitation announcements.

Procurement Automated Source System To develop an inventory of small businesses interested in performing federal contracts and subcontracts, the SBA has developed the Procurement Automated Source System (PASS). This national database lists the names of small businesses

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and their capabilities, so that federal procurement officers and private prime contractors can readily identify small firms that are potential contractors and subcontractors. Many federal agencies and some of the nation’s largest prime contractors access the system when searching for small companies to meet their procurement needs.

Minority Business Assistance The SBA Minority Small Business Division works closely with SBA Lending and Business Development officials, Small Business Development Centers, banks, and Economic Development and Procurement officials to help focus programs on the special needs of minority-owned small businesses. Training programs are jointly developed and offered throughout the year to any minority small business owner interested in developing business management abilities and exploiting procurement opportunities in the state, federal, and private sectors. SBA Business Opportunity Specialists serve as the clearinghouse for minority business owners seeking specific management or contract assistance by tapping into the extensive minority and small business assistance programs available throughout the state. Federal Contract Assistance

The 8(a) Contracting and Business Development Program gets its name from the section of the Small Business Act from which it derives its authority. Through the program, existing small businesses owned by socially and economically disadvantaged persons may obtain federal contracts to support a carefully planned program designed to strengthen the competitive viability of the firm. Prospective applicants for participation in the SBA 8(a) program must meet a number of eligibility requirements including, but not limited to: ✪

an established track record of at least two full years of revenue-producing business operation as demonstrated by federal tax returns;

✪

socially and economically disadvantaged;

✪

owned, controlled, and operated full-time by a disadvantaged applicant; and,

✪

a reasonable potential for success through participation in the 8(a) program.

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The 8(a) program can be an effective tool for assisting the minority business entrepreneur. Anyone interested in learning more about the SBA 8(a) program is encouraged to contact the Minority Small Business Division of your local SBA office. To locate an office near you, go to the SBA website at: www.sba.gov

International Trade Assistance One of the primary objectives of the SBA is to encourage small businesses to consider the global marketplace. Through a range of educational and outreach programs, the SBA is encouraging more small businesses to participate in international trade and assist those currently exporting to expand their markets. Export assistance is available through: ✪

export marketing publications and resource guides and

✪

Matchmaker Trade Missions, co-sponsored with the U.S. Department of Commerce, that arrange direct contacts for American firms with potential partners in new international markets.

11

Special Problems Confronting Businesses

Though the theme of this book is the start-up and formation of a business, many businesses face myriad problems in the formative period. Addressing and surmounting these problems, even if they involve a change or wind-up in the business entity, can be crucial for the entrepreneur to avoid economic disaster and move forward. The problems discussed in this chapter are complex in nature and will often require the assistance of attorneys, accountants, or other professionals to solve.

Collecting Debts At some point in time, most businesses face the unpleasant task of seeking collection on an existing account receivable. There are a variety of methods to implement collections of money due or fees owed to the business entity. The most common method employed in most companies involves the issuance of a notice of overdue payment to the perceived obligor. Typically, a thirty-day return time is granted to the obligor in the initial correspondence, with the provision that interest charges will accrue at the expiration of that period. At the conclusion of the thirty-day time frame, a follow-up letter

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should be forwarded to the obligor indicating that no payment has been received and further assessing the previously stated interest charge to the entire balance of the account. The business entity may determine how many interest letters will be sent to the nonpaying party before proceeding to the next step, which may involve filing court proceedings for collection or undertaking notification of credit agencies. Collecting outstanding debts owed to a business presents unique and challenging problems. In many cases, especially those dealing with consumers in the marketplace, these problems arise because of a failure by business to reconcile the need for prompt cash or asset recovery with federal law. Fair Debt Collection Practices Act

Though the business entity’s determination to recover amounts due is understandable, the entity must be guided in collection activity by the federal Fair Debt Collection Practices Act (FDCPA). (15 U.S.C. Sec. 1692 et seq.) The FDCPA regulates the collection practices of creditors and their attorneys. Under this Act, businesses are considered consumer debt collectors subject to civil liability in numerous cases interpreting the FDCPA. Liability to the business entity under FDCPA can include money damages, costs, and attorney’s fees. Multiple violations of the FDCPA can also be the basis for class actions against a corporate or partnership creditor by one or more injured consumer debtors. The FDCPA prohibits a creditor from making false, deceptive, and misleading statements to consumer debtors. The FDCPA’s protections are triggered beginning with the initial communication between the creditor and debtor. Within five days after that initial contact, the creditor must provide the debtor with formal written notice of the unpaid debt. After receiving said notice, the debtor has thirty days to dispute the validity of the debt. If a dispute is lodged, the creditor must provide either written verification of the debt or a copy of a judgment against the debtor. Pursuant to the FDCPA, creditor representations to consumer debtors are not evaluated under the meaning they may have in a particular case. Instead, they are measured under an objective least sophisticated consumer standard. Under that standard, a court assumes that the debtor is a naive and trusting individual and would consider a creditor’s actions or statements to be oppressive, false, or threatening in nature. The FDCPA also prohibits creditors from the design, compilation, or furnishing of forms to debtors that create the false belief that a third person (such as an

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attorney) is participating in the collection of a debt when that person is not so participating. Examples of this can be the inclusion of an attorney’s name on a business’ collection letters or reference to anticipated collection activity by an attorney in correspondence or documents.

Misuse of Apparent Authority Apparent authority results from an expression by a person or entity to a third person that another is its agent. Legally, apparent authority is entirely distinct from express or implied authority. However, the power to deal with third persons arising from apparent authority may be identical to the power created by express or implied authority, since the statements of a principal (such as a corporation) to the third person may be similarly interpreted as those made to the agent. The potential problem this creates is that an unauthorized agent negotiating and/or intending to consummate a transaction, such as a contract or a lease, may claim authority to make a transaction that, in fact, is not possessed. Nevertheless, the business entity may be legally bound by the act of the unauthorized agent. In some instances, the entity can and will attempt to raise the legal defense of a lack of apparent or actual authority on behalf of the agent, and in some instances, such a defense can be highly successful. However, protracted and expensive litigation may be necessary to ascertain exactly what authority was possessed to commence or consummate the transaction. It will be uncertain if the business entity can extricate itself from its duties pursuant to the transaction. Avoidance of a miscommunication of an agent’s authority is essential for the business entity. Fortunately, such a problem can often be avoided by a strict limitation of the entity’s authorized signatories, coupled with internal requirements that any and all transactions or contracts be reviewed and approved only by a duly authorized official.

Criminal Misconduct Criminal activity can be widespread in the business world. Interaction between employees and consumers, as well as the business and creditors, offer many

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potential problems. Further, corporate directors and partners in a partnership face unique potential criminal problems. A business entity can be prosecuted for deceptive business practices if the entity, through its agents, servants, or employees, engages in false representation, alteration or mislabeling of sold goods, or false advertising. Consumers

Similar prosecution can take place if the corporation falsifies statements for the purpose of obtaining property or credit. Omission of information can also be falsification. (N.J.S.A. 2C:21-7.)

Creditors

A director or partner faces significant legal liability for fraud if he or she intentionally acts to hinder a creditor’s enforcement of a security interest. (N.J.S.A. 2C:21-12.) In instances where a corporation or partnership is insolvent, a director or partner who destroys, removes, conceals, encumbers, transfers, or otherwise deals with the business’ property with purpose to defeat or obstruct the claim of any creditor can be found guilty of fraud. (N.J.S.A. 2C:21-13.)

Directors

A director of a corporation is guilty of a crime when he or she purposely or knowingly uses, controls, or operates a corporation for the furtherance or promotion of any criminal object. (N.J.S.A. 2C:21-9c.) A director also commits a crime when, with intent to defraud, he or she concurs in any vote or act of the directors of the corporation to: ✪

make an illegal dividend;

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divide the stock of the corporation;

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discount any note or other debt in payment of an installment of capital stock;

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enable any stockholder to withdraw any part of the money paid on his or her stock; or,

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apply any portion of the funds of the corporation to the purchase of shares of its own stock. (N.J.S.A. 2C:21-9a.)

Similarly, a crime is committed by a director when, with purpose to defraud, he or she issues, participates in issuing, or concurs in a vote to issue any increase in

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the corporation’s capital stock beyond the amount duly authorized by the corporation, or sells, agrees to sell, or is directly interested in the sale of that increased stock. (N.J.S.A. 2C:21-9b.) Any of the foregoing crimes are punishable by substantial fines and/or imprisonment. Partners

A partner is also subject to prosecution for criminal acts. For example, a partner commits a crime if said partner solicits, accepts, or agrees to accept any benefit in exchange for knowingly violating or agreeing to violate his or her duty of fidelity as a partner. This is called a commercial bribe and is punishable by fines and incarceration. (N.J.S.A. 2C:21-10a.)

Corporate Ultra Vires Acts Ultra vires acts are transactions unauthorized by a corporation. They may be undertaken by one or more corporate officers or employees and result in substantial damage to the corporation. The business entity can often be the target of litigation in the aftermath of ultra vires transactions. Unfortunately, neither an act of a corporation nor a transfer of real or personal property to or by a corporation may be invalidated because the corporation was without power to engage in such act or transfer. However, a lack of capacity or power may be asserted in limited instances to seek the following: ✪

to set aside a contract entered into by the corporation without authorization;

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to permit the corporation to sue and recover against an incumbent or former officers or directors of a corporation; or,

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to permit the New Jersey Attorney General to enjoin the corporation from the transaction of unauthorized business or to dissolve the corporation. (N.J.S.A. 14A:3-2.)

Though the foregoing discussion of potential problems is by no means comprehensive, it nevertheless illustrates the need for the business entity to constantly and vigilantly police its activities, as well as the actions of its employees or officers who may act on behalf of the entity.

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Economically Distressed Corporations

A business entity encountering serious economic trouble may be compelled to reorganize the entity or halt business. Reorganization can come in the manner of an out-of-court workout or a court-managed reorganization under Chapter 11 Bankruptcy provisions. (11 U.S.C. beginning with Sec. 1101.) Total liquidation, which will result in dissolution of the entity, occurs through Chapter 7 of the Bankruptcy Code. (11 U.S.C. beginning with Sec. 701.)

Out-of-Court Workout Rehabilitation A business entity may enter into contracts or agreements with creditors to release debts at settled amounts. An out-of-court workout bears similarity to a Chapter 11 filing, however, there is no court involvement. Like a Chapter 11 filing, a realistic business plan covering at least one year of the debtor’s future operations should be created. An out-of-court workout does not provide Chapter 11 protection, but does avoid the costs associated with Chapter 11 procedures. The out-of-court rehabilitation option is often a desirable choice for those entities that wish to reduce their fiscal cost outlays associated with court

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processes. Court costs, delays, and all aspects of court related redress and remedies can create mounting fiscal concerns for a troubled business. Out-ofcourt rehabilitation provides a way to avoid these significant expenditures. Besides cost savings, other advantages that an out-of-court workout may have over Chapter 11 include cases when: ✪

a stigma attached to filing may significantly affect the corporation;

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the creditors are few or not representative of a wide range of various creditors;

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the business can begin paying debts promptly; or,

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the business possessed additional collateral to offer in place of cash.

Chapter 11 Rehabilitation Chapter 11 may be a more favorable alternative than an out-of-court workout in situations when: ✪

litigation matters pending against the corporation are numerous;

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a buyer desires a purchase of assets free of all indebtedness and liens;

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a lender seeks benefit of Chapter 11 debtor-in-possession financing;

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a lenders refuse to accept reasonable conditions;

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the corporation does not wish to reorganize, however, fails to pay debts;

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the corporation seeks tax avoidance or tax forgiveness on income by proceeding under Chapter 11; or,

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significant government claims must be paid first outside of bankruptcy and would receive no priority in bankruptcy filing.

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Filing a Chapter 11 petition, however, is not a panacea. Prosecuting a reorganization requires payment of administrative expenses, including fees for attorneys, accountants, and preservation or upkeep of business property. Moreover, though resort to the bankruptcy process is a powerful tool for the business entity, it may impose a negative stigma upon the entity. Finally, only 20% to 25% of all Chapter 11 filings result in a successful reorganization. Pros and Cons to Filing under Chapter 11

Determining whether to pursue reorganization under Chapter 11 requires a careful review of the pros and cons. Advantages. ✪

Pending and threatened litigation for damages or equitable relief is stayed.

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The business will continue the operation of its business in most cases.

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The business may obtain financing from new lenders by granting them equal or priming liens, over the objection of existing secured lenders.

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Lenders are often more willing to lend under court-supervised terms and conditions.

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A Chapter 11 debtor has the benefit of a favorable statute, the Bankruptcy Code.

Disadvantages. ✪

Filing for Chapter 11 relief may present a negative stigma.

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Only 20% to 25% of all Chapter 11 filings result in a successful reorganization.

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A Chapter 11 debtor is required to promptly demonstrate a positive income flow.

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A Chapter 11 filing increases expenses of the business (cost of counsel, accountants, and experts associated with the case).

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Chapter 7 Liquidation Chapter 7 involves stopping business operations, disbursing business assets to satisfy liabilities, and ultimately terminating and dissolving the business entity. This procedure is administered by a trustee approved by and overseen by the Bankruptcy Court. Chapter 7 bankruptcy sets forth a methodical liquidation wherein liabilities significantly surpass assets and maintaining business functioning is not possible.

New Jersey Remedies Unfortunately, not all businesses succeed. Once in a while, a business faces the challenges of an ever-changing economy or becomes subject to a plight of an effected sector of the population and cannot sustain itself in ongoing business. When such an event occurs, it is necessary to consider the options available to economically distressed businesses under New Jersey law. Assignment for the Benefit of Creditors

Pursuant to N.J.S.A. 2A:19-1 et seq., a business entity may wind up its affairs by assigning its assets for the benefit of creditors. In such an assignment, the business assignor must prepare and file a general inventory of the business’s property, together with a list of creditors and the amount of their respective claims. This must be done according to the best information available in the books and records of the business. The assignment is then provided to the assignee. It is recorded and public notice provided to creditors with a true inventory filed by the assignee under oath. After the presentation of claims by creditors within a fixed period, the assignee disposes of all of the business assignor’s property.

Insolvency and Receivership

When the aggregate value of a business’s property is not sufficient in amount to pay its debts, or the business is unable, by its available assets or the honest use of credit, to pay its debts as they become due, the business is insolvent. (N.J.S.A. 14A:14-2 (f ).) When a business is insolvent (or alleged to be so) or has suspended ordinary business for lack of funds, a creditor, shareholders, or the business itself may commence a receivership action against the business for appointment of a receiver or receivers to take possession of the property of the business (including books, records, and papers). The receiver’s broad powers include authority to institute and defend litigation on behalf of the business, sell, assign, convey, or otherwise dispose of the property of the business, and settle or compromise creditor claims. (N.J.S.A. 14A:14-5, 6, 7.)

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Hiring an Attorney

Whether you need an attorney to assist you in the formation and start-up of a business will depend upon many factors, such as how comfortable you feel handling the matter yourself, the complexity of the business unit to be formed, or if litigation (the process of a lawsuit) could arise from the start-up process. It is advisable to hire an attorney if you expect to form a business with many participants and employees. In the event your business is the subject of a lawsuit, there is no choice, as a business must be represented by counsel in the courts of New Jersey. A general rule is that you should consider hiring an attorney whenever you reach a point where you no longer feel comfortable representing yourself. This point will vary greatly with each person, so there is no easy way to be more definite. This chapter discusses some of the pros and cons of hiring an attorney and some of the elements you may wish to consider in making this decision.

Costs One of the first questions you will want to consider, especially in the early stages of the corporation’s existence, is the cost of an attorney. Attorneys come in all

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ages, shapes, sizes, sexes, racial, and ethnic groups—and also price ranges. For a very rough estimate, you can expect an attorney to charge anywhere from $250 to $20,000 for business law matters. Lawyers usually charge an hourly rate for contested business law matters, ranging from about $100 to $300 per hour. Most new (and therefore less expensive) attorneys would be quite capable of handling a simple business matters, but if your situation became more complicated, you would probably prefer a more experienced lawyer. As a general rule, you can expect costs to be more than what you think at the beginning of the matter.

Advantages and Disadvantages to Hiring a Lawyer The following are some advantages to hiring a lawyer. ✪

You can let your lawyer worry about all of the details. By having an attorney, you need only become generally familiar with the contents of this book, as it will be your attorney’s job to file the proper papers in the correct form, deal with the courts, and to deal with your opponent and your opponent’s attorney.

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Lawyers provide professional assistance with problems. In the event your case is complicated or suddenly becomes complicated, it is an advantage to have an attorney who is familiar with your case. It can also be comforting to have a lawyer to turn to for advice and to answer your questions.

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In litigation, judges and other lawyers may take you more seriously. Most judges prefer that litigants have lawyers. They feel this helps a case proceed in a more orderly fashion.

On the other hand, there are also advantages to representing yourself, such as: ✪

saving the cost of a lawyer and

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avoiding the difficult process of selecting an attorney.

You may want to look for an attorney who will be willing to accept an hourly fee to answer your questions and give you help as you need it. This way, you will save some legal costs but still receive some professional assistance. You will also

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establish a relationship with an attorney who will be somewhat familiar with your organization or a particular case in the event things become complicated and you need a full-time lawyer.

Selecting a Lawyer Selecting a lawyer is a two-step process. First, you need to decide with which attorney you will make an appointment, then you need to decide if you wish to hire (retain) that attorney. Ask a Friend

A common (and frequently the best) way to find a lawyer is to ask someone you know to recommend one to you. This is especially helpful if the lawyer represented your friend in a business law matter.

Lawyer Referral Service

You can find a referral service by looking in the Yellow Pages under Attorney Referral Services or Attorneys. This is a service, usually operated by a bar association, that is designed to match a client with an attorney handling cases in the area of law the client needs. The referral service does not guarantee the quality of work, the level of experience, nor ability of the attorney. Finding a lawyer in this manner will at least connect you with one who is interested in business law and business law matters and probably has some experience in this area.

Yellow Pages

Check under the heading for Attorneys in the Yellow Pages. Many of the lawyers and law firms will place display ads indicating their areas of practice and educational backgrounds. Look for firms or lawyers that indicate they practice in areas such as Incorporations, Small Business, and Business Law. Big ads are not necessarily indicative of expertise. Keep in mind that some lawyers do not need to advertise.

Ask another Lawyer

If you have used the services of an attorney in the past for some other matter (for example, a real estate closing, traffic ticket, or a will), you may want to call and ask if he or she could refer you to an attorney whose ability in the area of business law is respected.

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Evaluating Lawyers From your search, you should select three to five lawyers worthy of further consideration. Your first step will be to call each attorney’s office, explain that you are interested in seeking representation and aid in business law matters, and ask the following questions. ✪

Does the attorney (or law firm) handle this type of matter?

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What is the fee range and what is the cost of an initial consultation? (Do not expect to get a definite answer on a business law fee, but the attorney may be able to give you a range or an hourly rate. You will probably need to meet with the lawyer for anything more detailed.)

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How soon can you get an appointment? (Most offices require you to make an appointment.)

Once you get in contact with the attorney at the appointment, ask the following questions. ✪

How much will it cost?

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How will the fee be paid?

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How long has the attorney been in practice?

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How long has the attorney been in practice in New Jersey?

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What percentage of the attorney’s cases involve business law cases or other business law matters? (Do not expect an exact answer, but you should get a rough estimate that is at least twenty percent.)

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How long will it take? (Do not expect an exact answer, but the attorney should be able to give you an average range and discuss things that may make a difference.)

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If you get acceptable answers to these questions, it’s time to ask yourself the following questions about the lawyer. ✪

Do you feel comfortable talking to the lawyer?

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Is the lawyer friendly toward you?

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Does the lawyer seem confident in himself or herself?

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Does the lawyer seem to be straight-forward with you and able to explain issues so you understand?

If you get satisfactory answers to all of these questions, you probably have a lawyer with whom you will be happy to work. Most clients are happiest with an attorney with whom they feel comfortable.

Working with a Lawyer In general, you will work best with your attorney if you keep an open, honest, and friendly attitude. Also, consider the following suggestions. Ask Questions

If you want to know something or if you do not understand something, ask your attorney. If you do not understand the answer, tell your attorney and ask him or her to explain it again. You should not be embarrassed to ask questions. Many people who say they had a bad experience with a lawyer either did not ask enough questions or had a lawyer who would not take the time to explain things to them. If your lawyer is not taking the time to explain what he or she is doing, it may be time to look for a new lawyer.

Give Complete Information

Anything you tell your attorney is confidential. An attorney can lose his or her license to practice if he or she reveals information without your permission. So do not hold back. Tell your lawyer everything, even if it does not seem important to you. There are many things that seem unimportant to a nonattorney, but can change the outcome of a case. Also, do not hold something back because you are afraid it will hurt your case. It will definitely hurt your case if your lawyer does not find out about it until he or she hears it in court from your opponent’s attorney. If your lawyer knows in advance, he or she can plan to eliminate or reduce damage to your case.

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Accept Reality

Listen to what your lawyer tells you about the law and the system. It will do you no good to argue because the law or the system does not work the way you think it should. For example, if your lawyer tells you that the judge cannot hear your case for two weeks, do not try demanding that he or she set a hearing tomorrow. By refusing to accept reality, you are only setting yourself up for disappointment. And remember—it is not your attorney’s fault that the system is not perfect or that the law does not say what you would like it to say.

Be Patient

The advice to be patient applies both to being patient with the system (which is often slow), as well as being patient with your attorney. Do not expect your lawyer to return your phone call within an hour. Your lawyer may not be able to return it the same day. Most lawyers are very busy. It is rare that an attorney can maintain a full caseload and still make each client feel as if he or she is the only client. Despite the popular trend toward lawyer-bashing, you should remember that many lawyers are good people who wish to aid and assist the public.

Talk to the Secretary

Your lawyer’s secretary can be a valuable source of information. Be friendly and get to know the secretary. Often, he or she will be able to answer your questions and you will not get a bill for the time you talk to the secretary.

Your Opponent

It is your lawyer’s job to communicate with your opponent or with your opponent’s lawyer. Let your lawyer do his or her job. Many lawyers have had clients lose or damage their cases when the client decides to say or do something on their own.

Be On Time

The advice to be on time applies to both appointments with your lawyer and to court hearings.

Keep Your Case Moving

Many lawyers operate on the old principle of the squeaking wheel gets the oil. Work on a case tends to be put off until a deadline is near, an emergency develops, or the client calls. There is a reason for this. Many lawyers take more cases than can be effectively handled in order to earn the income they desire. Your task is to become a squeaking wheel that does not squeak too much. Whenever you talk to your lawyer, ask the following questions. ✪

What is the next step?

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When do you expect it to be done?

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When should I talk to you next?

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Call your lawyer if you do not hear anything when you expect. Do not remind your lawyer of the missed call. Just ask how things are going.

Legal Payments There are several manners by which a lawyer may accept payment from you. If you are a business client, you may fall into one of the categories discussed below. ✪

Hourly or per diem rate—most attorneys bill by the hour. If travel is involved, they may bill by the day.

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Flat fee—some attorneys suggest a flat fee for certain routine matters, such as reviewing a contract or closing a loan.

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Monthly retainer—if you anticipate a lot of routine questions, one option is a monthly fee that entitles you to all the routine legal advice you need.

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Contingent fee—for lawsuits or other complex matters, lawyers often work on a contingency basis. This means that if they succeed, they receive a percentage of the proceeds (usually between 25% and 40%). If they fail, they receive only out-of-pocket expenses.

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Value billing or partial contingency—some law firms bill at a higher rate on business matters if the attorneys obtain a favorable result, such as negotiating a contract that saves the client thousands of dollars. Try to avoid lawyers who use this method.

If you think one method will work better for you than another, do not hesitate to bring it up with the attorney. Many will offer flexible arrangements to meet your needs. When you hire an attorney, draw up an agreement (called an engagement letter) detailing the billing method. If more than one attorney works on your file, make sure you specify the hourly rate for each individual so you are not charged $200 an hour for legal work done by an associate who only charges $75. This agreement should also specify what expenses you are expected to reimburse. Some attorneys expect to be reimbursed for meals, secretarial overtime, postage, and photocopies. Others consider these expenses the costs of doing business. Agree to reimburse only reasonable and necessary out-of-pocket expenses.

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No matter what type of billing method your attorney uses, there are steps you can take to control legal costs. Estimates

Have the attorney estimate the cost of each matter in writing, so you can decide whether it’s worth pursuing. If the bill comes in over the estimate, ask why. Some attorneys also offer caps, guaranteeing in writing the maximum cost of a particular service. This helps you budget and gives you more certainty than just getting an estimate.

Time Increments

Learn what increments of time the firm uses to calculate its bill. Attorneys keep track of their time in increments as short as six minutes or as long as half an hour. Will a five-minute phone call cost you $20 or $120?

Itemized Bills

Request monthly, itemized bills. Some lawyers wait until a bill gets large before sending an invoice. Ask for monthly invoices instead and review them. The most obvious red flag is excessive fees. This means too many people—or the wrong people—are working on your file. It is also possible you may be mistakenly billed for work done for another client, so review your invoices carefully.

Discounts

See if you can negotiate prompt-payment discounts. Request that your bill be discounted if you pay within thirty days of your invoice date. A 5% discount on legal fees can add thousands of dollars to your yearly bottom line.

Be Prepared

Before you meet with or call your lawyer, have the necessary documents with you and know exactly what you want to discuss. Fax needed documents ahead of time so your attorney does not have to read them during the conference and can instead get right down to business.

Regular Meetings

Meet with your lawyer regularly. At first glance, this may not seem like a good way to keep costs down, but you will be amazed at how much it reduces the endless rounds of phone tag that plague busy entrepreneurs and attorneys. More important, a monthly five- or ten-minute meeting (even by phone) can save you substantial sums by nipping small legal problems in the bud before they have a chance to grow.

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Firing Your Lawyer If you can no longer work with your lawyer, it is time to either go it alone or get a new attorney. You will need to send your lawyer a letter stating that you no longer desire his or her services and are discharging him or her from your case. Also state that you will be coming by his or her office the following day to pick up your file. The attorney does not have to give you his or her own notes or other work he or she has in progress. However, he or she must give you the essential contents of your file (such as copies of papers already filed or prepared and billed for, and any documents that you provided). If the lawyer refuses to give you your file, for any reason, contact the New Jersey Bar about filing a complaint (grievance) against the lawyer. Of course, you will need to settle any remaining fees charged.

Glossary

A accounts payable. Bills that are owed. accounts receivable. The amounts of money due or owed to a business or professional by customers or clients. action. A lawsuit in which one party (or parties) sues another. addendum. An addition to a completed written document. adjusted basis. In accounting, the original cost of an asset adjusted for costs of improvements, depreciation, damage and other events that may have affected its value during the period of ownership. advance. A payment that is made before it is legally due, such as before shipment is made, a sale is completed, a book is completed by the author, or a note is due to be paid.

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affidavit. Any written document in which the signer swears under oath before a notary public or someone authorized to take oaths (like a County Clerk), that the statements in the document are true. agency. The relationship of a person (called the agent) who acts on behalf of another person, company, or government, known as the principal. agent. A person who is authorized to act for another (the agent’s principal) through employment, contract, or apparent authority. agreement. Any meeting of the minds, even without legal obligation. amend. To alter or change by adding, subtracting, or substituting. antitrust laws. Acts adopted by Congress to outlaw or restrict business practices considered to be monopolistic or that restrain interstate commerce. apparent authority. The appearance of being the agent of another (employer or principal) with the power to act for the principal. appreciate. To increase in value over a period of time through the natural course of events, including inflation, greater rarity, or public acceptance. asset. Generally, any item of property that has monetary value. assignment for benefit of creditors. A method used for a debtor to work out a payment schedule to his or her creditors through a trustee who receives directly a portion of the debtor’s income on a regular basis to pay the debtor’s bills. association. Any group of people who have joined together for a particular purpose. attorney. An agent or someone authorized to act for another. attorney of record. The attorney who has appeared in court and/or signed pleadings or other forms on behalf of a client. attorney-client privilege. The requirement that an attorney may not reveal communications, conversations and letters between himself or herself and his or

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her client, under the theory that a person should be able to speak freely and honestly with his or her attorney without fear of future revelation. attorney-in-fact. Someone specifically named by another through a written power of attorney to act for that person in the conduct of the appointer’s business. audit. An examination by a trained accountant of the financial records of a business, including noting improper or careless practices, recommendations for improvements, and a balancing of the books. auditor. An accountant who conducts an audit to verify the accuracy of the financial records and accounting practices of a business. authority. A right coupled with the power to do an act or order others to act.

B business. Any activity or enterprise entered into for profit.

C carrying on business. Pursuing a particular occupation on a continuous and substantial basis. certificate of incorporation. A document which some states issue to prove a corporation’s existence upon the filing of articles of incorporation. In most states the articles are sufficient proof. certified check. A check issued by a bank which certifies that the maker of the check has enough money in his/her account to cover the amount to be paid. charter. The name for articles of incorporation in some states, as in a corporate charter.

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check. A draft upon a particular account in a bank, in which the drawer or maker (the person who has the account and signs the check) directs the bank to pay a certain amount to a payee. civil law. A generic term for noncriminal law. civil liability. A potential responsibility for payment of damages or other courtenforcement in a lawsuit, as distinguished from criminal liability, which means open to punishment for a crime. civil penalties. Fines or surcharges imposed by a governmental agency to enforce regulations such as late payment of taxes, failure to obtain a permit, etc. claim. To make a demand for money, for property, or for enforcement of a right provided by law. close corporation. A corporation which is permitted by state law to operate more informally than most corporations (allowing decisions without meetings of the board of directors) and has only a limited number of shareholders. Usually a close corporation’s shareholders are involved in the actual operation of the business and often are family members. collateral. The property pledged to secure a loan or debt, usually funds or personal property as distinguished from real property. collusion. Where two persons (or business entities through their officers or other employees) enter into a deceitful agreement, usually secret, to defraud and/or gain an unfair advantage over a third party, competitors, consumers, or those with whom they are negotiating. comingling. The act of mixing the funds belonging to one party with those of another party, or, most importantly, with funds held in trust for another. common law. The traditional unwritten law of England. common stock. The stock in a corporation in which dividends are calculated upon a percentage of net profits, with distribution determined by the board of directors. company. Any formal business entity for profit, which may be a corporation, a partnership, association or individual proprietorship.

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complaint. The first document filed with the court by a person or entity claiming legal rights against another. conflict of interest. A situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. consideration. Something of value exchanged for the performance or promise of performance by the other party in a contract. corporation. An organization formed with state governmental approval to act as an artificial person to carry on business (or other activities), which can sue or be sued, and (unless it is non-profit) can issue shares of stock to raise funds with which to start a business or increase its capital. counter offer. An offer made in response to a previous offer by the other party during negotiations for a final contract. court. Any official tribunal presided over by a judge or judges in which legal issues and claims are heard and determined. creditor. A person or entity to whom a debt is owed.

D damages. The amount of money which a plaintiff (the person suing) may be awarded in a lawsuit. depreciate. To reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. dissolution of corporation. A termination of a corporation, by either a) voluntarily by resolution, paying debts, distributing assets and filing dissolution documents with the Secretary of State, or b) by state suspension for not paying corporate taxes or some other action of the government.

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doing business. Carrying on the normal activities of a corporation on a regular basis or with substantial contacts—not just an occasional shipment.

E et seq. Abbreviation for the Latin phrase et sequentes meaning “and the following.” Commonly used by attorneys to include numbered lists, pages or sections after the first number is stated. expense. In business accounting and business taxation, any current cost of operation, such as rent, utilities and payroll, as distinguished from capital expenditure for long-term property and equipment. express contract. A contract in which all elements are specifically stated (offer, acceptance, consideration), and the terms are stated, as compared to an “implied” contract in which the existence of the contract is assumed by the circumstance.

F face value. In shares of stock, the original cost of the stock shown on the certificate, or par value. fiduciary. A person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances that require total trust, good faith and honesty. fiduciary relationship. Where one person places complete confidence in another in regard to a particular transaction or one's general affairs or business. foreign corporation. A corporation that is incorporated under the laws of a different state or nation. full disclosure. The need in business transactions to tell the whole truth about any matter which the other party should know in deciding to buy or contract.

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G good faith. An honest intent to act without taking an unfair advantage over another person or to fulfill a promise to act, even when some legal technicality is not fulfilled.

H hidden asset. An item of value that does not show on the books of a business, often excluded for some improper purpose such as escaping taxation or hiding it from a bankruptcy trustee.

J joint and several. A debt or a judgment for negligence, in which each debtor (one who owes) or each judgment defendant (one who has a judgment against him/her) is responsible (liable) for the entire amount of the debt or judgment. joint enterprise. A generic term for an activity of two or more people, usually (but not necessarily) for profit, which may include partnership, joint venture or any business in which more than one person invests, works, has equal management control and/or is otherwise involved for an agreed upon goal or purpose. joint liability. When two or more persons are both responsible for a debt, claim, or judgment. joint venture. An enterprise entered into by two or more people for profit and for a limited purpose. judgment creditor. The winning plaintiff in a lawsuit to whom the court decides the defendant owes money. jurisdiction. The authority given by law to a court to try cases and rule on legal matters within a particular geographic area and/or over certain types of legal cases.

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L limited liability. The maximum amount a person participating in a business can lose or be charged in case of claims against the company or its bankruptcy. limited partnership. A special type of partnership common when people need funding for a business, or when they are putting together an investment in a real estate development. liquidate. To sell the assets of a business, paying bills and dividing the remainder among shareholders, partners or other investors. litigation. Any lawsuit or other resort to the courts to determine a legal question or matter.

M merger. The joining together of two corporations in which one corporation transfers all of its assets to the other, which continues to exist. minutes. The written record of meetings, particularly of boards of directors and/or shareholders of corporations, kept by the secretary of the corporation or organization.

N net. The amount of money or value remaining after all costs, losses, taxes, depreciation of value and other expenses and deductions have been paid and/or subtracted. notary public. A person authorized by the state in which the person resides to administer oaths (swearings to truth of a statement), take acknowledgments, certify documents and to take depositions if the notary is also a court reporter. The signature and seal or stamp of a notary public is necessary to attest to the

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oath of truth of a person making an affidavit and to attest that a person has acknowledged that he or she executed a deed, power of attorney, or other document, and is required for recording in public records.

O obligation. A legal duty to pay or do something. offer. A specific proposal to enter into an agreement with another.

P partner. One of the co-owners and investors in a partnership. partnership. A business enterprise entered into for profit which is owned by more than one person. pierce the corporate veil. to prove that a corporation exists merely as a completely controlled front (alter ego) for an individual or group, so that in a lawsuit the individual defendants can be held responsible (liable) for damages for actions of the corporation. preferred dividend. A payment of a corporation’s profits to holders of preferred shares of stock. preferred stock. A class of shares of stock in a corporation that gives the holders priority in payment of dividends (and distribution of assets in case of dissolution of the corporation) over owners of common stock. principal place of business. The location of the head office of a business where the books and records are kept and/or management works. puffing. The exaggeration of the good points of a product, a business, real property and the prospects for future rise in value, profits and growth.

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Q quasi-contract. A situation in which there is an obligation as if there was a contract, although the technical requirements of a contract have not been fulfilled. quasi-corporation. A business which has operated as a corporation without completing the legal requirements, often in the period just before formal incorporation.

R ratification. Confirmation of an action that was not preapproved or not authorized, usually by a principal (employer) who adopts the acts of his or her agent (employee). reasonable. In law, just, rational, or appropriate in the circumstances. reasonable time. In contracts, common custom in the business or under the circumstances will define “reasonable time” to perform or pay. registration statement. A detailed report to be filed with the Securities and Exchange Commission by a corporation making an issuance of shares to be advertised and sold to the general public in more than one state (in interstate commerce), which must be approved by the SEC before it will approve the stock issuance. register. The record of shareholders, and issuance and transfer of shares on the records of the corporation. reorganization. As applied to bankruptcy, a corporation in deep financial trouble may be given time to reorganize while being protected from creditors by the United States Bankruptcy Court.

S shareholder. The owner of one or more shares of stock in a corporation. Also called a stockholder.

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shareholders’ agreement. An employment agreement among the shareholders of a small corporation permitting a shareholder to take a management position with the corporation without any claim of conflict of interest or self-dealing against the shareholder/manager. shareholders’ derivative action. A lawsuit by a corporation’s shareholders, theoretically on behalf of the corporation, to protect and benefit all shareholders against the corporation for improper management. shareholders’ meeting. A meeting, usually annual, of all shareholders of a corporation to elect the board of directors and hear reports on the company’s business situation. stock. A share in the ownership of a corporation. Also called shares. stock certificate. A printed document that states the name, incorporation state, date of incorporation, registered number of the certificate, number of shares of stock in a corporation the certificate represents, name of the shareholder, date of issuance and the number of shares authorized in the particular issue of stock, signed by the president and secretary of the corporation. On the reverse side of the certificate is a form for transfer of the certificate to another person. stock option. The right to purchase stock in the future at a price set at the time the option is granted. stockholder. A shareholder in a corporation.

T tax return. The form to be filed with a taxing authority by a taxpayer that details income, expenses, exemptions, deductions and calculation of taxes chargeable to the taxpayer.

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U unfair competition. Use of wrongful and/or fraudulent business methods to gain an unfair advantage over competitors, including: a) untrue or misleading advertising, b) misleading customers by imitative trademark, name or package, or c) falsely disparaging another’s product. unissued stock. A corporation’s shares of stock that are authorized by its articles of incorporation, but have never been issued (sold) to anyone.

V voting trust. A trust that solicits vote proxies of shareholders of a corporation to elect a board of directors and vote on other matters at a shareholders’ meeting.

W winding up. The liquidating of the assets of a corporation, settling accounts, paying bills, distributing remaining assets to shareholders, and then dissolving the business.

Appendix A: Statutes

This Appendix contains selected sections from New Jersey's Uniform Partnership Act and Limited Liability Corporation Act. These statutes provide comprehensive information and direction related to the proper formation and operation of business entities in New Jersey. PARTNERSHIPS AND PARTNERSHIP ASSOCIATIONS 42:1A-4. Agreement governing partners, partnership; prohibited terms 4. a. Except as otherwise provided in subsection b. of this section, relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this act governs relations among the partners and between the partners and the partnership. b.The partnership agreement shall not: (1) unreasonably restrict the right of access to books and records under subsection b. of section 23 of this act; (2) reduce the duty of loyalty under subsection b. of section 24 or subsection b. of section 33 of this act so as to permit a partner to engage in conduct which is intentionally injurious to the partnership;

(3) unreasonably reduce the duty of care under subsection c. of section 24 or paragraph (3) of subsection b. of section 33 of this act; (4) vary the right of a court to expel a partner in the events specified in subsection e. of section 31 of this act; (5) vary the requirement to wind up the partnership business in cases specified in subsection d., e. or f. of section 39 of this act; (6) vary the law applicable to a limited liability partnership under subsection b. of section 7 of this act; or (7) restrict rights of third parties under this act. 42:1A-6. Statements filed in the Division of Commercial Recording; effects, fees 6. a. A statement may be filed in the office of the Division of Commercial Recording in the Department of the Treasury. A certified copy of a statement that is filed in an office in another state may be filed in the office of the Division of Commercial Recording in the

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Department of the Treasury. This statement may indicate the authority of one or more particular partners with respect to any matter or class of matters. In addition, either filing has the effect provided in this act with respect to partnership property located in or transactions that occur in this State. b.A certified copy of a statement that has been filed in the office of the Division of Commercial Recording in the Department of the Treasury and recorded in the office of the county recording officer has the effect provided for recorded statements in this act. A recorded statement that is not a certified copy of a statement filed in the office of the Division of Commercial Recording in the Department of the Treasury does not have the effect provided for recorded statements in this act. c.A statement filed by a partnership shall be executed by at least two partners. Other statements shall be executed by a partner or other person authorized by this act. An individual who executes a statement as, or on behalf of, a partner or other person named as a partner in a statement shall personally declare under penalty of perjury that the contents of the statement are accurate. d.A person authorized by this act to file a statement may amend or cancel the statement by filing an amendment or cancellation that names the partnership, identifies the statement, and states the substance of the amendment or cancellation. e.A person who files a statement pursuant to this section shall promptly send a copy of the statement to every nonfiling partner and to any other person named as a partner in the statement. Failure to send a copy of a statement to a partner or other person does not limit the effectiveness of the statement as to a person not a partner. f.The Division of Commercial Recording in the Department of the Treasury may collect a fee for filing or providing a certified copy of a statement. The county recording officer may collect a fee for recording a statement. 42:1A-7. Law governing relations among partners, between partners and partnership 7. a. Except as otherwise provided in subsection b. of this section, the law of the jurisdiction in which a partnership has its chief executive office governs relations among the partners and between the partners and the partnership. b.The law of this State governs relations among the partners and between the partners and the partnership and the liability of partners for an obligation of a limited liability partnership. 42:1A-8. Partnership governed by this act and its amendments 8.A partnership governed by the provisions of this act is subject to any amendment to or repeal of this act. 42:1A-9. Entity as partnership; limited partnership 9. a. A partnership is an entity distinct from its partners.

b.A limited liability partnership continues to be the same entity that existed before the filing of a statement of qualification under section 47 of this act. 42:1A-10. Formation of partnership; rules for determining formation 10. a. Except as otherwise provided in subsection b. of this section, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. b.An association formed under a statute other than this act, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this act. c.In determining whether a partnership is formed, the following rules apply: (1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property. (2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived. (3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (a) of a debt by installments or otherwise; (b) for services as an independent contractor or of wages or other compensation to an employee; (c) of rent; (d) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; (e) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or (f ) for the sale of the goodwill of a business or other property by installments or otherwise. 42:1A-11. Property of the partnership 11. Property acquired by a partnership is property of the partnership and not of the partners individually. 42:1A-12. Acquisition of partnership property; presumptions 12. a. Property is partnership property if acquired in the name of: (1) the partnership; or (2) one or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership. b.Property is acquired in the name of the partnership by a transfer to: (1) the partnership in its name; or

appendix a: statutes (2) one or more partners in their capacity as partners in the partnership, if the name of the partnership is indicated in the instrument transferring title to the property. c.Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership. d.Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes. 42:1A-13. Partner considered agent of partnership; limitation 13. Subject to the effect of a statement of partnership authority under section 15 of this act: a.Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. b.An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners. 42:1A-14. Transfer of partnership property 14. a. Partnership property may be transferred as follows: (1) subject to the effect of a statement of partnership authority under section 15 of this act, partnership property held in the name of the partnership may be transferred by an instrument of transfer executed by a partner in the partnership name. (2) partnership property held in the name of one or more partners with an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, but without an indication of the name of the partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held. (3) partnership property held in the name of one or more persons other than the partnership, without an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held.

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b.A partnership may recover partnership property from a transferee only if it proves that execution of the instrument of initial transfer did not bind the partnership under section 13 of this act and: (1) as to a subsequent transferee who gave value for property transferred under paragraphs (1) and (2) of subsection a. of this section, proves that the subsequent transferee knew or had received a notification that the person who executed the instrument of initial transfer lacked authority to bind the partnership; or (2) as to a transferee who gave value for property transferred under paragraph (3) of subsection a. of this section, proves that the transferee knew or had received a notification that the property was partnership property and that the person who executed the instrument of initial transfer lacked authority to bind the partnership. c.A partnership may not recover partnership property from a subsequent transferee if the partnership would not have been entitled to recover the property, under subsection b. of this section, from any earlier transferee of the property. d.If a person holds all of the partners’ interests in the partnership, all of the partnership property vests in that person. The person may execute a document in the name of the partnership to evidence vesting of the property in that person and may file or record the document. 42:1A-15. Statement of partnership authority; filing 15. a. A partnership may file a statement of partnership authority, which: (1) shall include: (a) the name of the partnership; (b) the street address of its chief executive office and of one office in this State, if there is one; (c) the names and mailing addresses of all of the partners or of an agent appointed and maintained by the partnership for the purpose of subsection b. of this section; and (d) the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership; and (2) may state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter. b.If a statement of partnership authority names an agent, the agent shall maintain a list of the names and mailing addresses of all of the partners and make it available to any person on request for good cause shown. c.If a filed statement of partnership authority is executed pursuant to subsection c. of section 6 of this act, and states the name of the partnership, but does not contain all of the other information required by subsection a. of this section, the statement nevertheless operates with respect to a person not a partner as provided in subsections d. and e. of this section.

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d.A filed statement of partnership authority supplements the authority of a partner to enter into transactions on behalf of the partnership as follows: (1) except for transfers of real property, a grant of authority contained in a filed statement of partnership authority is conclusive in favor of a person who gives value without knowledge to the contrary, so long as and to the extent that a limitation on that authority is not then contained in another filed statement. A filed cancellation of a limitation on authority revives the previous grant of authority. (2) a grant of authority to transfer real property held in the name of the partnership contained in a certified copy of a filed statement of partnership authority recorded in the office of the county recording officer is conclusive in favor of a person who gives value without knowledge to the contrary, so long as and to the extent that a certified copy of a filed statement containing a limitation on that authority is not then of record in the office of the county recording officer. The recording in the office of the county recording officer of a certified copy of a filed cancellation of a limitation on authority revives the previous grant of authority. e.A person not a partner is deemed to know of a limitation on the authority of a partner to transfer real property held in the name of the partnership if a certified copy of the filed statement containing the limitation on authority is of record in the office of the county recording officer. f.Except as otherwise provided in subsections d. and e. of this section and sections 37 and 43 of this act, a person not a partner is not deemed to know of a limitation on the authority of a partner merely because the limitation is contained in a filed statement. 42:1A-16. Statement of denial; limitation on authority 16. A partner or other person named as a partner in a filed statement of partnership authority or in a list maintained by an agent pursuant to subsection b. of section 15 of this act may file a statement of denial stating the name of the partnership and the fact that is being denied, which may include denial of a person’s authority or status as a partner. A statement of denial is a limitation on authority as provided in subsections d. and e. of section 15 of this act. 42:1A-17. Partnership liable for loss, injury 17. a. A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with the authority of the partnership. b.If, in the course of the partnership’s business or while acting with the authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss. 42:1A-18. Partnership obligations; liability of partners 18. a. Except as otherwise provided in subsections b. and c. of this section, all partners are liable jointly and severally

for all obligations of the partnership unless otherwise agreed by the claimant or provided by law. b.A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner. c.An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. This subsection applies notwithstanding anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership under subsection b. of section 47 of this act. 42:1A-19. Suits, actions by or against partnership; satisfaction of judgments 19. a. A partnership may sue and be sued in the name of the partnership. b.An action may be brought against the partnership and, to the extent not inconsistent with section 18 of this act, any or all of the partners in the same action or in separate actions. c.A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership shall not be satisfied from a partner’s assets unless there is also a judgment against the partner. d.A judgment creditor of a partner shall not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under section 18 of this act and: (1) a judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part; (2) the partnership is a debtor in bankruptcy; (3) the partner has agreed that the creditor need not exhaust partnership assets; (4) a court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court’s equitable powers; or (5) liability is imposed on the partner by law or contract independent of the existence of the partnership. e.This section applies to any partnership liability or obligation resulting from a representation by a partner or purported partner under section 20 of this act. 42:1A-20. Partnership by representation; liability 20. a. If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not

appendix a: statutes partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership. If the representation, either by the purported partner or by a person with the purported partner’s consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant. If partnership liability results, the purported partner is liable with respect to that liability as if the purported partner were a partner. If no partnership liability results, the purported partner is liable with respect to that liability jointly and severally with any other person consenting to the representation. b.If a person is thus represented to be a partner in an existing partnership, or with one or more persons not partners, the purported partner is an agent of persons consenting to the representation to bind them to the same extent and in the same manner as if the purported partner were a partner, with respect to persons who enter into transactions in reliance upon the representation. If all of the partners of the existing partnership consent to the representation, a partnership act or obligation results. If fewer than all of the partners of the existing partnership consent to the representation, the person acting and the partners consenting to the representation are jointly and severally liable. c.A person is not liable as a partner merely because the person is named by another in a statement of partnership authority. d.A person does not continue to be liable as a partner merely because of a failure to file a statement of dissociation or to amend a statement of partnership authority to indicate the partner’s dissociation from the partnership. e.Except as otherwise provided in subsections a. and b. of this section, persons who are not partners as to each other are not liable as partners to other persons. 42:1A-21. Rights and duties of partners 21. a. Each partner is deemed to have an account that is: (1) credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner’s share of the partnership profits; and (2) charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partner’s share of the partnership losses. b.Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner’s share of the profits. c.A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the busi-

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ness of the partnership or for the preservation of its business or property. d.A partnership shall reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute. e.A payment or advance made by a partner which gives rise to a partnership obligation under subsection c. or d. of this section constitutes a loan to the partnership which accrues interest from the date of the payment or advance. f.Each partner has equal rights in the management and conduct of the partnership business. g.A partner shall use or possess partnership property only on behalf of the partnership. h.A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. i.A person shall become a partner only with the consent of all of the partners. j.A difference arising as to a matter in the ordinary course of business of a partnership shall be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement shall be undertaken only with the consent of all of the partners. k.This section shall not affect the obligations of a partnership to other persons under section 13 of this act. 42:1A-22. Distributions in kind 22. A partner has no right to receive, and shall not be required to accept, a distribution in kind. 42:1A-23. Books, records; rendering of information 23. a. A partnership shall keep its books and records, if any, at its chief executive office. b.A partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished. c.Each partner and the partnership shall furnish to a partner, and to the legal representative of a deceased partner or partner under legal disability: (1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this act; and (2) on demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.

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42:1A-24. Fiduciary duties 24. a. The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections b. and c. of this section, as those duties may be clarified or limited in the partnership agreement, subject to subsection b. of section 4 of this act. b.A partner’s duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (2) to refrain from knowingly dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest materially adverse to the partnership; and (3) to refrain from actions intended to cause material injury to the partnership in the conduct of the partnership business before the dissolution of the partnership. c.A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. d.A partner does not violate a duty or obligation under this act or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest. e.A partner may lend money to and transact other business with the partnership, and as to each loan or transaction the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law. f.This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner. 42:1A-25. Legal actions 25. a. A partnership may maintain an action against a partner for a breach of the partnership agreement, or for the violation of a duty to the partnership, causing harm to the partnership. b.A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to: (1) enforce the partner’s rights under the partnership agreement; (2) enforce the partner’s rights under this act, including: (a) the partner’s rights under section 21, 23 or 24 of this act; (b) the partner’s right on dissociation to have the partner’s interest in the partnership purchased pursuant to section 34 of this act or enforce any other right under Article 6 or 7 of this act; or

(c) the partner’s right to compel a dissolution and winding up of the partnership business under section 39 of this act or enforce any other right under Article 8 of this act; or (3) enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship. c.The accrual of, and any time limitation on, a right of action for a remedy under this section is governed by other law. A right to an accounting upon a dissolution and winding up does not revive a claim barred by law. 42:1A-26. Continuation of partnership beyond term or undertaking 26. a. If a partnership for a definite term or particular undertaking is continued, without an express agreement, after the expiration of the term or completion of the undertaking, the rights and duties of the partners remain the same as they were at the expiration or completion, so far as is consistent with a partnership at will. b.If the partners, or those of them who habitually acted in the business during the term or undertaking, continue the business without any settlement or liquidation of the partnership, they are presumed to have agreed that the partnership will continue. 42:1A-27. Partner not co-owner 27. A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily. 42:1A-28. Transferable interest of partner 28. The only transferable interest of a partner in the partnership is the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions. The interest is personal property. 42:1A-29. Transfer of partner’s interest 29. a. A transfer, in whole or in part, of a partner’s transferable interest in the partnership: (1) is permissible; (2) does not by itself cause the partner’s dissociation or a dissolution and winding up of the partnership business; and (3) does not, as against the other partners or the partnership, entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership business, to require access to information concerning partnership transactions, or to inspect or copy the partnership books or records. b.A transferee of a partner’s transferable interest in the partnership has a right: (1) to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled; (2) to receive upon the dissolution and winding up of the partnership business, in accordance with the transfer, the net amount otherwise distributable to the transferor; and (3) to seek, under subsection f. of section 39 of this act, a judicial determination that it is equitable to wind up the partnership business.

appendix a: statutes c.In a dissolution and winding up, a transferee is entitled to an account of partnership transactions only from the date of the latest account agreed to by all of the partners. d.Upon transfer, the transferor retains the rights and duties of a partner other than the interest in distributions transferred. e.A partnership need not give effect to a transferee’s rights under this section until it has notice of the transfer. f.A transfer of a partner’s transferable interest in the partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer. 42:1A-31. Dissociation from partnership; events causing 31. A partner is dissociated from a partnership upon the occurrence of any of the following events: a.The partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner; b.An event agreed to in the partnership agreement as causing the partner’s dissociation; c.The partner’s expulsion pursuant to the partnership agreement; d.The partner’s expulsion by the unanimous vote of the other partners if: (1) it is unlawful to carry on the partnership business with that partner; (2) there has been a transfer of all or substantially all of that partner’s transferable interest in the partnership, other than a transfer for security purposes, or a court order charging the partner’s interest, which has not been foreclosed; (3) within 90 days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or (4) a partnership that is a partner has been dissolved and its business is being wound up; e.On application by the partnership or another partner, the partner’s expulsion by judicial determination because: (1) the partner engaged in wrongful conduct that adversely and materially affected the partnership business; (2) the partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under section 24 of this act; or (3) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner; f.The partner’s: (1) becoming a debtor in bankruptcy; (2) executing an assignment for the benefit of creditors;

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(3) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner’s property; or (4) failing, within 90 days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner’s property obtained without the partner’s consent or acquiescence, or failing within 90 days after the expiration of a stay to have the appointment vacated; g.In the case of a partner who is an individual: (1) the partner’s death; (2) the appointment of a guardian or general conservator for the partner; or (3) a judicial determination that the partner has otherwise become incapable of performing the partner’s duties under the partnership agreement; h.In the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee; i.In the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or j.Termination of a partner who is not an individual, partnership, corporation, trust, or estate. 42:1A-32. Dissociation of partners; wrongful conditions 32. a. A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to subsection a. of section 31 of this act. b.A partner’s dissociation is wrongful only if: (1) it is in breach of an express provision of the partnership agreement; or (2) in the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking: (a) the partner withdraws by express will, unless the withdrawal follows within 90 days after another partner’s dissociation by death or otherwise under subsections f. through j. of section 31 of this act or wrongful dissociation under this subsection; (b) the partner is expelled by judicial determination under subsection e. of section 31 of this act; (c) the partner is dissociated by becoming a debtor in bankruptcy; or (d) in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated. c.A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any

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other obligation of the partner to the partnership or to the other partners. 42:1A-33. Dissociation; effects on partnership, partner 33. a. If a partner’s dissociation results in a dissolution and winding up of the partnership business, Article 8 of this act applies; otherwise, Article 7 of this act applies. b.Upon a partner’s dissociation: (1) the partner’s right to participate in the management and conduct of the partnership business terminates, except as otherwise provided in section 41 of this act; (2) the partner’s duty of loyalty under paragraph (3) of subsection b. of section 24 of this act terminates; and (3) the partner’s duty of loyalty under paragraphs (1) and (2) of subsection b. and duty of care under subsection c. of section 24 of this act continue only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to section 41 of this act. 42:1A-34. Dissociation not resulting in dissolution; buyout; damages 34. a. If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under section 39 of this act, except as otherwise provided in the partnership agreement, the partnership shall cause the dissociated partner’s interest in the partnership to be purchased for a buyout price as determined pursuant to subsection b. of this section. b.As used in subsection a. of this section, “buyout price” means the fair value as of the date of withdrawal based upon the right to share in distributions from the partnership unless the partnership agreement provides for another fair value formula. c.Damages for wrongful dissociation under subsection b. of section 32 of this act, and all other amounts owing, whether or not presently due, from the dissociated partner to the partnership, shall be offset against the buyout price. Interest shall be paid from the date the amount owed becomes due to the date of payment. d.A partnership shall indemnify a dissociated partner whose interest is being purchased against all partnership liabilities, whether incurred before or after the dissociation, except liabilities incurred by an act of the dissociated partner under section 35 of this act. e.If no agreement for the purchase of a dissociated partner’s interest is reached within 120 days after a written demand for payment, the partnership shall pay, or cause to be paid, in cash to the dissociated partner the amount the partnership estimates to be the buyout price and accrued interest, reduced by any offsets and accrued interest under subsection c. of this section. f.If a deferred payment is authorized under subsection h. of this section, the partnership may tender a written offer to pay the amount it estimates to be the buyout price and accrued interest, reduced by any offsets under subsection c. of this section, stating the time of payment, the amount

and type of security for payment, and the other terms and conditions of the obligation. g.The payment or tender required by subsection e. or f. of this section shall be accompanied by the following: (1) a statement of partnership assets and liabilities as of the date of dissociation; (2) the latest available partnership balance sheet and income statement, if any; (3) an explanation of how the estimated amount of the payment was calculated; and (4) written notice that the payment is in full satisfaction of the obligation to purchase unless, within 120 days after the written notice, the dissociated partner commences an action to determine the buyout price, any offsets under subsection c. of this section, or other terms of the obligation to purchase. h.A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking, unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership. A deferred payment shall be adequately secured and bear interest. i.A dissociated partner may maintain an action against the partnership, pursuant to subparagraph (b) of paragraph (2) of subsection b. of section 25 of this act, to determine the buyout price of that partner’s interest, any offsets under subsection c. of this section, or other terms of the obligation to purchase. The action shall be commenced within 120 days after the partnership has tendered payment or an offer to pay or within one year after written demand for payment if no payment or offer to pay is tendered. The court shall determine the buyout price of the dissociated partner’s interest, any offset due under subsection c. of this section, and accrued interest, and enter judgment for any additional payment or refund. If deferred payment is authorized under subsection h. of this section, the court shall also determine the security for payment and other terms of the obligation to purchase. The court may assess reasonable attorney’s fees and the fees and expenses of appraisers or other experts for a party to the action, in amounts the court finds equitable, against a party that the court finds acted arbitrarily, vexatiously, or not in good faith. The finding shall be based on the partnership’s failure to tender payment or an offer to pay or to comply with subsection g. of this section. 42:1A-35. Partnership bound by act of dissociated partner; conditions; liability 35. a. For two years after a partner dissociates without resulting in a dissolution and winding up of the partnership business, the partnership, including a surviving partnership under Article 9 of this act, is bound by an act of the dissociated partner which would have bound the

appendix a: statutes partnership under section 13 of this act before dissociation only if at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner’s dissociation; and (3) is not deemed to have had knowledge under subsection e. of section 15 or notice under subsection c. of section 37 of this act. b.A dissociated partner is liable to the partnership for any damage caused to the partnership arising from an obligation incurred by the dissociated partner after dissociation for which the partnership is liable under subsection a. of this section. 42:1A-36. Dissociated partner’s liability 36. a. A partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred after dissociation, except as otherwise provided in subsection b. of this section. b.A partner who dissociates without resulting in a dissolution and winding up of the partnership business is liable as a partner to the other party in a transaction entered into by the partnership, or a surviving partnership under Article 9 of this act, within two years after the partner’s dissociation, only if the partner is liable for the obligation under section 18 of this act and at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner’s dissociation; and (3) is not deemed to have had knowledge under subsection e. of section 15 or notice under section subsection c. of section 37 of this act. c.By agreement with the partnership creditor and the partners continuing the business, a dissociated partner may be released from liability for a partnership obligation. d.A dissociated partner is released from liability for a partnership obligation if a partnership creditor, with notice of the partner’s dissociation but without the partner’s consent, agrees to a material alteration in the nature or time of payment of a partnership obligation. 42:1A-37. Statement of dissociation 37. a. A dissociated partner or the partnership may file a statement of dissociation stating the name of the partnership and that the partner is dissociated from the partnership. b.A statement of dissociation is a limitation on the authority of a dissociated partner for the purposes of subsections d. and e. of section 15 of this act. c.For the purposes of paragraph (3) of subsection a. of section 35 and paragraph (3) of subsection b. of section 36 of this act, a person not a partner is deemed to have notice of the dissociation 90 days after the statement of dissociation is filed.

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42:1A-38. Continued use of name relative to liability 38. Continued use of a partnership name, or a dissociated partner’s name as part thereof, by partners continuing the business does not of itself make the dissociated partner liable for an obligation of the partners or the partnership continuing the business. 42:1A-39. Dissolution of partnership; winding up, event causing 39. A partnership is dissolved, and its business shall be wound up, only upon the occurrence of any of the following events: a.In a partnership at will, the partnership’s having notice from a partner, other than a partner who is dissociated under subsections b. through j. of section 31 of this act, of that partner’s express will to withdraw as a partner, or on a later date specified by the partner, unless the partnership agreement provides that no dissolution occurs until 90 days after the partnership having received notice of a partner’s express will to withdraw as a partner, a majority in interest of the remaining parties, including partners who have rightfully dissociated pursuant to subparagraph (a) of paragraph (2) of subsection b. of section 32 of this act, agree to continue the partnership; b.In a partnership for a definite term or particular undertaking: (1) the expiration of 90 days after a partner’s dissociation by death or otherwise under subsections f. through j. of section 31 of this act or wrongful dissociation under subsection b. of section 32 of this act, unless before that time a majority in interest of the remaining partners, including partners who have rightfully dissociated pursuant to subparagraph (a) of paragraph (2) of subsection b. of section 32 of this act, agree to continue the partnership; (2) the express will of all of the partners to wind up the partnership business; or (3) the expiration of the term or the completion of the undertaking; c.An event agreed to in the partnership agreement resulting in the winding up of the partnership business; d.An event that makes it unlawful for all or substantially all of the business of the partnership to be continued, but a cure of illegality within 90 days after notice to the partnership of the event is effective retroactively to the date of the event for purposes of this section; e.On application by a partner, a judicial determination that: (1) the economic purpose of the partnership is likely to be unreasonably frustrated; (2) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (3) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement; or

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f.On application by a transferee of a partner’s transferable interest, a judicial determination that it is equitable to wind up the partnership business: (1) after the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer; or (2) at any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer. 42:1A-40. Dissolution, continuation for purpose of winding up 40. a. Subject to subsection b. of this section, a partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed. b.At any time after the dissolution of a partnership and before the winding up of its business is completed, all of the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the partnership’s business wound up and the partnership terminated. In that event: (1) the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred; and (2) the rights of a third party accruing under subsection a. of section 42 of this act or arising out of conduct in reliance on the dissolution before the third party knew or received a notification of the waiver shall not be adversely affected. 42:1A-41. Postdissolution, rights, duties on winding up 41. a. After dissolution, a partner who has not wrongfully dissociated may participate in winding up the partnership’s business, but on application of any partner, partner’s legal representative, or transferee, a court of competent jurisdiction, for good cause shown, may order judicial supervision of the winding up. b.The legal representative of the last surviving partner may wind up a partnership’s business. c.A person winding up a partnership’s business shall preserve the partnership business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, settle and close the partnership’s business, dispose of and transfer the partnership’s property, discharge the partnership’s liabilities, distribute the assets of the partnership pursuant to section 45 of this act, settle disputes by mediation or arbitration, and perform other necessary acts. 42:1A-42. Partner’s act after dissolution 42. Subject to section 43 of this act, a partnership is bound by a partner’s act after dissolution that: a.Is appropriate for winding up the partnership business; or

b.Would have bound the partnership under section 13 of this act before dissolution, if the other party to the transaction did not have notice of the dissolution. 42:1A-43. Statement of dissolution, effects of filing 43. a. After dissolution, a partner who has not wrongfully dissociated may file a statement of dissolution stating the name of the partnership and that the partnership has dissolved and is winding up its business. b.A statement of dissolution cancels a filed statement of partnership authority for the purposes of subsection d. of section 15 of this act and is a limitation on authority for the purposes of subsection e. of section 15 of this act. c.For the purposes of sections 13 and 42 of this act, a person not a partner is deemed to have notice of the dissolution and the limitation on the partners’ authority as a result of the statement of dissolution 90 days after it is filed. d.After filing and, if appropriate, recording a statement of dissolution, a dissolved partnership may file and, if appropriate, record a statement of partnership authority which will operate with respect to a person not a partner as provided in subsections e. and f. of section 15 of this act in any transaction, whether or not the transaction is appropriate for winding up the partnership business. 42:1A-44. Liability after dissolution 44. a. Except as otherwise provided in subsection b. of this section and section 18 of this act, after dissolution a partner is liable to the other partners for the partner’s share of any partnership liability incurred under section 42 of this act. b.A partner who, with knowledge of the dissolution, incurs a partnership liability under subsection b. of section 42 of this act by an act that is not appropriate for winding up the partnership business is liable to the partnership for any damage caused to the partnership arising from the liability. 42:1A-45. Rights of partners to application of partnership assets; settlement of accounts 45. a. In winding up a partnership’s business, the assets of the partnership, including the contributions of the partners required by this section, shall be applied to discharge its obligations to creditors, including, to the extent permitted by law, partners who are creditors. Any surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under subsection b. of this section. b.Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, profits and losses that result from the liquidation of the partnership assets shall be credited and charged to the partners’ accounts. The partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner’s account. A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account but excluding from the

appendix a: statutes calculation charges attributable to an obligation for which the partner is not personally liable under section 18 of this act. c.If a partner fails to contribute the full amount required under subsection b. of this section, all of the other partners shall contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable under section 18 of this act. A partner or partner’s legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partner’s share of the partnership obligations for which the partner is personally liable under section 18 of this act. d.After the settlement of accounts, each partner shall contribute, in the proportion in which the partner shares partnership losses, the amount necessary to satisfy partnership obligations that were not known at the time of the settlement and for which the partner is personally liable under section 18 of this act. e.The estate of a deceased partner is liable for the partner’s obligation to contribute to the partnership. f.An assignee for the benefit of creditors of a partnership or a partner, or a person appointed by a court to represent creditors of a partnership or a partner, may enforce a partner’s obligation to contribute to the partnership. LIMITED LIABILITY PARTNERSHIPS 42:1A-47. Limited liability partnership; qualification as 47. a. A partnership may become a limited liability partnership pursuant to this section. b.The terms and conditions on which a partnership becomes a limited liability partnership shall be approved by the vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, the vote necessary to amend those provisions. c.After the approval required by subsection b. of this section, a partnership may become a limited liability partnership by filing a statement of qualification in the office of the Division of Commercial Recording in the Department of the Treasury. The statement shall contain: (1) the name of the partnership; (2) the street address of the partnership’s chief executive office and, if different, the street address of an office in this State, if any; (3) if the partnership does not have an office in this State, the name and street address of the partnership’s agent for service of process; (4) a statement that the partnership elects to be a limited liability partnership; and (5) a deferred effective date, if any.

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d.The agent of a limited liability partnership for service of process shall be an individual who is a resident of this State or other person authorized to do business in this State. e.The status of a partnership as a limited liability partnership is effective on the later of the filing of the statement or a date specified in the statement. The status remains effective, regardless of changes in the partnership, until it is canceled pursuant to subsection d. of section 6 of this act or revoked pursuant to section 49 of this act. f.The status of a partnership as a limited liability partnership and the liability of its partners is not affected by errors or later changes in the information required to be contained in the statement of qualification under subsection c. of this section. g.The filing of a statement of qualification establishes that a partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership. h.An amendment or cancellation of a statement of qualification is effective when it is filed or on a deferred effective date specified in the amendment or cancellation. 42:1A-48. Name of limited liability partnership 48. The name of a limited liability partnership shall end with “Registered Limited Liability Partnership”, “Limited Liability Partnership”, “R.L.L.P.”, “L.L.P.”, “RLLP,” or “LLP”. 42:1A-49. Annual report; filing 49. a. A limited liability partnership, and a foreign limited liability partnership authorized to transact business in this State, shall file an annual report in the office of the Division of Commercial Recording in the Department of the Treasury which contains: (1) the name of the limited liability partnership and the state or other jurisdiction under whose laws the foreign limited liability partnership is formed; (2) the street address of the partnership’s chief executive office and, if different, the street address of an office of the partnership in this State, if any; and (3) if the partnership does not have an office in this State, the name and street address of the partnership’s current agent for service of process. b.An annual report shall be filed each year following the calendar year in which a partnership files a statement of qualification or a foreign partnership becomes authorized to transact business in this State. c.The State Treasurer may revoke the statement of qualification of a partnership that fails to file an annual report when due or pay the required filing fee. To do so, the State Treasurer shall provide the partnership at least 60 days’ written notice of intent to revoke the statement. The notice shall be mailed to the partnership at its chief executive office set forth in the last filed statement of qualification or annual report. The notice shall specify the annual report that has not been filed, the fee that has not been paid, and

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the effective date of the revocation. The revocation is not effective if the annual report is filed and the fee is paid before the effective date of the revocation. d.A revocation under subsection c. of this section only affects a partnership’s status as a limited liability partnership and is not an event of dissolution of the partnership. e.A partnership whose statement of qualification has been revoked may apply to the Division of Commercial Recording in the Department of the Treasury for reinstatement within two years after the effective date of the revocation. The application shall state: (1) the name of the partnership and the effective date of the revocation; and (2) that the ground for revocation either did not exist or has been corrected. f.A reinstatement under subsection e. of this section relates back to and takes effect as of the effective date of the revocation, and the partnership’s status as a limited liability partnership continues as if the revocation had never occurred. 42:1A-50. Foreign limited liability partnership; law governing, effect in this State 50. a. The law under which a foreign limited liability partnership is formed governs relations among the partners and between the partners and the partnership and the liability of partners for obligations of the partnership. b.A foreign limited liability partnership shall not be denied a statement of foreign qualification by reason of any difference between the law under which the partnership was formed and the law of this State. c.A statement of foreign qualification does not authorize a foreign limited liability partnership to engage in any business or exercise any power that a partnership may not engage in or exercise in this State as a limited liability partnership. 42:1A-51. Statement of foreign qualification; filing 51. a. Before transacting business in this State, a foreign limited liability partnership shall file a statement of foreign qualification in the office of the Division of Commercial Recording in the Department of the Treasury. The statement shall contain: (1) the name of the foreign limited liability partnership which satisfies the requirements of the state or other jurisdiction under whose law it is formed and ends with “Registered Limited Liability Partnership”, “Limited Liability Partnership”, “R.L.L.P.”, “L.L.P.”, “RLLP,” or “LLP”; (2) the street address of the partnership’s chief executive office and, if different, the street address of an office of the partnership in this State, if any; (3) if there is no office of the partnership in this State, the name and street address of the partnership’s agent for service of process; and (4) a deferred effective date, if any.

b.The agent of a foreign limited liability company for service of process shall be an individual who is a resident of this State or other person authorized to do business in this State. c.The status of a partnership as a foreign limited liability partnership is effective on the later of the filing of the statement of foreign qualification or a date specified in the statement. The status remains effective, regardless of changes in the partnership, until it is canceled pursuant to subsection d. of section 6 of this act or revoked pursuant to section 49 of this act. d.An amendment or cancellation of a statement of foreign qualification is effective when it is filed or on a deferred effective date specified in the amendment or cancellation. 42:1A-53. Activities not considered transacting business 53. a. Activities of a foreign limited liability partnership which do not constitute transacting business for the purpose of sections 50 through 53 of this act include: (1) maintaining, defending, or settling an action or proceeding; (2) holding meetings of its partners or carrying on any other activity concerning its internal affairs; (3) maintaining bank accounts; (4) maintaining offices or agencies for the transfer, exchange and registration of the partnership’s own securities or maintaining trustees or depositories with respect to those securities; (5) selling through independent contractors; (6) soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this State before they become contracts; (7) creating or acquiring indebtedness, with or without a mortgage, or other security interest in property; (8) collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired; (9) conducting an isolated transaction that is completed within 30 days and is not one in the course of similar transactions; and (10) transacting business in interstate commerce. b.For purposes of sections 50 through 53 of this act, the ownership in this State of income-producing real property or tangible personal property, other than property excluded under subsection a. of this section, constitutes transacting business in this State. c.This section does not apply in determining the contacts or activities that may subject a foreign limited liability partnership to service of process, taxation, or regulation under any other law of this State. 42:1A-54. Restraint of foreign limited liability partnership 54. The Attorney General may maintain an action to restrain a foreign limited liability partnership from trans-

appendix a: statutes acting business in this State in violation of sections 50 through 53 of this act. LIMITED LIABILITY COMPANIES 42:2B-3. Name of limited liability company 3. The name of each limited liability company as set forth in its certificate of formation: a. Shall contain the words “Limited Liability Company” or the abbreviation “L.L.C.”; b. May contain the name of a member or manager; c. Must be such as to distinguish it upon the records in the office of the Secretary of State from the name of any corporation, limited partnership, business trust or limited liability company reserved, registered, formed or organized under the laws of this State or qualified to do business or registered as a foreign corporation, foreign limited partnership or foreign limited liability company in this State; provided, however, that a limited liability company may register under any name which does not distinguish it upon the records in the office of the Secretary of State from the name of any domestic or foreign corporation, limited partnership, business trust or limited liability company reserved, registered, formed or organized under the laws of this State with the written consent of the other corporation, limited partnership, business trust or limited liability company, which written consent shall be filed with the Secretary of State; and d. Shall not contain any word or phrase, or any abbreviation or derivative thereof, the use of which is prohibited or restricted by any other statute of this State, unless the restrictions have been complied with. 42:2B-4. Conditions for use of alternate name; certificate of registration 4. a. No domestic limited liability company or foreign limited liability company which conducts activities in this State shall conduct any of those activities using an alternate name, including an abbreviation of its name or an acronym, unless: (1) It also uses its actual name in the transaction of any of its activities in a manner that is not deceptive as to its actual identity; or (2) It has first registered the alternate name as provided in subsection b. of this section. b. Any limited liability company may adopt and use any alternate name, including any name which would be unavailable as the name of a domestic or foreign limited liability company because of the prohibitions of subsection c. of section 3, but not including any name not permitted as a limited liability company name by subsection a. or d. of section 3, by filing an original and a copy of a certificate of registration of alternate name with the Secretary of State executed on behalf of the limited liability company. The certificate shall set forth:

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(1) The name, jurisdiction and date of establishment of the limited liability company; (2) The alternate name; (3) A brief statement of the character or nature of the particular activities to be conducted using the alternate name; (4) That the limited liability company intends to use the alternate name in this State; (5) That the limited liability company has not previously used the alternate name in this State in violation of this section or, if it has, the month and year in which it commenced the use. c. The registration shall be effective for five years from the date of filing and may be renewed successively for additional five-year periods by filing an original and a copy of the certificate of renewal executed on behalf of the limited liability company anytime within 90 days prior to, but not later than, the date of expiration of the registration. The certificate of renewal shall set forth the information required in paragraphs (1) through (4) of subsection b. of this section, the date of the certificate of registration then in effect and that the limited liability company is continuing to use the alternate name. d. This section shall not: (1) Grant to the registrant of an alternate name any right in the name as against any prior or subsequent use of the name, regardless of whether used as a trademark, trade name, business name or corporate name; or (2) Interfere with the power of any court to enjoin the use of the name on the basis of the law of unfair competition or on any other basis except the identity or similarity of the alternate name to any corporate, limited partnership or limited liability company name. e. A limited liability company which has used an alternate name in this State contrary to the provisions of this section shall, upon filing a certificate of registration of alternate name or an untimely certificate of renewal, pay to the Secretary of State the filing fee prescribed for the certificate plus an additional filing fee equal to the full amount of the regular filing fee multiplied by the number of years it has been using the alternate name in violation of this section. For the purpose of this subsection, any part of a year shall be considered a full year. f. The failure of a limited liability company to file a certificate of registration or renewal of alternate name shall not impair the validity of any contract or act of the limited liability company and shall not prevent the limited liability company from defending any action or proceedings in any court of this State, but the limited liability company shall not maintain any action or proceeding in any court of this State arising out of a contract or act in which it used the alternate name until it has filed the applicable certificate. g. (1) A limited liability company which files a certificate of registration of alternate name which contains a false statement or omission regarding the date it first used an

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alternate name in this State shall, if the false statement or omission reduces the amount of the additional fee it paid or should have paid as provided in subsection e. of this section, forfeit to the State a penalty of not less than $200 nor more than $500. (2) A limited liability company which should have filed a certificate of registration or renewal of alternate name and fails to do so within 60 days after being notified of its obligation to do so by certified or registered mail by the Secretary of State, by any other governmental officer, or by any person aggrieved by its failure to do so, shall forfeit to the State a penalty of not less than $200 nor more than $500. (3) A penalty imposed under this section shall be recovered with costs in an action brought by the Attorney General. The court may proceed on the action in a summary manner. 42:2B-5. Exclusive use, reservation of specified name 5. a. The exclusive right to the use of a name may be reserved by: (1) Any person intending to organize a limited liability company under this act and to adopt that name; (2) Any domestic limited liability company or any foreign limited liability company registered in this State which, in either case, proposes to change its name; (3) Any foreign limited liability company intending to register in this State and adopt that name; and (4) Any person intending to organize a foreign limited liability company and intending to have it register in this State and adopt that name. b. The reservation of a specified name shall be made by filing with the Secretary of State an application, executed by the applicant, together with a duplicate copy, which may be either a signed or conformed copy, specifying the name to be reserved and the name and address of the applicant. If the Secretary of State finds that the name is available for use by a domestic or foreign limited liability company, he shall reserve the name for the exclusive use of the applicant for a period of 120 days. Once having so reserved a name, the same applicant may again reserve the same name for successive 120 day periods. The right to the exclusive use of a reserved name may be transferred to any other person by filing in the office of the Secretary of State a notice of the transfer, executed by the applicant for whom the name was reserved, together with a duplicate copy, which may be either a signed or conformed copy, specifying the name to be transferred and the name and address of the transferee. The reservation of a specified name may be cancelled by filing with the Secretary of State a notice of cancellation, executed by the applicant or transferee, together with a duplicate copy, which may be either a signed or conformed copy, specifying the name reservation to be cancelled and the name and address of the applicant or transferee. Any duplicate copy filed with the Secretary of State as required

by this subsection shall be returned by the Secretary of State to the person who filed it or his representative with a notation thereon of the action taken with respect to the original copy thereof by the Secretary of State. 42:2B-6. Company office; agent 6. a. Each domestic and foreign limited liability company shall have and maintain in this State: (1) A registered office, which may but need not be a place of its business in this State; and (2) A registered agent for service of process on the limited liability company, which agent may be either an individual resident of this State whose business office is identical with the limited liability company’s registered office, or a domestic corporation, or a foreign corporation authorized to do business in this State having a business office identical with such registered office, or the limited liability company itself. b. (1) A registered agent may (with prior notice to the limited liability company for which it is the registered agent), change the address of the registered office of any domestic or foreign limited liability company for which the registered agent is registered agent to another address in this State by filing in the office of the Secretary of State a certificate, executed by the registered agent, setting forth the names of each limited liability company, and the address at which the registered agent has maintained the registered office for each limited liability company, and further certifying to the new address to which the registered office will be changed on a given day, and at which new address the registered agent will thereafter maintain the registered office for each limited liability company recited in the certificate. Upon the filing of such certificate, the Secretary of State shall furnish to the registered agent a certified copy of the same under his hand and seal of office, and thereafter, or until further change of address, as authorized by law, the registered office in this State of each limited liability company recited in the certificate shall be located at the new address of the registered agent thereof as given in the certificate. (2) In the event of a change of name of any person acting as a registered agent of a limited liability company, the registered agent shall file in the office of the Secretary of State a certificate, executed by the registered agent, setting forth the new name of the registered agent, the name of the registered agent before it was changed, the name of each limited liability company represented by the registered agent, and the address at which the registered agent has maintained the registered office for each limited liability company. Upon the filing of the certificate, the Secretary of State shall furnish to the registered agent a certified copy of the certificate under his hand and seal of office. (3) Filing a certificate under this section shall be deemed to be an amendment of the certificate of formation of each limited liability company affected thereby and no limited

appendix a: statutes liability company shall be required to take any further action with respect thereto, to amend its certificate of formation under this act. 42:2B-7. Agent resignation; successor 7. a. The registered agent of a domestic limited liability company or a foreign limited liability company authorized to transact business in this State may resign by complying with the provisions of this section. b. The registered agent of a foreign or domestic limited liability company may resign and appoint a successor registered agent by filing a certificate in the office of the Secretary of State, stating that it resigns and the name and address of the successor registered agent. There shall be attached to such certificate a statement executed by the affected limited liability company ratifying and approving such change of registered agent. Upon such filing, the successor registered agent shall become the registered agent of each limited liability company which has ratified and approved the substitution and the successor registered agent’s address, as stated in such certificate, shall become the address of each limited liability company’s registered office in this State. The Secretary of State shall furnish to the successor registered agent upon request a certified copy of the certificate of resignation. Filing of the certificate of resignation shall be deemed to be an amendment of the certificate of formation of the limited liability company affected thereby and the limited liability company shall not be required to take any further action with respect thereto, to amend its certificate of formation under this act. c. The registered agent of a limited liability company may resign without appointing a successor registered agent by complying with the following provisions: (1) The registered agent, or, in the case of a registered agent who is deceased or has been declared incompetent by a court of competent jurisdiction, his legal representative, shall serve a notice of resignation by certified mail, return receipt requested, upon the limited liability company at the address last known to the agent, and shall make an affidavit of such service. If service cannot be made, the affidavit shall so state, and shall state briefly why service cannot be made. The affidavit, together with a copy of notice of resignation, shall be filed in the office of the Secretary of State. (2) The resignation shall become effective 30 days after filing the affidavit of service in the office of the Secretary of State or upon the designation by the limited liability company of a new registered agent pursuant to this act, whichever is earlier. If the limited liability company fails to designate a new registered agent within the 30-day period, the limited liability company shall thereafter be deemed to have no registered agent or registered office in this State, until the limited liability company files a certificate of change of address of registered office and registered agent indicating the new registered office and registered agent.

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42:2B-8. Purpose of limited liability company; powers 8. a. A limited liability company may carry on any lawful business, purpose or activity. b. A limited liability company shall possess and may exercise all the powers and privileges granted by this act or by any other law or by its operating agreement, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the limited liability company. 42:2B-8.1. Annual report by limited liability company to Secretary of State 8.1. a. Each domestic and foreign limited liability company shall file an annual report with the office of the Secretary of State, setting forth: (1) the name and address of the limited liability company; (2) the name and address of the registered agent of the limited liability company; and (3) the name and addresses of the managing members or managers, as the case may be. b. If no annual report is filed as required by this section for two consecutive years, (1) the certificate of a domestic limited liability company shall be transferred to an inactive list maintained by the Secretary of State. A limited liability company on the inactive list shall remain a limited liability company and the limited liability of its members and managers shall not be affected by its transfer to this list. The name of a limited liability company on the inactive list shall, subject to any other rights that limited liability company may have to its name, be available for use by any other limited liability company, including a newlyformed limited liability company. (2) the certificate of a foreign limited liability company may be revoked by the Secretary of State. (3) if the certificate of a domestic limited liability company has been transferred to the inactive list or if the certificate of a foreign limited liability company has been revoked, the certificate shall be reinstated by proclamation of the Secretary of State upon payment of all fees due to the Secretary of State, consisting of a reinstatement filing fee, current annual report fee, all delinquent annual report fees, and a late filing fee. The reinstatement relates back to the date of transfer of the certificate of a domestic limited liability company to the inactive list or to the date of revocation of the certificate of a foreign limited liability company, as the case may be, and shall validate all actions taken in the interim. In the event that in the interim the name of the limited liability company has become unavailable, the Secretary of State shall reinstate the certificate upon, in the case of a domestic limited liability company, the filing of an amendment to its certificate of formation to change the name to an available name and in the case of a foreign limited liability company, the filing of an amended certificate of registration adopting an alternate name. The

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Secretary of State shall provide the forms necessary to effect annual report reinstatements. 42:2B-9. Members’, managers’ rights, obligations 9. Except as otherwise provided in an operating agreement, a member or manager may lend money to, borrow money from, act as a surety, guarantor or endorser for, guarantee or assume one or more specific obligations of, provide collateral for, and transact other business with a limited liability company and, subject to other applicable law, has the same rights and obligations with respect to any such matter as a person who is not a member or manager. 42:2B-10. Indemnification powers 10. Subject to such standards and restrictions, if any, as are set forth in its operating agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever. 42:2B-11 Certificate of formation; filing. 11. a. In order to form a limited liability company, one or more authorized persons must execute a certificate of formation. The certificate of formation shall be filed in the office of the Secretary of State and set forth: (1)The name of the limited liability company; (2)The address of the registered office and the name and address of the registered agent for service of process required to be maintained by section 6 of this act; (3)(Deleted by amendment, P.L.1998, c.79.) (4)If the limited liability company is to have perpetual existence, regardless of whether the limited liability company is subject to any dissolution contingencies, then the word “perpetual” shall be stated; if the limited liability company is to have a specific date of dissolution, regardless of whether the limited liability company is subject to any dissolution contingencies, the latest date on which the limited liability company is to dissolve; and (5)Any other matters the members determine to include therein. b.A limited liability company is formed at the time of the filing of the initial certificate of formation in the office of the Secretary of State or at any later date or time specified in the certificate of formation if, in either case, there has been substantial compliance with the requirements of this section. A limited liability company formed under this act shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company’s certificate of formation. 42:2B-12. Certificate of correction; filing 12. If any instrument filed with the Secretary of State under any provision of this act is an inaccurate record of the limited liability company action therein referred to, or was defectively or erroneously executed, the instrument may be corrected by filing with the Secretary of State a certificate of correction executed by an authorized person. The certificate of correction shall specify the inaccuracy or

defect to be corrected and shall set forth the correction. The instrument so corrected shall be deemed to have been effective in its corrected form as of its original filing date except as to persons who actually relied in good faith upon the inaccurate portion of the certificate and who are adversely affected by the correction. As to these persons, the correction shall be effective as of the effective date of filing of the certificate of correction. Such filing shall only be made if the Secretary of State consents to the filing. 42:2B-13. Amending a certificate of formation 13. a. A certificate of formation is amended by filing a certificate of amendment thereto in the office of the Secretary of State. The certificate of amendment shall set forth: (1) The name of the limited liability company; and (2) The amendment to the certificate of formation. b. A manager or, if there is no manager, any member who becomes aware that any statement in a certificate of formation was false when made, or that any matter described has changed making the certificate of formation false in any material respect, shall promptly amend the certificate of formation. c. A certificate of formation may be amended at any time for any other proper purpose. d. Unless a later effective date (which shall be a date certain not later than 30 days after the date of filing) is provided for in the certificate of amendment, a certificate of amendment shall be effective at the time of its filing with the Secretary of State. 42:2B-14 Cancellation of certificate of formation; filing of certificate of cancellation. 14. a. A certificate of formation shall be canceled upon the dissolution and the completion of winding up of a limited liability company, or upon the filing of a certificate of merger or consolidation if the limited liability company is not the surviving or resulting entity in a merger or consolidation. b.A certificate of cancellation shall be filed in the office of the Secretary of State to accomplish the cancellation of a certificate of formation upon the dissolution and the completion of winding up of a limited liability company and shall set forth: (1)The name of the limited liability company; (2)The date of filing of its certificate of formation; (3)The reason for filing the certificate of cancellation; (4)The future effective date or time (which shall be a date or time certain) of cancellation if it is not to be effective upon the filing of the certificate; and (5)Any other information the person filing the certificate of cancellation determines. c.(Deleted by amendment, P.L.1998, c.79.) 42:2B-15. Execution of certificates 15. a. Each certificate required by this act to be filed in the office of the Secretary of State shall be executed by one or more authorized persons.

appendix a: statutes b. Unless otherwise provided in an operating agreement, any person may sign any certificate or amendment thereof or enter into an operating agreement or amendment thereof by an agent, including an attorney-in-fact. An authorization, including a power of attorney, to sign any certificate or amendment thereof or to enter into an operating agreement or amendment thereof need not be in writing, need not be sworn to, verified or acknowledged, and need not be filed in the office of the Secretary of State, but if in writing, must be retained by the limited liability company. c. The execution of a certificate by an authorized person constitutes an oath or affirmation, under the penalties of perjury in the third degree, that, to the best of the authorized person’s knowledge and belief, the facts stated therein are true. 42:2B-16. Action to compel execution of certificate, agreement 16. a. If a person required to execute a certificate required by this act fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the Superior Court to direct the execution of the certificate. If the court finds that the execution of the certificate is proper and that any person so designated has failed or refused to execute the certificate, it shall order the Secretary of State to record an appropriate certificate. b. If a person required to execute an operating agreement or amendment thereof fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the Superior Court to direct the execution of the operating agreement or amendment thereof. If the court finds that the operating agreement or amendment thereof should be executed and that any person required to execute the operating agreement or amendment thereof has failed or refused to do so, it shall enter an order granting appropriate relief. 42:2B-17. Filing of certificates; effectiveness 17. a. The original signed copy of the certificate of formation and of any certificates of amendment or cancellation (or of any judicial decree of amendment or cancellation), and of any certificate of merger or consolidation and of any restated certificate shall be delivered to the Secretary of State. A person who executes a certificate as an agent or fiduciary need not exhibit evidence of his authority as a prerequisite to filing. Any signature on any certificate authorized to be filed in the office of the Secretary of State under any provision of this act may be a facsimile. Unless the Secretary of State finds that any certificate does not conform to law, upon receipt of all filing fees required by law the Secretary of State shall: (1) Certify that the certificate of formation, the certificate of amendment, the certificate of cancellation (or of any judicial decree of amendment or cancellation), the certificate of merger or consolidation or the restated certificate

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has been filed in his office by endorsing upon the original certificate the word “Filed,” and the date and hour of the filing. This endorsement is conclusive of the date and time of its filing in the absence of actual fraud; (2) File and index the endorsed certificate; and (3) Prepare and return to the person who filed it or his representative a copy of the original signed instrument, similarly endorsed, and shall certify such copy as a true copy of the original signed instrument. b. Upon the filing of a certificate of amendment (or judicial decree of amendment) or restated certificate in the office of the Secretary of State, or upon the future effective date or time of a certificate of amendment (or judicial decree thereof ) or restated certificate, as provided for therein, the certificate of formation shall be amended or restated as set forth therein. Upon the filing of a certificate of cancellation (or a judicial decree thereof ), or a certificate of merger or consolidation which acts as a certificate of cancellation, or upon the future effective date or time of a certificate of cancellation (or a judicial decree thereof ) or of a certificate of merger or consolidation which acts as a certificate of cancellation, the certificate of formation is cancelled. 42:2B-18. Certificate of formation serves as notice 18. A certificate of formation filed in the office of the Secretary of State is notice that the entity formed in connection with the filing of the certificate of formation is a limited liability company formed under the laws of this State and is notice of all other facts set forth therein which are required or permitted to be set forth in a certificate of formation by paragraphs (1) and (2) of subsection a. of section 11 of this act. If any provision of an operating agreement is inconsistent with the information contained in the certificate of formation of that limited liability company, as amended, on file with the office of the Secretary of State, the operating agreement shall be controlling except with respect to any third party who can show actual and reasonable reliance to the detriment of that third party, upon the information contained in the certificate of formation. 42:2B-19. Restated certificate of formation 19. a. A limited liability company may, at any time, integrate into a single instrument all of the provisions of its certificate of formation which are then in effect and operative as a result of there having previously been filed in the office of the Secretary of State one or more certificates or other instruments pursuant to this act and it may at the same time also further amend its certificate of formation by adopting a restated certificate of formation. b. If a restated certificate of formation merely restates and integrates but does not further amend the initial certificate of formation, as previously amended or supplemented by any instrument that was executed and filed pursuant to this act, it shall be specifically designated in its heading as a

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“Restated Certificate of Formation” together with such other words as the limited liability company may deem appropriate and shall be executed by an authorized person and filed as provided in section 17 of this act in the office of the Secretary of State. If a restated certificate restates and integrates and also further amends in any respect the certificate of formation, as previously amended or supplemented, it shall be specifically designated in its heading as an “Amended and Restated Certificate of Formation” together with such other words as the limited liability company may deem appropriate and shall be executed by at least one authorized person, and filed as provided in section 17 of this act in the office of the Secretary of State. c. A restated certificate of formation shall state, either in its heading or in an introductory paragraph, the limited liability company’s present name, and, if it has been changed, the name under which it was originally filed, and the future effective date (which shall be a date certain not more than 30 days after the date of filing) of the restated certificate if it is not to be effective upon the filing of the restated certificate. If a restated certificate only restates and integrates and does not further amend a limited liability company’s certificate of formation and there is no discrepancy between the existing certificate of formation and the restated certificate, it shall state that fact as well. d. Upon the filing of a restated certificate of formation with the Secretary of State, or upon the future effective date or time of a restated certificate of formation as provided for therein, the initial certificate of formation, as amended or supplemented, shall be superseded; the restated certificate of formation, including any further amendment or changes made thereby, shall be the certificate of formation of the limited liability company, but the original effective date of formation shall remain unchanged. e. Any amendment or change effected in connection with the restatement and integration of the certificate of formation shall be subject to any other provision of this act, not inconsistent with this section, which would apply if a separate certificate of amendment were filed to effect such amendment or change. 42:2B-21. Members of limited liability company, interest 21. a. In connection with the formation of a limited liability company, a person acquiring a limited liability company interest is admitted as a member of the limited liability company upon the later to occur of: (1) The formation of the limited liability company; or (2) The time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, when the person’s admission is reflected in the records of the limited liability company. b. After the formation of a limited liability company, a person acquiring a limited liability company interest is admitted as a member of the limited liability company:

(1) In the case of a person acquiring a limited liability company interest directly from the limited liability company, at the time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, upon the consent of all members and when the person’s admission is reflected in the records of the limited liability company; or (2) In the case of an assignee of a limited liability company interest, (a) as provided in section 46 of this act and (b) at the time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, when the assignee’s permitted admission is reflected in the records of the limited liability company. c. A person may be admitted to a limited liability company as a member of the limited liability company and may receive a limited liability company interest in the limited liability company without making a contribution or being obligated to make a contribution to the limited liability company. d. An operating agreement or another written agreement or writing: (1) May provide that a person shall be admitted as a member of a limited liability company, or shall become an assignee of a limited liability company interest or other rights or powers of a member to the extent assigned, and shall become bound by the operating agreement (a) if the person (or a representative authorized by the person orally, in writing or by other action such as payment for a limited liability company interest) executes the operating agreement or any other writing evidencing the intent of the person to become a member or assignee, or (b) without such execution, if the person (or a representative authorized by the person orally, in writing or by other action such as payment for a limited liability company interest) complies with the conditions for becoming a member or assignee as set forth in the operating agreement or any other writing and requests (orally, in writing or by other action such as payment for a limited liability company interest) that the records of the limited liability company reflect such admission or assignment; and (2) Shall not be unenforceable by reason of its not having been signed by a person being admitted as a member or becoming an assignee as provided in paragraph (1) of this subsection, or by reason of its having been signed by a representatives as provided in this act. 42:2B-22. Operating agreement, classes of members 22. a. An operating agreement may provide for classes or groups of members having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and

appendix a: statutes groups of members. An operating agreement may provide for the taking of an action, including the amendment of the operating agreement, without the vote or approval of any member or class or group of members, including an action to create under the provisions of the operating agreement a class or group of limited liability company interests that was not previously outstanding. b. An operating agreement may grant to all or certain identified members or a specified class or group of the members the right to vote, separately or with all or any class or group of managers or members, on any matter. Voting by members may be on a per capita, number, financial interest, class, group or any other basis. c. An operating agreement which grants a right to vote may set forth provisions relating to notice of the time, place or purpose of any meeting at which any matter is to be voted on by any manager or class or group of managers, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote. 42:2B-23. Debts, obligations, liabilities 23. Except as otherwise provided by this act, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company; and no member, manager, employee or agent of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company, or for any debt, obligation or liability of any other member, manager, employee or agent of the limited liability company, by reason of being a member, or acting as a manager, employee or agent of the limited liability company. 42:2B-24 Dissociation of membership. 24.A member shall be dissociated from a limited liability company upon the occurrence of any of the following events: a.Unless otherwise provided in an operating agreement, or with the written consent of all members, (1)on the date the limited liability company receives notice of the member’s resignation as a member, or on a later date specified by the member; (2)an event agreed to in the operating agreement as causing the member’s dissociation; (3)a member: (a)becomes a debtor in bankruptcy; (b)executes an assignment for the benefit of creditors; (c)seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the member or of all or substantially all of that member’s properties; or (d)fails, within 90 days after the appointment, without the member’s consent or acquiescence, of a trustee, receiver or liquidator of the member or of all or substantially all of that

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member’s properties, to have the appointment vacated or stayed, or fails within 90 days after the expiration of a stay to have the appointment vacated; or b. (1) the member’s expulsion pursuant to the operating agreement; (2)the member’s expulsion by the unanimous vote of the other members if: (a)it is unlawful to carry on the limited liability company with that member; (b)there has been a transfer of all of that member’s transferable interest in the limited liability company, other than a transfer for security purposes, or a court order charging the member’s interest; (c)within 90 days after the limited liability company notifies a corporate member that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or (d)a limited liability company or a partnership that is a member has been dissolved and its business is being wound up; (3)on application by the limited liability company or another member, the member’s expulsion by judicial determination because: (a)the member engaged in wrongful conduct that adversely and materially affected the limited liability company’s business; (b)the member willfully or persistently committed a material breach of the operating agreement; or (c)the member engaged in conduct relating to the limited liability company business which makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company; (4)in the case of a member who is an individual: (a)the member’s death; (b)the appointment of a guardian or general conservator for the member; or (c)a judicial determination that the member has become incapable of performing the member’s duties under the operating agreement; (5)in the case of a member that is a trust or is acting as a member by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the limited liability company, but not merely by reason of the substitution of a successor trustee; (6)in the case of a member that is an estate or is acting as a member by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the limited liability company, but not merely by reason of the substitution of a successor personal representative; or

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(7)termination of a member who is not an individual, partnership, limited liability company, corporation, trust or estate. 42:2B-24.1. Rights of dissociated member 24.1. Upon a member’s dissociation, the dissociated member has, subject to section 39 of P.L.1993, c.210 (C.42:2B-39), only the rights of an assignee of a member’s limited liability interest. 42:2B-25. Information; member’s rights; manager’s rights 25. a. Each member of a limited liability company has the right, subject to such reasonable standards (including standards governing what information and documents are to be furnished at what time and location and at whose expense) as may be set forth in an operating agreement or otherwise established by the manager or, if there is no manager, then by the members, to obtain from the limited liability company from time to time upon reasonable demand for any purpose reasonably related to the member’s interest as a member of the limited liability company: (1) True and full information regarding the status of the business and financial condition of the limited liability company; (2) Promptly after becoming available, a copy of the limited liability company’s federal, State and local income tax returns for each year; (3) A current list of the name and last known business, residence or mailing address of each member and manager; (4) A copy of any written operating agreement and certificate of formation and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the operating agreement and any certificate and all amendments thereto have been executed; (5) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each member and which each member has agreed to contribute in the future, and the date on which each became a member; and (6) Except as kept confidential pursuant to subsection c. of this section, other information regarding the affairs of the limited liability company as is just and reasonable. b. Each manager shall have the right to examine all of the information described in this section for a purpose reasonably related to his position as a manager. c. The manager of a limited liability company shall have the right to keep confidential from the members, for such period of time as the manager deems reasonable, any information which the manager reasonably believes to be in the nature of trade secrets or other information the disclosure of which the manager in good faith believes is not in the best interest of the limited liability company or could damage the limited liability company or its business or which the limited liability company is required by law or by agreement with a third party to keep confidential.

d. A limited liability company may maintain its records in other than a written form if such form is capable of conversion into written form within a reasonable time. e. Any demand by a member under this section shall be in writing and shall state the purpose of the demand. 42:2B-26. Provisions of operating agreement on performance of members 26. An operating agreement may provide that a member who fails to perform in accordance with, or to comply with the terms and conditions of, the operating agreement shall be subject to specified penalties or specified consequences, and at the time or upon the happening of events specified in the operating agreement, a member shall be subject to specified penalties or specified consequences. Unless otherwise provided in the operating agreement, a member shall not be personally liable for failure to perform in accordance with, or to comply with the terms and conditions of, the operating agreement or for any other reason unless such failure to perform or to comply or such other reason constitutes gross negligence or willful misconduct by the member. The operating agreement may, in any event, eliminate or limit the personal liability of the member for such failure to perform or to comply or for such other reason. 42:2B-27 Management of company, control. 27. a. (1) Unless otherwise provided in an operating agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the then current percentage or other interest in the profits controlling; (2) provided, however, that if an operating agreement provides for the management, in whole or in part, of a limited liability company by one or more managers, the management of the limited liability company, to the extent so provided, shall be vested in the manager or managers who shall be chosen by the member or members in the manner provided in the operating agreement. The managers shall also hold the offices and have the responsibilities accorded to them by the members and set forth in an operating agreement. Subject to section 37 of this act, a manager shall cease to be a manager as provided in an operating agreement. b. (1) If a limited liability company is managed by its members, unless otherwise provided in the operating agreement, each member shall have the authority to bind the limited liability company. In addition, unless otherwise provided in the operating agreement, or to the extent that a court of competent jurisdiction determines that the operating agreement is without effect in this regard, each member in a limited liability company managed by its members shall also have the authority to file for insolvency or reorganization under appropriate State or federal law, so long as that filing has the prior approval of members then

appendix a: statutes owning more than 50 percent of the interests in the profits of the limited liability company. (2)If the limited liability company is managed by a manager or managers, the managers shall, in addition to all other authority accorded by the operating agreement, have the authority to file for insolvency or reorganization under appropriate State or federal law, unless otherwise provided in the operating agreement, except to the extent a court of competent jurisdiction determines that the operating agreement is without effect in this regard. 42:2B-28. Manager as member 28. A manager of a limited liability company may make contributions to the limited liability company and share in the profits and losses of, and in distributions from, the limited liability company as a member. A person who is both a manager and a member has the rights and powers, and is subject to the restrictions and liabilities, of a manager and, except as provided in an operating agreement, also has the rights and powers, and is subject to the restrictions and liabilities, of a member to the extent of his participation in the limited liability company as a member. 42:2B-29. Operating agreement provisions for classes and groups of managers 29. a. An operating agreement may provide for classes or groups of managers having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of managers having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of managers. An operating agreement may provide for the taking of an action, including the amendment of the operating agreement, without the vote or approval of any manager or class or group of managers, including an action to create under the provisions of the operating agreement a class or group of limited liability company interests that was not previously outstanding. b. An operating agreement may grant to all or certain identified managers or a specified class or group of the managers the right to vote, separately or with all or any class or group of managers or members, on any matter. Voting by managers may be on a per capita, number, financial interest, class, group or any other basis. c. An operating agreement which grants a right to vote may set forth provisions relating to notice of the time, place or purpose of any meeting at which any matter is to be voted on by any manager or class or group of managers, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote.

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42:2B-30. Provisions of operating agreement on performance of managers 30. An operating agreement may provide that a manager who fails to perform in accordance with, or to comply with the terms and conditions of, the operating agreement shall be subject to specified penalties or specified consequences, and at the time or upon the happening of events specified in the operating agreement, a manager shall be subject to specified penalties or specified consequences. Unless otherwise provided in the operating agreement, a manager shall not be personally liable for failure to perform in accordance with, or to comply with the terms and conditions of, the operating agreement or for any other reason unless such failure to perform or to comply or such other reason constitutes gross negligence or willful misconduct by the manager. The operating agreement may, in any event, eliminate or limit the personal liability of the manager for such failure to perform or to comply or for such other reason. 42:2B-31 Protection for member, manager for reliance on information. 31.A member or manager of a limited liability company shall be fully protected in relying in good faith upon the records of the limited liability company and upon such information, opinions, reports or statements presented to the limited liability company by any of its other managers, members, officers, employees, or committees of the limited liability company, or by any other person, as to matters the member or manager reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the limited liability company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the limited liability company or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid. For purposes of this section, a member or manager who is the person responsible for the making of any records of a limited liability company may only rely on those records in good faith if that reliance is reasonable. 42:2B-32. Member contributions 32. The contribution of a member to a limited liability company may be in cash, property or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services. 42:2B-33. Obligations of members for contributions promised 33. a. Except as provided in an operating agreement, a member is obligated to a limited liability company to perform any promise to contribute cash or property or to perform services, even if he is unable to perform because of death, disability or any other reason. If a member does not make the required contribution of property or services, he is obligated at the option of the limited liability company

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to contribute cash equal to that portion of the agreed value (as stated in the records of the limited liability company) of the contribution that has not been made. The foregoing option shall be in addition to, and not in lieu of, any other rights, including the right to specific performance, that the limited liability company may have against such member under the operating agreement or applicable law. b. Unless otherwise provided in an operating agreement, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of this act may be compromised only by consent of all the members. Notwithstanding the compromise, a creditor of a limited liability company who extends credit, after the entering into of an operating agreement or an amendment thereto which, in either case, reflects the obligation, and before the amendment thereof to reflect the compromise, may enforce the original obligation to the extent that, in extending credit, the creditor reasonably relied on the obligation of a member to make a contribution or return. A conditional obligation of a member to make a contribution or return money or other property to a limited liability company may not be enforced unless the conditions of the obligation have been satisfied or waived as to or by such member. Conditional obligations include contributions payable upon a discretionary call of a limited liability company prior to the time the call occurs. c. An operating agreement may provide that the limited liability company interest of any member who fails to make any contribution that he is obligated to make shall be subject to specified penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of reducing or eliminating the defaulting member’s proportionate interest in a limited liability company, subordinating his limited liability company interest to that of nondefaulting members, a forced sale of his limited liability company interest, forfeiture of his limited liability company interest, the lending by other members of the amount necessary to meet his commitment, a fixing of the value of his limited liability company interest by appraisal or by formula and redemption or sale of his limited liability company interest at such value, or other penalty or consequence. 42:2B-34. Allocation of profits and losses 34. The profits and losses of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in an operating agreement. If the operating agreement does not so provide, profits and losses shall be allocated on the basis of the agreed value (as stated in the records of the limited liability company) of the contributions made by each member to the extent they have been received by the limited liability company and have not been returned.

42:2B-35. Distributions of cash, other assets 35. Distributions of cash or other assets of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in an operating agreement. If the operating agreement does not so provide, distributions shall be made on the basis of the agreed value (as stated in the records of the limited liability company) of the contributions made by each member to the extent they have been received by the limited liability company and have not been returned. 42:2B-36. Distributions to member prior to resignation, dissolution, winding up 36. Except as provided in this act, to the extent and at the times or upon the happening of the events specified in an operating agreement, a member is entitled to receive from a limited liability company distributions before his resignation from the limited liability company and before the dissolution and winding up thereof. 42:2B-37 Resignation of manager. 37.A manager may resign as a manager of a limited liability company at the time or upon the happening of events specified in an operating agreement and in accordance with the operating agreement. An operating agreement may provide that a manager shall not have the right to resign as a manager of a limited liability company. Notwithstanding that an operating agreement provides that a manager does not have the right to resign as a manager of a limited liability company, a manager may resign as a manager of a limited liability company at any time by giving written notice to the member or members, as the case may be, and other managers. If the resignation of a manager violates an operating agreement, in addition to any remedies otherwise available under applicable law, a limited liability company may recover from the resigning manager damages for breach of the operating agreement and offset the damages against the amount otherwise distributable to the resigning manager. 42:2B-38. Resignation of member 38. A member may resign from a limited liability company at the time or upon the happening of events specified in an operating agreement and in accordance with the operating agreement. If an operating agreement does not specify the time or the events upon the happening of which a member may resign or a definite time for the dissolution and winding up of a limited liability company, a member may resign upon not less than six months’ prior written notice to the limited liability company at its registered office as set forth in the certificate of formation filed in the office of the Secretary of State and to each member and manager at each member’s and manager’s address as set forth on the records of the limited liability company. Notwithstanding anything to the contrary set forth in this act, an operating agreement may provide that a member may not resign from a limited liability company or assign his limited liability company

appendix a: statutes interest prior to the dissolution and winding up of the limited liability company. 42:2B-39 Distribution to resigning member. 39. a. Except as provided in this act, upon resignation any resigning member from a limited liability company with at least one remaining member is entitled to receive any distribution to which he is entitled under an operating agreement and, if not otherwise provided or permitted in an operating agreement, he is entitled to receive, within a reasonable time after resignation, the fair value of his limited liability company interest as of the date of resignation, less all applicable valuation discounts, unless the operating agreement provides for another distribution formula. Upon resignation from a limited liability company of which that member had been the last member, unless the limited liability company continues as permitted pursuant to subsection d. of section 48 of P.L.1993, c.210 (C.42:2B48), the resigning member shall not be entitled to receive any distribution except pursuant to section 51 of P.L.1993, c.210 (C.42:2B-51). If the limited liability company continues as permitted under subsection d. of section 48 of P.L.1993, c.210 (C.42:2B-48), the resigning member shall be treated as, and have the rights of, a resigning member from a limited liability company with at least one remaining member. If the resignation of a member violates an operating agreement, in addition to any remedies otherwise available under applicable law, a limited liability company may recover from the resigning member damages for breach of the operating agreement and offset the damages against the amount otherwise distributable to the resigning member. b.As used in subsection a. of this section, “all applicable valuation discounts” shall include discounts for lack of liquidity, relative size of holding, absence of any trading market and comparable factors. 42:2B-40. Member distributions limited to cash 40. Except as provided in an operating agreement, a member, regardless of the nature of his contribution, has no right to demand and receive any distribution from a limited liability company in any form other than cash. Except as provided in an operating agreement, a member may not be compelled to accept a distribution of any asset in kind from a limited liability company to the extent that the percentage of the asset distributed to him exceeds a percentage of that asset which is equal to the percentage in which he shares in distributions from the limited liability company. 42:2B-42. Distributions to members, limitations; violations, liability 42. a. A limited liability company shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited liability company, other than liabilities to members on account of their limited liability company interests and liabilities for which the recourse of

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creditors is limited to specified property of the limited liability company, exceed the fair value of the assets of the limited liability company, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited liability company only to the extent that the fair value of that property exceeds that liability. b. A member who receives a distribution in violation of subsection a. of this section, and who knew at the time of the distribution that the distribution violated subsection a. of this section, shall be liable to a limited liability company for the amount of the distribution. A member who receives a distribution in violation of subsection a. of this section, and who did not know at the time of the distribution that the distribution violated subsection a. of this section, shall not be liable for the amount of the distribution. Subject to subsection c. of this section, this subsection b. shall not affect any obligation or liability of a member under an operating agreement or other applicable law for the amount of a distribution. c. Unless otherwise agreed, a member who receives a distribution from a limited liability company shall have no liability under this act or other applicable law for the amount of the distribution after the expiration of three years from the date of the distribution unless an action to recover the distribution from the member is commenced prior to the expiration of the three year period and an adjudication of liability against the member is made in the said action. 42:2B-43. Company interest, personal property 43. A limited liability company interest is personal property. A member has no interest in specific limited liability company property. 42:2B-44 Company interest assignable; rights of assignee. 44. a. A limited liability company interest is assignable in whole or in part except as provided in an operating agreement. The assignee of a member’s limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in an operating agreement and upon: (1)The approval of all of the non-assigning members of that interest, if any, of the limited liability company; or (2)Compliance with any procedure provided for in the operating agreement. b.Unless otherwise provided in an operating agreement: (1)An assignment entitles the assignee to receive the distribution or distributions, and to receive the allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned; (2)A member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of his limited liability company interest; and

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(3)The pledge of, or granting of a security interest, lien or other encumbrance in or against, any or all of the limited liability company interest of a member shall not cause the member to cease to be a member, to become dissociated or to fail to have the power to exercise any rights or powers of a member. c.An operating agreement may provide that a member’s interest in a limited liability company may be evidenced by a certificate of limited liability company interest issued by the limited liability company. d.Unless otherwise provided in an operating agreement and except to the extent assumed by agreement, until an assignee of a limited liability company interest becomes a member, the assignee shall have no liability as a member solely as a result of the assignment. e.An assignee shall have no authority to seek or obtain a court order dissolving or liquidating a limited liability company. 42:2B-45. Rights of judgment creditor of member 45. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. An action by a court pursuant to this section does not deprive any member of the benefit of any exemption laws applicable to his limited liability company interest. A court order charging the limited liability company interest of a member pursuant to this section shall be the sole remedy of a judgment creditor, who shall have no right under P.L.1993, c.210 (C.42:2B-1 et seq.) or any other State law to interfere with the management or force dissolution of a limited liability company or to seek an order of the court requiring a foreclosure sale of the limited liability company interest. Nothing in this section shall be construed to affect in any way the rights of a judgment creditor of a member under federal bankruptcy or reorganization laws. 42:2B-46 Conditions for assignee becoming member; rights, obligations, liability. 46. a. An assignee of a limited liability company interest may become a member as provided in an operating agreement and upon: (1)The approval of all of the members of the limited liability company other than the member assigning his limited liability company interest; or (2)Compliance with any procedure provided for in the operating agreement. b.An assignee who has become a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of a member under an operating agreement and this act. Notwithstanding the foregoing, unless otherwise provided in an operating agreement, an

assignee who becomes a member is liable for the obligations of his assignor to make contributions as provided in section 33 of this act, but shall not be liable for the obligations of his assignor under section 37 or 38. However, the assignee is not obligated for liabilities, including the obligations of his assignor to make contributions as provided in section 33 of this act, unknown to the assignee at the time he became a member and which could not be ascertained from an operating agreement. c.Whether or not an assignee of a limited liability company interest becomes a member, the assignor is not released from his liability to a limited liability company under sections 32 through 42 of this act. d.In addition to subsection a. of this section, an assignee of a limited liability company interest may become a member of a limited liability company unless otherwise provided or expressly precluded by a provision of the operating agreement, upon that assignee’s election when: (1)there are no members of the limited liability company; (2)that election is made within 90 days after the date on which the limited liability company no longer has at least one member; and (3)the assignee either first became an assignee when there were no members of the limited liability company remaining in connection with the resignation or other dissociation of the last remaining member of the limited liability company or is an assignee of a member of the limited liability company when that member is the only member of the limited liability company. If an assignee timely elects to become a member of the limited liability company as provided in this section, the certificate of formation shall remain valid and the limited liability company shall continue to have existence as though it has always had at least one member. 42:2B-47 Death, incompetence of member. 47.If a member who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the member’s executor, administrator, guardian, conservator or other legal representative may exercise all of the member’s rights for the purpose of settling his estate or administering his property, including any power under an operating agreement of an assignee to become a member and the power given to an assignee under subsection d. of section 46 of P.L.1993, c.210 (C.42:2B-46). If a member is a corporation, trust or other entity and is dissolved or terminated, the powers of that member may, in addition to the powers given to an assignee under subsection d. of section 46 of P.L.1993, c.210 (C.42:2B-46), be exercised by its legal representative or successor. 42:2B-48 Dissolution, wind up. 48.A limited liability company is dissolved and its affairs shall be wound up upon the first to occur of the following:

appendix a: statutes a.Unless the certificate of formation specifies that the limited liability company is perpetual, at the time specified in an operating agreement, or 30 years from the date of the formation of the limited liability company if no specified time for dissolution and winding up, regardless of any dissolution contingencies, is set forth in the operating agreement; b.Upon the happening of events specified in an operating agreement; c.The written consent of all members, which includes written consent of the sole member of a limited liability company with only one member; d.Ninety days after the date on which the limited liability company no longer has at least one member, unless at least one new member is admitted within that 90-day period; or e.The entry of a decree of judicial dissolution under section 49 of this act. 42:2B-49. Dissolution by decree 49. On application by or for a member or manager the Superior Court may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with an operating agreement. 42:2B-49.2. Creditors not complying barred from suing, exceptions 49.2.Any creditor who does not file a claim as provided within the time limit specified in the notice given pursuant to section 1 of this act, and all those claiming through the creditor or under the claim, shall be forever barred from suing on the claim or otherwise realizing upon or enforcing it except, in the case of a creditor who shows good cause for not having previously filed a claim, to the extent the Superior Court may allow: a.against the limited liability company to the extent of any undistributed assets; or b.if the undistributed assets are not sufficient to satisfy a claim, against a member to the extent of the member’s ratable part of the claim, out of the assets of the limited liability company distributed to the member in dissolution. This section shall not apply to claims which are in litigation on the date of the first publication of the notice pursuant to section 1 of this act. 42:2B-50. Wind-up of affairs; appointment of liquidating trustee; liability not affected, imposed 50. a. Unless otherwise provided in an operating agreement, a manager who has not wrongfully dissolved a limited liability company or, if there is no manager, the members or a person approved by the members or, if there is more than one class or group of members, then by each class or group of members, in either case, by members who own more than 50 percent of the then current percentage or other interest in the profits of the limited liability company owned by all of the members or by the members in each class or group, as appropriate, may wind up the limited liability company’s affairs; but the Chancery Division, General Equity Part of Superior Court, upon cause shown,

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may wind up the limited liability company’s affairs upon application of any member or manager, his legal representative or assignee, and in connection therewith, may appoint a liquidating trustee. b. Upon dissolution of a limited liability company and until the filing of a certificate of cancellation as provided in section 14 of this act, the persons winding up the limited liability company’s affairs may, in the name of, and for and on behalf of, the limited liability company, prosecute and defend suits, whether civil, criminal or administrative, gradually settle and close the limited liability company’s business, dispose of and convey the limited liability company’s property, discharge or make reasonable provision for the limited liability company’s liabilities, and distribute to the members any remaining assets of the limited liability company, all without affecting the liability of members and managers and without imposing liability on a liquidating trustee. 42:2B-51. Distribution of assets upon winding up; payment of claims, obligations 51. a. Upon the winding up of a limited liability company, the assets shall be distributed as follows: (1) To creditors, including members and managers who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the limited liability company (whether by payment or the making of reasonable provision for payment thereof ) other than liabilities for which reasonable provision for payment has been made and liabilities for distributions to members under section 36 or 39 of this act; (2) Unless otherwise provided in an operating agreement, to members and former members in satisfaction of liabilities for distributions under section 36 or 39 of this act; and (3) Unless otherwise provided in an operating agreement, to members first for the return of their contributions and second respecting their limited liability company interests, in the proportions in which the members share in distributions. b. A limited liability company which has dissolved shall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured claims and obligations, known to the limited liability company and all claims and obligations which are known to the limited liability company but for which the identity of the claimant is unknown. If there are sufficient assets, the claims and obligations shall be paid in full and any provision for payment made shall be made in full. If there are insufficient assets, the claims and obligations shall be paid or provided for according to their priority and, among claims and obligations of equal priority, ratably to the extent of assets available therefor. Unless otherwise provided in an operating agreement, any remaining assets shall be distributed as provided in this act. Any liquidating trustee winding up a limited liability company’s affairs who

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has complied with this section shall not be personally liable to the claimants of the dissolved limited liability company by reason of the trustee’s actions in winding up the limited liability company. 42:2B-52. Laws governing foreign company 52. The laws of the state, territory, possession, or other jurisdiction or country under which a foreign limited liability company is organized govern its organization and internal affairs and the liability of its members and managers and a foreign limited liability company may not be denied registration by reason of any difference between those laws and the laws of this State. 42:2B-53. Application for registration 53. a. Before doing business in this State, a foreign limited liability company shall register with the Secretary of State. In order to register, a foreign limited liability company shall submit to the Secretary of State a copy executed by an authorized person of an application for registration as a foreign limited liability company, setting forth: (1) The name of the foreign limited liability company and, if different, the name under which it proposes to register and do business in this State; (2) The state, territory, possession or other jurisdiction or country where formed, the date of its formation and a statement from an authorized person that, as of the date of filing, the foreign limited liability company validly exists as a limited liability company or a registered limited liability partnership under the laws of the jurisdiction of its formation; (3) The nature of the business or purposes to be conducted or promoted in this State; (4) The address of the registered office and the name and address of the registered agent for service of process required to be maintained by section 6 of this act; (5) A statement that the Secretary of State is appointed the agent of the foreign limited liability company for service of process; and (6) The date on which the foreign limited liability company first did, or intends to do, business in this State. b. A person shall not be deemed to be doing business in this State solely by reason of being a member or manager of a domestic limited liability company or a foreign limited liability company. 42:2B-54. Approval of application 54. a. If the Secretary of State finds that an application for registration from a foreign limited liability company conforms to law and all requisite fees have been paid, he shall: (1) Certify that the application has been filed in his office by endorsing upon the original application the word “Filed,” and the date and hour of the filing. This endorsement is conclusive of the date and time of its filing in the absence of actual fraud; (2) File and index the endorsed application.

b. The duplicate of the application, similarly endorsed, shall be returned to the person who filed the application or his representative. 42:2B-55. Certificate correcting statement 55. If any statement in the application for registration of a foreign limited liability company was false when made or any arrangements or other facts described have changed, making the application false in any respect, the foreign limited liability company shall promptly file in the office of the Secretary of State a certificate, executed by an authorized person, correcting the statement. 42:2B-56. Cancellation of registration 56. A foreign limited liability company may cancel its registration by filing in the office of the Secretary of State a certificate of cancellation, executed by an authorized person. A cancellation does not terminate the authority of the Secretary of State to accept service of process on the foreign limited liability company with respect to causes of action arising out of the doing of business in this State. 42:2B-57. Registration of foreign liability company; liability; violations, penalties 57. a. A foreign limited liability company doing business in this State may not maintain any action, suit or proceeding in this State until it has registered in this State, and has paid to this State all fees and penalties for the years or parts thereof, during which it did business in this State without having registered. b. The failure of a foreign limited liability company to register in this State does not impair: (1) The validity of any contract or act of the foreign limited liability company; (2) The right of any other party to the contract to maintain any action, suit or proceeding on the contract; or (3) Prevent the foreign limited liability company from defending any action, suit or proceeding in any court of this State. c. A member or a manager of a foreign limited liability company is not liable for the obligations of the foreign limited liability company solely by reason of the limited liability company’s having done business in this State without registration. d. Any foreign limited liability company doing business in this State without first having registered shall be fined and shall pay to the Secretary of State $200 for each year or part thereof during which the foreign limited liability company failed to register in this State. The penalty shall be recovered with costs in an action prosecuted by the Attorney General. The Superior Court may proceed in the action in a summary manner or otherwise. 42:2B-69 Taxation classification. 69. a. For all purposes of taxation under the laws of this State, a limited liability company formed under this act or qualified to do business in this State as a foreign limited liability company with two or more members shall be

appendix a: statutes classified as a partnership unless classified otherwise for federal income tax purposes, in which case the limited liability company shall be classified in the same manner as it is classified for federal income tax purposes. For all purposes of taxation under the laws of this State, a member or an assignee of a member of a limited liability company formed under this act or qualified to do business in this State as a foreign limited liability company shall be treated as a partner in a partnership unless the limited liability company is classified otherwise for federal income tax purposes, in which case the member or assignee of a member shall have the same status as the member or assignee of a member has for federal income tax purposes. b.For all purposes of taxation on income under the laws of this State and only for those purposes, a limited liability company formed under P.L. 1993, c.210 (C. 42:2B-1 et seq.) or qualified to do business in this State as a foreign limited liability company with one member is disregarded as an entity separate from its owner, unless classified other wise for federal tax purposes, in which case the limited liability company will be classified in the same manner as it is classified for federal income tax purposes. For all purposes of taxation on income under the laws of this State and only for those purposes, the sole member or an assignee of all of the limited liability company interest of the sole member of a limited liability company formed under P.L.1993, c.210 (C.42:2B-1 et seq.) or qualified to do business in this State as a foreign limited liability company is treated as the direct owner of the underlying assets of the limited liability company and of its operations, unless the limited liability company is classified otherwise for federal income tax purposes, in which case the member or assignee of a member will have the same status as the member or assignee of a member has for federal income tax purposes. 42:2B-70. Filings, reports 70. All filings and reports required by this act to be filed in the office of the Secretary of State shall be on forms and in a manner which shall be prescribed and furnished by the Secretary of State.

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Appendix B: Legal Holidays

The following days in each year shall be considered public holidays: ✪ January 1—known as New Year’s Day; ✪ the third Monday in January—known as Martin Luther King’s Birthday; ✪ February 12—known as Lincoln’s Birthday; ✪ the third Monday in February—known as Washington’s Birthday; ✪ the day designated and known as Good Friday; ✪ the last Monday in May—known as Memorial Day; ✪ July 4—known as Independence Day; ✪ the first Monday in September—known as Labor Day; ✪ the second Monday in October—known as Columbus Day; ✪ November 11—known as Armistice Day or Veterans’ Day; ✪ the fourth Thursday in November—known as Thanksgiving Day; ✪ December 25—known as Christmas Day; and, ✪ any general election day in this State. Whenever any of the days shall fall on a Sunday, the Monday following shall be deemed a public holiday.

Appendix C: Business Registration Application Packet

This appendix contains materials, information, and instructions pertaining to the registration of a business entity with the State of New Jersey for purposes of taxation after that business has been formed. New Jersey is very aggressive with respect to regulation and enforcement of business taxation. After initial registration, an on-going business will continue to receive, on a yearly basis, the forms, returns, additional instructions, and other information required to comply with New Jersey tax regulations. The reader is cautioned that business taxation issues are often complex and the authors strongly recommend consultation with a qualified accountant or tax attorney for the resolution of any questions or concerns. The materials also address the proper actions and reporting that must take place with respect to employees hired by the business entity. These must also be read carefully and scrupulously complied with to avoid possibly severe legal liability. Publisher’s Note: This packet of information contains internal cross-references. To assist the reader, those cross references have been retained. The page numbers found at the bottom center of the pages in this appendix reflect those cross-reference numbers. Applicants who are registering as Sole Proprietors or Partnerships must file pages 17–19, form NJ-REG. Applicants who are registering a new business

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entity (corporations, limited liability company, limited partnership, or a limited liability partnership), and who have already filed a new business certificate with our Commercial Recording/Corporate Filing Unit, need only complete pages 17–19. There is no need to complete pages 23 and 24 of the package if you have successfully filed with Commercial Recording. Applicants who are registering as a new business entity (corporations, limited liability company, limited partnership or a limited liability partnership) must complete the Public Records Filing for New Business Entity (pages 23 and 24) in addition to pages 17–19. Please note that the Public Records Filing should be submitted prior to the completion of form NJ-REG., but form NJ-REG must be submitted within sixty days of filing the new business entity. Sales Tax? If you will be collecting Sales Tax, you must submit your NJ-REG at least ten days prior to the date of your first sale, remitting use tax, or using NJ exemption certificates. You will receive a Certificate of Authority for sales tax indicating the 12-digit identification number assigned to your business. Federal Identification Number? All corporations and businesses with employees must have a Federal Employer Identification Number (FEIN). You must apply for your FEIN after you have formed your business entity. Contact the Internal Revenue Service at 1-800-829-1040 or www.irs.gov. Questions? Please contact the Client Registration Bureau at 609-292-1730 if you have questions regarding the filing of the Business Registration form. Please call 609-292-9292 for questions regarding the completion of the Public Records Filing for New Business Entity form.

Table of Contents Book Pg Packet Pg

Taxes of the State of New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

2

Instructions for NJ-REG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

6

Business Registration Form (NJ-REG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

17

Instructions for Business Entity Public Record Filing . . . . . . . . . . . . 163

21

Public Records Filing for New Business Entity . . . . . . . . . . . . . . . . . . . 165

23

Registration of Alternate Name Form (C-150G). . . . . . . . . . . . . . . . . . . . 167

25

New Hire Reporting Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

27

appendix c: business registration application packet

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Book Pg Packet Pg

New Hire Reporting Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

29

The Child Support Program and Employees Information . . . . . . . . . . . 173

31

Instructions for Business Change and Amendment Form (REG-C-L and REG-C-EA) . . . . . . . . . . . . . . . . . . . . . . . . . 177

35

Request for Change of Registration Information (REG-C-L) . . . . . . . . 179

37

Business Entity Amendment Filing (REG-C-EA). . . . . . . . . . . . . . . . . . . . . 181

39

New Jersey S Corporation or New Jersey QSSS Election Form . . . . . . 183

41

Request for Cigarette and/or Motor Fuel License Application (REG-L). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 (For Wholesaler, Distributor & Manufacturer Cigarette Licenses and Wholesaler, Distributor, Import, Export, Seller/User, Jobber and Storage Facility Operator Motor Fuel Licenses) Cigarette/Motor Fuels License Applications (CM-100) . . . . . . . . . . . . . 191 (Cigarette Retail, Vending & Manufacturer Representative Licenses and Motor Fuel Retail Dealers and Transport Licenses)

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Appendix D: Blank Forms

The following forms may be photocopied or removed from this book and used immediately. For additional forms and information go to the New Jersey Office of Business Services’ website at www.state.nj.us/commerce/smallbiz.html and the Internal Revenue Service’s website www.irs.gov. form 1: Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . 190 form 2: Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 form 3: Application for Employer Identification Number (IRS Form SS-4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 form 4: Employment Eligibility Verification (Form I-9). . . . . . . 196 form 5: Employee’s Withholding Allowance Certificate (IRS Form W-4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 form 6: Election by a Small Business Corporation (IRS Form 2553). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

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form 1

CERTIFICATE OF INCORPORATION OF [ENTER CORPORATE NAME] THE UNDERSIGNED, of the age of majority or over, for the purpose of forming a corporation pursuant to the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 et seq. (“Act”), hereby executes the following Certificate of Incorporation: FIRST: SECOND: THIRD: FOURTH: FIFTH: SIXTH:

The name of the corporation is [ENTER CORPORATION NAME]. The purpose or purposes for which the corporation is organized are to engage in any activity within the purposes for which corporations may be organized under the Act. The aggregate number of shares which the corporation shall have the authority to issue is [ENTER (note: 100 is often used)]. The address of the corporation’s registered office is [ENTER ADDRESS] and its registered agent for service of process at such office is [ENTER AGENT]. The effective date of this Certificate of Incorporation shall be the date of recording of this Certificate in the office of the Secretary of State of the State of New Jersey. The number of directors constituting the initial Board of Directors shall be [ENTER NUMBER], and the name and address of the directors is as follows: [ENTER NAMES AND ADDRESSES OF DIRECTORS]

SEVENTH:

The name and address of the incorporator is as follows: [ENTER THE NAME AND ADDRESS OF INCORPORATOR]

EIGHTH: NINTH:

The period of existence of the corporation is perpetual. The power to make and enter by-laws shall be vested in the Board of Directors, subject to the power of the shareholders of the corporation to alter or repeal by-laws as provided by law. The directors and officers of the corporation shall be indemnified by the corporation against reasonable costs, expenses and counsel fees paid or incurred in connection with any action, suit or proceeding in which the director or officer is a party by reason of being or having been a director or officer. The indemnification shall be subject to any conditions, limitations and restrictions as may be imposed thereon by law, and shall be in addition to and not in restriction or limitation of any other privilege or power which the corporation may otherwise have with respect to the indemnification or reimbursement of directors or officers.

TENTH:

IN WITNESS WHEREOF, the undersigned incorporator of the above named corporation has hereunto executed the Certificate of Incorporation on the day of , 2004.

______________________________ [NAME OF INCORPORATOR] an authorized person

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BY-LAWS OF [ENTER CORPORATE NAME] ADOPTED: [ENTER DATE OF ADOPTION]

1.

2. 3. 4.

5. 6. 7. 8. 9.

ARTICLE I OFFICES Registered Office and Agent. The registered office of the Corporation in the State of New Jersey is at [ENTER ADDRESS OF REGISTERED OFFICE] The registered agent of the Corporation at such office is [ENTER NAME OF REGISTERED AGENT] Principal Place of Business. The principal place of business of the Corporation is [ENTER ADDRESS OF PRINCIPAL PLACE OF BUSINESS] Other Places of Business. Branch or subordinate places of business or offices may be established at any time by the Board at any location where the Corporation is qualified to do business. Action Without Meeting. The Shareholders may act without a meeting by written consent in accordance with N.J.S.A. 14A:5-6. Such consents may be executed together, or in counterparts, and shall be filed in the Minute Book. Special rules apply to the annual election of directors, mergers, consolidations, acquisitions of shares or the sales of assets. Quorum. The presence at a meeting in person or by proxy of shares entitled to cast [ENTER PERCENTAGE] of the votes shall constitute a quorum. Action Without Meeting. The Board may act without a meeting if, prior or subsequent to such action, each member of the Board shall consent in writing to such action. Quorum. [ENTER PERCENTAGE] of the entire Board shall constitute a quorum for the transaction of business. Vacancies in Board of Directors. Any vacancy in the Board may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum of the Board, or by a sole remaining director. Removal of Directors. Any director may be removed for cause, or without cause unless otherwise provided in the Certificate of Incorporation, by a majority vote of shareholders.

ARTICLE II OFFICERS 1. Number. The officers of the Corporation shall be a President, Secretary, a Treasurer, and such other officers as the Shareholders may from time to time determine. 2. Election and Term of Office. The officers of the Corporation may be elected by the Shareholders at any annual, regular or special meeting of the Shareholders, and shall serve at the pleasure of the Shareholders. 3. Resignations. Any officer may resign at any time by giving written notice to the President or Secretary of the Corporation, or if both the offices of President and Secretary shall then be vacant, to all Shareholders. Any such resignation shall be effective upon receipt of such notice or at such subsequent time as shall be specified in the notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

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4. President. The President shall be the chief executive officer of the Corporation and shall supervise the business operations of the Corporation subject to the control of the Shareholders. The President, or such persons designated by the President, shall sign, execute, acknowledge, verify, deliver and accept, in the name of the Corporation, deeds, mortgages, bonds, contracts, and other instruments authorized by the Shareholders, except in cases where the signing and execution thereof shall be expressly delegated by the Shareholders to another officer or agent of the Corporation; and, in general, shall perform all duties incident to the office of President, as well as such other duties as may be conferred upon or assigned by the Shareholders or specifically conferred by these By-Laws. 5. Vice President. In the absence or disability of the President or when so directed by the President, any Vice President designated by the Shareholders in a specific case may perform all duties of the President, and when so acting, shall have all of the power of, and be subject to all the restrictions upon, the President; provided, however, that no Vice President shall act as a member of or as Chairman of any special committee of which the President is a member or Chairman by designation or ex officio, except when designated by the Shareholders. The Vice Presidents shall perform such other duties as from time to time may be assigned to them respectively by the shareholders or the President. 6. Secretary. The Secretary shall record all the votes of the Shareholders and the minutes of the meetings of the shareholders in a book or books to be kept for that purpose; he shall see that notices of meetings of the Shareholders and their committees are given and that all records and reports are properly kept and filed by the Corporation as required by law; shall be the custodian of the seal of the Corporation and shall see that it is affixed to all documents to be executed on behalf of the Corporation under its seal; shall have authority to attest the corporate seal and the signatures of officers of the Corporation; shall have charge of the stock ledger and shall keep the account for all books, documents, papers and records of the Corporation; and, in general, shall perform all duties incident to the office of Secretary, and such other duties as may from time to time be assigned by the President. 7. Treasurer. The Treasurer shall be the chief accounting officer of the Corporation, and shall have active control of and shall be responsible for all matters pertaining to the accounts of the Corporation and its subsidiaries.The Treasurer shall supervise the auditing of all payrolls and vouchers of the Corporation and shall direct the manner of certifying the same; shall supervise the manner of keeping all vouchers for payments by the Corporation and all other documents relating to such payments; shall receive, audit and consolidate and all operating and financial statements of the Corporation, its various departments, divisions and subsidiaries; shall have supervision of the books and accounts of the Corporation and shall report thereon and be directly responsible to the Shareholders. The Treasurer shall have the care and custody of all of the funds of the Corporation and shall deposit the same in such banks, or other depositories as the Shareholders shall from time to time direct or approve. The Treasurer shall keep a full and accurate account of all moneys received and paid on account of the Corporation, and shall render a statement of his accounts whenever the Shareholders shall require. The Treasurer shall perform all other necessary acts and duties in connection with the administration of the financial affairs of the Corporation. When required by the Shareholders, the Treasurer shall give bonds for the faithful discharge of the Treasurer’s duties in such sums and with such sureties as the Shareholders shall approve. In the absence of the Treasurer, an Assistant Treasurer or other person as shall be designated by the Shareholders, shall perform his duties. 8. Compensation of Officers and Others. Compensation of all officers shall be fixed by the Shareholders, or any committee or officer authorized by the Shareholders except that the compensation of any officer so authorized shall be fixed by the Shareholders. No officer shall be precluded from receiving compensation by reason of the fact that he is also a Shareholder of the Corporation.

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ARTICLE III MISCELLANEOUS 1. Indemnification. Each person who was or is a party and each person who is threatened to be or is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or arbitrative, by reason of the fact that such person is or was an officer or employee of the Corporation, or is or was serving at the request of the Corporation as an officer, trustee, agent, or employee of another corporation, partnership, joint venture, sole proprietorship, trust or other enterprise, whether or not for profit, shall be indemnified and reimbursed by the Corporation for liabilities (including amounts paid or incurred in satisfaction of settlements, judgments, fines or penalties) and expenses (including reasonable costs, disbursements and counsel fees) to the fullest extent permitted by the laws of the State of New Jersey in effect at the time of such indemnification. This right of indemnification shall inure to the benefit of the heirs, executors and administrators of each such person and shall not be exclusive of any other rights or indemnification to which any officer, employee or person may be entitled in any capacity as a matter of law or under any by-law, agreement, vote of shareholders, insurance policy, or otherwise,and shall continue as to each person who has ceased to be an officer or employee. 2. Borrowing. No officer, agent or employee of the Corporation shall have any authority to borrow money on its behalf, pledge credit, or mortgage or pledge real or personal property, except to the extent of the authority delegated by resolution of the Shareholders. Authority may be given by the Shareholders for any of the above purposes and may be general or limited to specific instances. 3. Deposits and Withdrawals. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks or financial institutions as the Shareholders or their designee may approve or designate, and all such funds shall be withdrawn only upon checks signed by one or more Shareholders, officers or employees as the Shareholders shall designate. 4. Amendments. Any or all of the provisions of these By-Laws may be altered or repealed by an affirmative vote of all the issued and outstanding shares of the Corporation. 5. Corporate Seal. The seal of the Corporation shall be held in the custody of the Secretary, who shall have the authority to affix it to the proper corporate documents and attest it. 6. Waiver of Notice. Any notice required by these By-Laws, the Certificate of Incorporation, or the New Jersey Business Corporation Act may be waived in writing by any person entitled to notice. The waiver or waivers may be executed either before or after the event with respect to which notice is waived. Each director or Shareholder attending a meeting without protesting, prior to its conclusion, the lack of proper notice shall be deemed to have waived notice of the meeting.

194

◆

form 3

◆

195

196

◆

form 4

◆

197

198

◆

form 5 ◆ 199

form 6 ◆ 201

202

◆

Index

401(k) plans, 4 8(a) Contracting and Business Development Program, 77

A accountants, 31, 57 advertising, 65–68 amendment, 30, 33 Americans with Disabilities Act (ADA), 45 annual meeting, 30 apparent authority, 81 Application for Employer Identification Number, 53 Articles of Incorporation. See Certificate of Incorporation assets, 88 assignment for the benefit of creditors, 88 attorneys, 31, 36, 52, 89, 91, 93, 94, 95 client confidentiality, 52 costs, 89 evaluating, 92 fees, 95, 96 firing, 97 hiring, 89, 90 referral service, 91 selecting, 91 working with, 93, 94

B bankruptcy, 86, 88 bar association, 91 billboards, 67, 68 Board of Directors, 15, 49. See directors bonds, 16 bulk mail, 66 bulletins, 67 Business Corporation Act, 10, 32 business entity, 2, 17, 33, 34, 49, 52, 53, 55, 59, 85 business insurance, 39 business judgment rule, 32 business name, 37 Business Opportunity Specialists, 77 business planning, 70 Business Regulation Form, 37 bylaws, 11, 30, 32, 33, 34

C C corporation, 13 Certificate of Incorporation, 12, 30, 32, 36, 38, 52 Chapter 11 bankruptcy, 85, 86, 87 pros and cons, 87 Chapter 7 bankruptcy, 85, 88 close corporation. See S corporation committees, 29, 31, 33 authority, 33

204

◆

how to start a business in new jersey compensation, 1 consideration, 36 consumers, 82 copyrights, 38, 51 corporate seal, 11 Corporation Business Tax Act, 55 corporations, 1, 10 foreign, 17 formation, 12 liability of, 13 records, 49 taxes, 13 counseling, 69 creditors, 82 criminal misconduct, 81, 82, 83

D debts collecting, 79, 81 financing, 14 Department of Commerce, 78 Department of Treasury, 26 direct mail, 66 director, 16 directors, 29, 30, 32, 57, 82 authority, 31 credentials, 30 duties, 31 number of, 30 personal liability, 32 term, 30 disability insurance, 40, 54 dissolution, 32, 85 dividends, 13, 32 documentation, 15, 30 due diligence, 31 duty of care, 22, 24, 34 duty of loyalty, 22, 24

E email, 51 employee, 1 Employees, 11, 16, 31 application, 44 process, 45 discrimination, 44 interviews, 45 references, 45 turnover, 43 employer identification number (EIN), 53 employment concerns, 43 lawsuits, 46 entrepreneurs, 2, 3

F Fair Debt Collection Practices Act (FDCPA), 80 Federal Insurance Contributions Act (FICA), 15, 54 Federal Unemployment Tax Act (FUTA), 54 Fictitious Business Name Statement, 37 fictitious name, 37 fiduciary duty, 32 fiduciary responsibility, 31 finances, 2 financing, 71 sources of, 59 flexibility, 2 foreign corporations, 17

G good faith, 31, 34 Gross Income Tax Act, 56 guaranty loans, 62

I I.R.C. Sec. 165, 10 I.R.C. Sec. 709, 9 I.R.C. Sec. 721(a), 9 I.R.C. Sec. 722, 9 I.R.C. Sec. 1401, 54 I.R.C. Sec. 3101, 54 I.R.C. Sec. 3301, 54 I.R.C. Sec. 6654, 54 I.R.C. Sec. 6655, 54 insolvency, 88 insurance, 39, 70 life, 40 unemployment, 56 intellectual property, 38, 51 Internal Revenue Service (IRS), 15, 51, 55, 57 international trade, 78 Internet, 66 investment, 16, 59 investors, 2 involuntary disassociation, 26

J job descriptions, 44 job fairs, 43 jointly and severally liability, 5 journals, 68

index

L lawyers. See attorneys liability, 14 limited, 14 personal, 16 liability insurance, 39 life insurance, 40 limited liability companies, 1, 17, 18 contributions, 19 Delaware, 18 foreign, 18 formation, 17 liabilities of, 19 operating agreements, 19 records, 50 single-member, 18 taxes, 18 Limited Liability Company Act, 17, 18 limited liability partnerships, 26 annual report, 26 foreign, 27 limited partnerships, 10 liquidation, 85, 88 litigation papers, 52 Loan Guaranty Program, 60

M majority, 30 marketing, 71 Matchmaker Trade Missions, 78 medical insurance, 54 Medicare, 15, 54 meetings, 30, 35 minutes, 49 mortgages, 16

N newsletters, 68 not-for-profit corporation, 16 notice of overdue payment, 79

O officer, 16 officers, 29, 31, 33, 57 roles, 34 term, 34 Old Age, Survivor, and Disability Insurance, 54 out-of-court workout, 85

P partners, 21, 57, 82, 83 accounts, 23 authority, 22

◆

205

conduct, 24 disabled, 6 disassociation, 25 involuntary, 26 fiduciary duties of a, 24 lawsuits by, 25 liability of, 5 management, 24 resolving differences between, 24 partnerships, 1, 5, 15, 57 accounting system, 9 agreements, 21 depreciation, 9 dissolution, 7, 8, 24 doing business outside New Jersey, 8 formation, 5 lawsuits by, 25 liability of, 5 organizational expenses, 9 property, 6 records, 23, 50 registration, 5 taxes, 8, 9 pass-through entity, 15 passive income, 54 passive investors, 10 patents, 38, 51 pensions, 11 phone books, 65 president, 33 Procurement Automated Source System (PASS), 76 professional corporations, 15, 16 defined, 16 restrictions, 16 professional liability insurance, 39 profits, 2, 13, 15 Public Records Filing for New Business Entity, 40

Q quorum, 30

R radio, 67 receivership, 88 records, 49, 50, 52, 70 format, 51 storage, 51 registered agent, 51 registered agents, 19, 20 reorganization, 85, 87 reports, 49, 52 format, 51 storage, 51

206

◆

how to start a business in new jersey

S S corporation, 13, 14, 15, 54, 56 tax advantages, 15 tax disadvantages, 15 termination, 14 S Corporation & QSSS Election Form, 14 secretary, 30, 33, 49, 94 Self-Employment Contributions Act (SICA), 54 Service Corps of Retired Executives (SCORE), 70 offices, 71 servicemark, 38 share register, 51 shareholders, 13, 14,16, 30, 32, 33, 34, 49, 50, 54 election process, 30 liabilities of, 36 meetings, 35 quorum, 35 voting rights, 36 small business defined, 61 Small Business Act, 77 Small Business Administration (SBA), 60, 61, 62, 63, 69 Business Development Division, 69 loans, 61, 62 collateral, 63 Minority Small Business Division, 77, 78 Small Business Innovation Development Act, 76 Small Business Innovation Research Program (SBIR), 76 Small Business Institute program, 76 Social Security, 15, 54 sole proprietors, 57 sole proprietorships, 1, 3 features, 4 statement of disassociation, 26 statement of foreign qualification, 27 statement of partnership authority, 22 stock, 13, 14, 16, 30 exchange, 13 issued, 16 offering, 13 owner, 30 transferred, 16 stockholders. See shareholders

T taxes, 2, 4, 51, 53, 54, 57, 70, 71 advisor, 53 consequences, 53 corporate, 56 exempt businesses, 55 federal returns, 54 income, 55

income filings, 54 personal, 56 quarterly estimated payment, 54 sales, 57 state, 55 withholding, 55, 56 telephone directory, 65 television, 67 trade magazines, 68 Trade Name Registration Act, 37 trade names, 38 trade secrets, 38, 51 trademarks, 38 training, 69 Transmittal of Income and Tax Statements, 55 treasurer, 33 Treasury Regulations Sec. 31.6001-1(e)(1), 51 Treasury Regulations. Sec. 31.6001-1(a), 51

U ultra vires acts, 83 unemployment compensation, 57 unemployment insurance, 54 unfair competition, 38 Uniform Partnership Act, 5, 21

V venture capitalist, 60 vice president, 34 voting rights, 16

W waiver, 52 wrongful disassociation, 25

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Tenants’ Rights in NY $21.95 NORTH CAROLINA TITLES 1-57248-185-4 How to File for Divorce in NC (3E) $22.95 1-57248-129-3 How to Make a NC Will (3E) $16.95 1-57248-184-6 How to Start a Business in NC (3E) $18.95 1-57248-091-2 Landlords’ Rights & Duties in NC $21.95 NORTH CAROLINA AND SOUTH CAROLINA TITLES 1-57248-371-7 How to Start a Business in NC or SC $24.95 OHIO TITLES 1-57248-190-0 How to File for Divorce in OH (2E) $24.95 1-57248-174-9 How to Form a Corporation in OH $24.95 1-57248-173-0 How to Make an OH Will $16.95 PENNSYLVANIA TITLES 1-57248-242-7 Child Custody, Visitation and Support in PA $26.95 1-57248-211-7 How to File for Divorce in PA (3E) $26.95 1-57248-358-X How to Form a Cooporation in PA $24.95 1-57248-094-7 How to Make a PA Will (2E) $16.95 1-57248-357-1 How to Start a Business in PA (3E) $21.95 1-57248-245-1 The Landlord’s Legal Guide in PA $24.95 TEXAS TITLES 1-57248-171-4 Child Custody, Visitation, and Support in TX $22.95 1-57248-399-7 How to File for Divorce in TX (4E) $24.95 1-57248-114-5 How to Form a Corporation in TX (2E) $24.95 1-57248-255-9 How to Make a TX Will (3E) $16.95 1-57248-214-1 How to Probate and Settle an Estate in TX (3E) $26.95 1-57248-228-1 How to Start a Business in TX (3E) $18.95 1-57248-111-0 How to Win in Small Claims Court in TX (2E) $16.95 1-57248-355-5 The Landlord’s Legal Guide in TX $24.95

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1-57248-122-6

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SubTotal This page SubTotal previous page Shipping— $5.00 for 1st book, $1.00 each additional Illinois residents add 6.75% sales tax Connecticut residents add 6.00% sales tax

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To order, call Sourcebooks at 1-800-432-7444 or FAX (630) 961-2168 (Bookstores, libraries, wholesalers—please call for discount) Prices are subject to change without notice. Find more legal information at: www.SphinxLegal.com

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F. Clifford Gibbons Rebecca A. DeSimone Attorneys at Law