New Jersey Limited Liability Companies
The New Jersey Limited Liability Company Act (the “NJ LLC Act”) governs the formation, operation and dissolution of limited liability companies in the State of New Jersey (“LLCs”).
Combining certain characteristics of both partnerships and corporations, LLCs are privately owned legal entities that can be formed for the purpose of earning profits, pursuing a social mission, or both, although some states require an LLC to be formed only for a “business purpose.” LLCs differ from for-profit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for pass-through income tax treatment. This means that income and expenses are reported as though the members incurred them directly, and profits or losses are taxed at the ownership (member) level, rather than the entity (company) level.
Members of LLCs can be individual investors as well as for-profit corporations and tax-exempt nonprofit corporations. For this reason and also because of pass-through taxation which eliminates “double taxation”, LLCs are preferred over for-profit corporations as vehicles for social enterprise, especially for joint ventures between a tax-exempt nonprofit with a social change mission and a for-profit business.
LLCs are akin to partnerships because the members have broad discretion to allocate profit and loss and management powers among themselves (via an “operating agreement”). On the other hand, as with the shareholders of corporations, the members of an LLC can be divided into classes, each with its own economic rights, and members have limited personal liability (discussed below).
Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit limited liability companies (nonprofit LLCs). The statutes of numerous states, including California, have language that permits nonprofit LLCs to exist. Assuming state laws permit formation of nonprofit LLCs, the IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be treated as a separate legal entity for tax purposes and its operating agreement includes the language mandated by the organizational test (social benefit purposes, distribution of assets upon dissolution, etc.) and it meets numerous requirements largely designed to guard against profits accruing to private individuals. These conditions will be discussed in the Nonprofit Taxation section.
To form and organize an LLC under the NJ LLC Act, a certificate of formation must be filed with the New Jersey Division of Revenue, Corporate Filing Unit, P.O. Box 308, Trenton, NJ 08625 (for administrative reasons, filings are made through the Division of Revenue, not the Secretary of State). The NJ LLC Act also provides that the member or members of an LLC may enter into an operating agreement, a document that is not filed with the New Jersey Secretary of State, but that determines the rights, duties and obligations of the members. See the Management and Control section below for further discussion.
The certificate of formation must set forth the following information:
i) the name of the NJ LLC, which must contain the words “Limited Liability Company” or the abbreviation “L.L.C.”;
ii) the address of the registered office and the name and address of the registered agent for service of process;
iii) whether the LLC is to have perpetual existence, or, if the LLC is to have a specific date of dissolution, the latest date on which the LLC is to be dissolved; and
iv) any other matters the members determine to include therein.
The certificate of formation is executed and filed by one or more persons authorized to form an LLC. Any legally competent individual or entity may organize an LLC and such individual or entity is not required to be a New Jersey resident. The NJ LLC Law permits the formation of single-member LLCs. The fees for filing the certificate of formation with the New Jersey Secretary of State is $125.
An LLC is deemed to have been formed at the time of the filing of the certificate of formation, unless the certificate of formation provides for a future effective date or time. The certificate of formation may be filed with the New Jersey Secretary of State prior to members entering into an operating agreement. The operating agreement may be entered into before, at the time of, or after the filing of the certificate of formation, and may be made effective as of the formation of the LLC or at such other time or date as provided in or reflected by the operating agreement.
An LLC may engage in any type of lawful business, purpose or activity. An LLC has the right to exercise all of the powers and privileges granted by the NJ LLC Act, by any other law, or by its operating agreement. The purposes and powers of an LLC may be restricted by provisions in the operating agreement if desired by the members.
A generic form of the certificate of formation for a NJ LLC may be found at Public Records, The State of New Jersey, Division of Revenue at: http://www.state.nj.us/treasury/revenue/pdforms/pubrec.pdf and in “New Jersey Corporations and Other Business Entities” as Form 18.01 (See Mackay, John R., New Jersey Corporations and Other Business Entities Form 18.01 (3d ed., LexisNexis Matthew Bender 2005)) (form updated December 2008). Some general forms of bylaws for nonprofit corporations may be found in “General Forms: Nonprofit Organizations: Forms for Creation, Operation and Dissolution” referenced in the Resources Section below.
Management and Control
Typically, an operating agreement entered into by the members governs the management of an LLC. The operating agreement - which is like the certificate of incorporation, bylaws and a shareholder agreement for a corporation all in a single document - may contain provisions requiring adherence to a social purpose, and such purpose and the values it embodies may be interwoven throughout the operating agreement.
The operating agreement defines the rights, duties and liabilities of the members, and managers, if applicable, of the LLC. The NJ LLC Act provides members of an LLC with great flexibility in establishing the management and structure of the LLC. In most cases, the rules set forth in the NJ LLC Act are default rules that may be modified in the operating agreement and are otherwise only applicable when the operating agreement is silent on the issue. Unless otherwise provided in the operating agreement and certificate of formation, the management of an LLC is vested in its members in proportion to their percentage interests in the profits of the LLC and, unless otherwise provided by the operating agreement, the decision of members owning more than 50 percent of such interests is controlling. However, an operating agreement may provide for one or more managers or any other management structure that the members desire and reflect in the operating agreement to manage the affairs of the LLC, in whole or in part.
Virtually any natural person, legal entity, association, government or representative may be a member of an LLC. In connection with the formation of an LLC, a person is admitted as a member of the LLC upon the later of (i) the formation of the NJ LLC or (ii) 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 LLC. Once an LLC has been formed, a person may be admitted as a member pursuant to the terms of the operating agreement.
An LLC may have an operating agreement that provides for classes or groups of members having such relative rights, powers and duties as such operating agreement may provide. The operating agreement may grant to all or certain identified members or classes or groups of members the right to vote, separately or with all or any other class or group of the members or managers, on any matter. The operating agreement may also provide for the taking of any action, including the amendment of the operating agreement, without the vote or approval of any member or class or group of members.
Under the NJ LLC Act, except as otherwise provided by the operating agreement, an interest in an LLC is freely assignable, in whole or in part. An assignee of an interest in an LLC must comply with the procedure provided for in the operating agreement in order to be admitted as a member, or have any right to participate in the management of the business and affairs of the LLC, or, in the absence of such a provision, upon either the approval of all the members of the LLC, other than the assignor. Absent anything ot the contrary in the operating agreement, a member of an LLC may resign as a member in accordance with procedures described in the operating agreement, or, in the absence of an operating agreement, by providing at least six months notice to the LLC’s registered agent and to each member and manager. An operating agreement may provide, however, that a member may not resign from an LLC or assign its membership interest prior to the dissolution and winding up of the LLC.
The NJ LLC Law provides certain default rules regarding allocations of profits and losses and distributions of assets, but members are free to contract with respect to such economic rights in the operating agreement. Absent a provision in the operating agreement to the contrary, the profits and losses of a NJ LLC must be allocated and distributions of cash or assets must be made on the basis of the agreed value of the contributions made by each member (as stated in the records of the NJ LLC) to the extent they have been received by the NJ LLC and have not been returned.
A generic form of operating agreement for a New Jersey limited liability company may be found in “New Jersey Corporations and Other Business Entities” as Form 18.05 (See Mackay, John R., New Jersey Corporations and Other Business Entities Form 18.05 (3d ed., LexisNexis Matthew Bender 2005)) (form updated December 2008). A generic form of an operating agreement for a New Jersey LLC with a social purpose may be found at: http://www.ilrg.com/forms/llc-opag-mem/us/nj.
Limited Liability of Members and Managers
Under the NJ LLC Act, the general rule is that a member or manager is not liable for the debts, obligations or liabilities of the LLC solely by reason of being a member or manager of the LLC. Moreover, a member is required to make contributions to the LLC and other payment obligations that are provided in an operating agreement, and under certain limited circumstances, a member may be required to return distributions wrongfully distributed to it.
The operating agreement of an LLC may eliminate or limit the personal liability of members and managers of the LLC for any damages for any breach of duty (including fiduciary duties) in such capacity. The operating agreement may also provide for the NJ LLC to indemnify and hold harmless its members and managers from and against any and all claims and demands whatsoever.
Merger, Dissolution and Term of Existence
The NJ LLC Act permits an LLC to merge with or into another LLC, or with or into “other business entities,” which include a corporation, a business trust, an association, a real estate investment trust, a common-law trust, or any other unincorporated business, including a general partnership and a foreign limited liability company, among other entities. To merge an LLC, the merging entities must enter into an agreement of merger disclosing the terms of the merger and file a certificate of merger with the New Jersey Secretary of State. Unless the operating agreement requires a higher vote, such merger must be approved by members of the LLC who own more than 50 percent of the then current percentage or other interest in the profits of the LLC as a whole or of each class or group, as appropriate. The operating agreement may not require a vote of less than a majority of those members entitled to vote on the merger or consolidation.
The NJ LLC Act provides that an LLC will have perpetual existence unless a time is otherwise specified in the certificate of formation and operating agreement. The NJ LLC Act states that an LLC will dissolve at the earliest to occur of the following:
i) if the certificate of formation does not specify that the LLC is perpetual, the time specified in the operating agreement or 30 years from the date of formation of the LLC, if no specified time for dissolution or winding up is included in the operating agreement;
ii) upon the happening of events specified in the operating agreement;
iii) the written consent of all members (even for single-member LLCs);
iv) 90 days after the date on which the LLC no longer has at least one member (and no new members are admitted within that 90-day period); or
v) the entry of a decree of a judicial dissolution from the superior court in the judicial district in which the office of the LLC is located dissolving the LLC because it is not reasonably practicable to carry on the business under the operating agreement.
Upon dissolution, unless otherwise specified in the operating agreement, the affairs of the LLC may be wound up by the manager, and in the absence of the manager, by the members of the LLC. Upon the winding up of an LLC, the assets of the LLC must first be distributed to creditors of the LLC, and then, unless otherwise provided in the operating agreement, to the members in satisfaction of liabilities for distributions, for return of their contributions and with respect to their interests in the LLC in the proportions in which the members share in distributions.
An LLC offers the same flexibility in raising capital as a for-profit corporation.
Recordkeeping and State Reports
LLCs are required to keep certain types of records and information for member inspection. It is recommended that members of a NJ LLC set forth in the operating agreement how the books and records of the LLC should be kept and maintained. Members of NJ LLCs have the right, subject to reasonable standards set forth in the operating agreement, to obtain from the LLC upon reasonable demand for any purpose reasonably related to the member’s interest as a member of the LLC, certain information regarding the affairs of the NJ LLC. Such information includes:
- information regarding the status of the business and financial condition of the LLC;
- the LLC’s federal, state and local income tax returns for each year;
- a current list of the name and last known business, residence or mailing address of each member and manager;
- a copy of any written operating agreement and certificate of formation, including all amendments and powers of attorney for execution of such documents;
- 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
- except as kept confidential by the manager under certain circumstances, other information regarding the affairs of the LLC.
An LLC may maintain its records in a form other than written form, provided such form can be converted into written form within a reasonable time frame.
Domestic and foreign limited liability companies (LLCs) are required to file an annual report with the New Jersey Secretary of State disclosing the name and address of the LLC, the name and address of the registered agent of the LLC, and the name and addresses of the managing members or managers, as the case may be. The filing fee for annual reports is $50.
Unless it elects to be treated for federal and state purposes as a corporation, an LLC is generally not subject to separate entity-level taxation of its income under state and federal tax laws, although it is required to file an informational return. Unless a member is exempt from income taxation, usually its distributive share of membership income and loss is treated as income or loss to the member and reported on its return, regardless of whether the member actually receives the income. For federal income tax purposes, LLCs may be classified as partnerships if they have more than one member or may be disregarded as separate entities if they have only a single member.
Under new Jersey law, an LLC with two or more members will be classified as a partnership for New Jersey tax purposes, unless it is classified otherwise for federal income tax purposes, in which case the LLC will be classified in the same manner as it is classified for federal income tax purposes. A member of an LLC will be treated for New Jersey tax purposes as a partner in a partnership unless the limited liability company is classified otherwise for federal income tax purposes, in which case the member will receive similar treatment for New Jersey tax purposes. If the LLC has only one member, for New Jersey tax purposes, it will be disregarded as an entity separate from its owner and is treated as the direct owner of the underlying assets of the LLC and of its operations, unless classified other wise for federal tax purposes, in which case the LLC will receive similar treatment for New Jersey tax purposes.
The Division of Revenue of the State of New Jersey requires all new business entities in the state to register with the Division of Revenue by completing all of the applicable forms in the NJ-REG packet. By completing and filing the Business Registration Form included in NJ-REG, (and the Public Records Filing for New Business Entity form, if applicable) with the Division of Revenue, an LLC will be registered for applicable taxes and related liabilities that are administered by the Department of Labor and Division of Taxation. After registering, LLCs will receive the forms, returns, instructions and other information required for ongoing compliance with New Jersey State taxes and employment regulations.
For New Jersey tax purposes, every partnership or limited liability company that has income from sources in the State of New Jersey, or has a New Jersey resident partner, must file the New Jersey Partnership return, Form NJ-1065. Form NJ-1065 is not solely an information return; Form NJ-1065 must be filed by a partnership even if its principal place of business is outside New Jersey. Tax is imposed on the partners on income and gains derived from a partnership. Income and gains derived from an LLC regardless of whether they are actually distributed.
If an LLC has three or more owners and New Jersey source income or loss, it generally must pay a $150 per owner filing fee (to a maximum of $250,000). LLCs must pay $150 for each individual, trust, estate or entity, including any “pass-through” entity, that owns a membership interest, plus one-half of the tax year’s filing fee as the prepayment towards the next year’s filing fee. Nonprofit owners of LLCs are not exempt from the fee. Tax may be required to be remitted on behalf of nonresident partners. Subject to some exemptions, partnerships must pay a tax on behalf of nonresident partners that have New Jersey allocated income. If the member is an individual, trust or estate, the tax is 6.37 percent of the New Jersey allocated income of all the nonresident members. If the member is a corporation or another LLC, the tax is 9 percent of the New Jersey allocated income of such members.
It is recommended that an LLC or partnership seek professional assistance in determining its New Jersey partnership tax liabilities.
Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships (Incisive Media, 2009).
Limited Liability Company Center, How to form a New Jersey Limited Liability Company, available at: http://www.limitedliabilitycompanycenter.com/newjersey.html.