In New Jersey, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. Domestic corporations (corporations organized in New Jersey) and foreign corporations (corporations organized in a state other than New Jersey) are subject to a New Jersey corporation business tax. The tax is imposed only on income allocable to New Jersey, and the rate varies based on income level:

• if income is greater than $100,000, it is taxed at a 9 percent rate.
• if income is greater than $50,000 and no more than $100,000, the tax rate is 7.5 percent.
• if income is $50,000 or less, a 6.5 percent rate is applicable.

In any event, the minimum tax due is:

• if gross receipts are less than $100,000, the minimum tax is $500;
• if gross receipts are $100,000 or more but less than $250,000, the minimum tax is $750;
• if gross receipts are $250,000 or more but less than $500,000, the minimum tax is $1,000;
• if gross receipts are $500,000 or more but less than $1,000,000, the minimum tax is $1,500; and
• if gross receipts are $1 million or more, the minimum tax is $2,000.

For privilege periods ending on or after July 1, 2006, and before July 1, 2009, in addition to a New Jersey taxpayer's business corporation tax liability, a surtax of 4 percent will be imposed on the liability remaining after any credits allowed, other than credits for installment payments, estimated payments made with filing extensions, or overpayments applied from prior privilege periods. No credits are allowed against the surtax other than those for installment payments, estimated tax payments made with filing extensions, or overpayments applied from prior privilege periods.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

New Jersey S corporations are subject to tax at a reduced rate on the portion of entire net income not subject to federal income tax. The phase-out of the tax, that was to be completed in 2003, was postponed by the Business Tax Reform Act of 2002. The new phase-out schedule and rates are as follows:

If your S corporation has income of $100,000 or less, the tax is eliminated for such S corporations.

Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their New Jersey taxable adjusted gross income their distributive share of partnership income.

Limited liability companies (LLCs). New Jersey law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in New Jersey are classified as either partnerships or corporations for New Jersey tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership on the federal level, then it will not be taxed on its net income. Instead, members must include in their New Jersey taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for New Jersey tax purposes.