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Acquiring an existing company can help you expand your business or even launch a career as an entrepreneur without having to start from scratch. A loan that helps you buy a preexisting business or franchise (or buy out partners of your current business) is called a business acquisition loan.

Keep reading to learn more on business acquisition loans, common uses for a business acquisition loan, tips for getting a business acquisition loan, and more.

What Is a Business Acquisition Loan?

A business acquisition loan is a type of small business financing that’s used to acquire a franchise or pre-existing business. Like any kind of funding, a business acquisition loan involves risk, even if you’re aiming to buy a company that’s already successful.

If the acquisition makes sense for you or your current company, financing the arrangement with a business acquisition loan can speed up the process of starting your new venture. Make the best decision for your situation by learning how business acquisition loans work and what you’ll need to apply for one.

Do Business Acquisition Loans Work?

With a business acquisition loan, a bank, credit union, or online lender loans money to a small business that it can use to purchase a new business, buy a franchise, or expand their current business.

The lender will have basic requirements that must be met, such as a minimum credit score, minimum annual revenue, and minimum length of time in business. The requirements will vary, so it’s always best to shop around to find the right loan and lender for your situation.

Most business acquisition loans will come with fixed interest rates and set terms, which you’ll see before signing. Make sure you can afford the monthly payment so you don’t risk defaulting on the loan. Once you receive the loan, you’ll start making payments to the lender the following month.

💡 Recommended: Business Owner Financing

Common Uses for a Business Acquisition Loan

Taking out a business acquisition loan allows a borrower to finance the purchase of an existing business or expand their current one. An acquisition loan can be used to:

•  Obtain a standalone business

•  Purchase a franchise

•  Buy out partners in your current business

While requirements vary by lender and situation, both new entrepreneurs and existing business owners can usually find options to apply for.

Recommended: Startup Business Loans

4 Types of Small Business Acquisition Loans

There are numerous types of business loans, many of which are well-suited to people wanting to acquire a business. If you’re wondering how to finance a business purchase, start by exploring your options thoroughly to see which requirements you meet and what structure makes the most sense for your needs. There are four common types of business acquisition loans to consider.

1. SBA 7(a) Business Acquisition Loan

There are a wide range of loans offered by the Small Business Administration (SBA), including the SBA 7(a) loan. While the SBA 7(a) loan isn’t issued solely for the purpose of acquisition, the funds can be used toward the purchase of a new business.

With an SBA 7(a) loan, you can borrow up to $5 million, but typically you’ll need to make a 10% down payment. A personal guarantee is required if you own more than 20% of the business. In order to qualify for an SBA 7(a) loan, you’ll need a good credit score and enough cash flow to keep up with the loan payments.

The SBA doesn’t lend directly to business owners. Instead, applicants must apply with a lender that specializes in SBA loans. These may include banks, credit unions, and certain online lenders. Each lender will have its own approval requirements, so you should still compare lending options even if they’re providing the same type of loan.

Recommended: Large Business Loans

2. Online Lenders

Online business acquisition lenders often have less stringent approval criteria than traditional bank lenders. And they may offer more funding options, too.

Online lenders have different requirements of applicants, including length of time in business, minimum credit score, and annual revenue.

Online business lenders have a reputation for much faster funding times when compared to banks and credit unions. Preapproval is generally swift once you’ve submitted all of your documentation, and funds could arrive in your bank account within a few days. These conveniences may, however, come with rates that are typically higher than those seen at traditional banks.

Recommended: Small Business Line of Credit

3. Seller Financing

Though it depends upon the specific situation of the business you want to acquire, in some cases, you may be able to arrange for seller financing. Essentially, this means that you’re getting the loan from the seller and making your monthly payments to that former owner.

Seller financing might appeal to a business owner who’s retiring, for example, but still interested in a passive income stream. In cases like these, the loan terms could potentially be quite flexible since you’re making financing arrangements with an individual rather than a financial institution.

You’ll likely need a large down payment (up to 50% of the purchase price) to make it more appealing to the seller to finance the rest of the deal. Then, you’ll need to agree on other terms, including the interest rate and repayment period. These details are outlined in the loan promissory note, which must be drawn up by a lawyer and is legally binding.

4. Equipment Financing

Businesses that rely heavily on equipment may sometimes rely on equipment financing to fund their purchases. In order for this to be an option, the bulk of the business’s value should be in the equipment. A construction firm may rely on its bulldozers and other heavy machinery, for example, or an accounting firm may depend on its computer systems.

Because the equipment is used as collateral, an equipment loan can help reduce the immediate cost of acquiring the business. You may also be able to avoid making a down payment, depending on the lender.

Pros and Cons of a Business Acquisition Loan

Like any other business loan, there are both advantages and disadvantages to a business acquisition loan.

Pros of a Business Acquisition Loan

One of the primary benefits of a business acquisition loan is the ability to secure ownership without depleting personal savings, which helps maintain liquidity for other needs. Additionally, lenders often offer competitive interest rates, especially through SBA loans, making these loans more affordable than alternative financing options. The loan also provides the opportunity to acquire a business with an established customer base, reducing the risk compared to starting a business from scratch.

Pros:

•  Maintains personal savings and liquidity

•  Access to competitive interest rates

•  Easier entry into an established business with existing revenue

Cons of Business Acquisition Loans

One of the biggest cons of obtaining a business acquisition loan is that it can be a lengthy process, requiring detailed financial records and a solid credit history. Borrowers may also face high upfront costs, including down payments and origination fees. Furthermore, repayment obligations could strain cash flow, particularly if the acquired business doesn’t perform as expected.

Cons:

•  Lengthy and rigorous application process

•  High upfront costs, including a down payment

•  Potential cash flow challenges if the business underperforms

Business Acquisition Loan Requirements

Applying for a business acquisition loan typically requires more work than other types of business loans. You’ll need to provide information about your finances and the business you want to purchase.

What each lender wants can vary, but there are some general requirements and documentation you may need when you’re applying for a business acquisition loan, including:

•  A fair to good personal credit score

•  Personal and business bank statements and tax returns

•  Business financial statements and a business plan

•  Proof of down payment and/or collateral

Additionally, you’ll likely need to supply some details about the acquisition and the business itself, such as:

•  A letter of intent outlining the terms of the acquisition

•  Company valuation

Recommended: Working Capital Line of Credit

Tips for Getting a Business Acquisition Loan

In order to qualify for a business acquisition loan, you’ll want to make sure your business is established, your credit is in good standing, and you have decent annual revenues. While minimum credit scores and annual revenue amounts will vary by lender and type of loan, typically the better these two numbers are, the better the interest rate and terms you’ll receive.

If you’re a startup or have bad credit, it may still be possible to get a business acquisition loan. Here are two things you can do to help increase your odds of approval.

Offer a Down Payment

One option is to offer a large down payment along with collateral or a personal guarantee. You may find a lender willing to accept just one of these additions or you may need to extend all three in order to get approved. The risk, of course, is that you could lose your personal assets if you default on the loan, so it’s crucial to weigh that risk against the potential for return.

Build Your Credit Scores

It’s also a good idea to look for ways to build your credit score before applying for a loan. Make all of your payments on time each month, pay down excessive debt, and check for errors on each of your credit reports.

Recommended: Business Expansion Loans

Compare Business Acquisition Loan Options

Skipping the bootstrap phase and diving right into running an existing company is an attractive option for many entrepreneurs. A business acquisition loan makes this possible, whether you’re extending your existing company’s footprint, purchasing a franchise, or simply starting off your entrepreneurial career with a company that’s already gotten off the ground.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How do you get a business acquisition loan?

There are several funding options for business acquisition loans, including SBA 7(a) loans, equipment financing, seller financing, and small business loans from online lenders. To get a business acquisition loan, first decide which type of loan would be right for your needs. Then, shop around different lenders — including banks, credit unions, and online lenders — to find the best rate and terms. Once you’ve narrowed your search, you’ll submit a full application to your lender of choice and wait for final approval.

What is an acquisition loan?

An acquisition loan allows you to borrow money in order to purchase a business that is already established. It can be used to purchase a franchise, buy out partners in your own company, expand your company’s footprint, or simply jumpstart the process of developing a business. Once you’ve taken out the loan, payments come due regularly and include principal and interest. Collateral is often required to qualify for an acquisition loan.

How much money can you borrow to buy a business?

The amount you can borrow to buy a business depends on the lender, your creditworthiness, and the business’s value. Loans typically range from $5,000 to several million dollars. Small Business Administration (SBA) loans can finance up to $5 million, while private lenders may offer more for larger acquisitions.

Can I use an SBA loan to buy a business?

Yes, SBA loans come with flexible options that let you use the funds to buy a business. The SBA 7(a) loan has minimal restrictions on what the funds can be used for. Terms last from five to 25 years and, while interest rates depend on your application, they are generally competitive.

How do you get funding for an acquisition?

To fund a business acquisition, a business can use its own savings or company funds, it can offer bonds or equity to investors, or it can acquire a loan, such as a small business term loan, an SBA loan, or a secured business loan.

Photo credit: iStock/simonkr

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB0224014

GAAS stands for “generally accepted accounting standards,” whereas GAAP stands for “generally accepted accounting principles.” While people often use these two terms interchangeably, they are different. GAAP is used by accountants when creating financial documents. GAAS, on the other hand, is used by auditors to double-check those documents once they’re done.

Here’s what you need to know about GAAS vs. GAAP, including how each one works, how they differ, and how they work together.

What Is GAAP?

GAAP is a set of accounting procedures and principles issued by the Financial Accounting Standards Board (FASB). GAAP was established to provide consistency in how financial statements are created, eliminate the potential for fraudulent or misleading financial reports, and make it easier for investors and creditors to evaluate companies and compare them apples-to-apples.

All publicly traded and regulated companies must follow GAAP when compiling their financial statements. While small businesses that don’t get audited aren’t required to use GAAP, hiring an accountant to create GAAP-compliant financial documents for your business can still be helpful. It allows you to compare your company to other companies in your industry. It can also be useful if you’re looking to attract an investor or apply for a small business loan. Without GAAP, it’s harder for lenders, investors, and other interested parties to know whether a business is performing well or poorly.

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What Is GAAS?

GAAS is a set of systematic guidelines used by auditors (not accountants) when checking the accuracy of financial statements disclosed by GAAP-compliant companies. The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) created GAAS.

GAAS helps to ensure the consistency and verifiability of auditors’ actions and helps make sure that auditors don’t miss any material information. The use of GAAS also means that auditing is of the highest quality and that reports from different auditors are comparable.

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How Does GAAS Work?

The Securities and Exchange Commission (SEC) requires that the financial statements of public companies be examined by external, independent auditors. These auditors are tasked with determining whether those financial statements follow GAAP. GAAS lays out the auditing standards and guidelines that auditors must follow.

What Are GAAS Standards?

There are 10 GAAS standards auditors must follow, divided into three categories:

General Standards

1.   The auditor must be trained and qualified to do the audit.

2.   The auditor should be objective and not allow their personal opinion to sway their findings.

3.   The auditor must be professional during the audit and during the writing of the report.

Standards of Field Work

1.   The auditor should plan the work that must be done and properly supervise any assistants during the audit.

2.   The auditor must thoroughly understand the business or entity that is being audited so as to understand the risk of fraud or error during the reporting of financial statements; furthermore, the auditor should also plan future audits, if needed, based on their findings.

3.   The auditor must acquire sufficient evidence during the audit process so that they can form an opinion on their findings (whether everything is copacetic, there has been error, or there has been deliberate fraud).

Standards of Reporting

1.   The auditor must determine and state in their report whether the financial statements they reviewed were written following GAAP regulations.

2.   The auditor must state when, and under what circumstances, GAAP principles and regulations were not followed.

3.   The auditor must state whenever financial disclosures are not adequate.

4.   The auditor must state their opinion regarding any financial disclosures they review. If they are unable to reach an opinion, then they must state their reasons. Lastly, when an auditor’s name is linked to an audit, they must state what degree of responsibility they are taking to the veracity of their findings.

Comparing GAAP to GAAS

GAAP and GAAS have some similarities, as well as some key differences.

Similarities

1.   Both are designed to make sure a company’s financial statements are complete, consistent, and comparable. While they are used by different professions, the mindset behind them is the same.

2.   Both consist of 10 rules or principles. The guidelines are different, but the behavior that is expected of either accountants or auditors is summed up in 10 key concepts.

3.   Both were created to instill trust and confidence in a company’s financial records. Thanks to GAAP and GAAS, investors, lenders, and other third parties know they can trust the financial information released by GAAP-compliant companies.

Differences

1.   They are used by different professions. GAAP is used by accountants; GAAS is used by auditors.

2.   They have different functions. The primary function of GAAP is to assist firms in making their financial statements. The main job of GAAS is to help auditors properly audit companies.

3.   They are used at different stages. GAAP is used first, when companies are preparing financial statements. GAAS is later, after those documents have been prepared.

Pros and Cons of GAAS

Here, in chart form, are the upsides and downsides of GAAS.

The Takeaway

The difference between GAAP vs. GAAS revolves around who is doing the work. If an accountant is preparing financial statements, then GAAP is being followed. If the veracity of the financial documents is under review, then GAAS is being observed.

Publicly traded companies must follow GAAP principles and be audited by someone following GAAS standards. Both act as checkpoints that companies must get through before they can be publicly traded. Small businesses aren’t required to follow GAAP regulations. However, doing so can make it easier for outsiders to evaluate your business, such as when you are seeking approval for certain types of business loans.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.

FAQ

Who uses GAAS?

Auditors use GAAS (generally accepted auditing standards) to review financial statements issued by a company that follows GAAP (generally accepted accounting principles).

What does GAAS stand for?

GAAS stands for “generally accepted auditing standards.”

What are the three types of GAAS?

The three GAAS categories are general standards, standards of field work, and standards of reporting. Each of the 10 GAAS guidelines accords with one of these three types of standards.

How are GAAP and GAAS connected?

GAAP (generally accepted accounting principles) are the guidelines used by accountants when preparing financial statements for publicly traded companies or private companies that wish to use GAAP. GAAS (generally accepted auditing standards) are the guidelines used by auditors when reviewing the financial statements of public companies to make sure GAAP guidelines have been followed.

What are the differences between GAAS and GAAP?

GAAP’s function is to assist firms in compiling their financial statements. GAAS exists to help auditors properly audit companies’ financial details. That’s why these two sets of rules come into play at different stages of financial documentation. GAAP is used by accountants during the preparation of a company’s financial statements. Later, when the company is audited, the auditors apply GAAS.

Photo credit: iStock/Poike

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-017

If you’re an employer hiring workers, you’ll have to make a decision about whether you bring someone on as an employee on payroll or as an independent contractor. This decision will have an impact on how that worker is paid and how taxes are withheld from their paycheck. You’ll need to inform the IRS of your decision by turning in Form W-2 for employees on payroll and Form 1099-NEC for independent contractors.

Getting this decision right is important, with ramifications for your employees and your business, so understanding the difference between 1099 vs W-2 employees is key.

Employee Classification Basics

Depending on a worker’s role at a company, employers must supply the IRS with one of two types of tax forms. It can be, either a Form 1099-NEC or a Form W-2. Freelancers, or independent contractors, are typically asked to fill out a 1099. Employees on payroll will be asked to fill out a W-2.

W2 Employee Characteristics

A W-2 worker is someone who is formally employed with a company or an organization. They may work full-time or part-time and may be salaried or hourly employees.

Employers typically have a lot of control over how W-2 employees work, including over the tools and processes needed to reach a desired outcome. In return, W-2 employees are often entitled to a lot of protections, such as minimum wage, overtime, and family or medical leave. W-2 employees often participate in employer benefit programs, such as health insurance and retirement plans.

1099 Contractor Definitions

In general, independent contractors are self-employed. They are workers in an independent trade, business, or profession who supply services to the general public. For instance, this category could include professionals such as doctors, lawyers and accountants, or subcontractors who are providing skilled labor to an organization, such as software engineers or graphic designers..

Legally, employers cannot control the details of how services are performed by independent contractors, such as how work is to be performed and when. They can only control the result of the work. Independent contractors typically do not participate in employer benefit packages.

Tax Implications

The tax treatment of W-2 versus 1099 employees is one of the most marked differences between these types of workers. Employers carry much of the burden of withholding and paying taxes for W-2 employees, while 1099 employees shoulder all of the responsibility themselves.

A 1099 employee may be able to make more tax deductions against the equipment, supplies, and other expenses related to their business.

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Employer Responsibilities

W2 employees have taxes withheld from their paycheck by their employer, including income taxes, Social Security taxes, and Medicare taxes. Employers must pay the matching employer portion of Social Security and Medicare taxes, as well as unemployment taxes.

For 1099 employees, on the other hand, employers don’t have to withhold or pay any taxes on payments.

Employee/Contractor Obligations

For all intents and purposes, 1099 workers are their own employers. That means they are responsible for covering all taxes on their own, including self-employment tax. The current self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. This self-employment tax is double what W-2 employees pay, as their employers cover half of this amount for them.

Deduction Differences

Taxes on wages for W-2 employees are withheld directly from their paychecks along with other payroll deductions. The employee never receives that money unless they get some back in the form of a tax return. When it comes to income tax, the employer will decide how much to withhold based on the employee’s Form W-4, Employee’s Withholding Certificate.

Ideally, the amount withheld over the course of a year would equal exactly the amount owed on an employee’s annual federal income taxes. If the employee’s withheld amount is more or less than this, they may want to adjust their withholding accordingly.

Because taxes are not withheld from 1099 employees’ paychecks, these workers may owe quarterly taxes instead. These are estimated payments to the IRS four times per year. Depending on an independent contractor’s income in a given quarter, these payments may vary. However, ideally, these too will add up to equal the amount owed on an employee’s annual income tax return.

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Making the Right Choice

It is an employer’s responsibility to make the right choice between offering a W-2 and a 1099 to the workers they hire. It’s important to get this decision right. Failure to do so can result in legal or financial ramifications. For example, if workers are incorrectly identified as independent contractors, employers might be liable for back employment taxes.

In general, if an employer controls what a worker does and how, they are likely a W-2 employee. Similarly, if the employer controls aspects of their job such as how they’re paid and whether they’re reimbursed for expenses, they are likely a W-2 employee. The same is true if they are offered company benefits.

If none of these apply, the hired contractor is likely a 1099 contractor.

Be aware that a worker’s relationship to a business can change over time, so it’s important to reassess it periodically to determine if their W-2 or 1099 status has changed.

Employee Status Tests

There are several tests from the IRS, Department of Labor (DOL), and the Equal Employment Opportunity Commission (EEOC) that employers can apply to workers to help determine whether they are 1099 contractors or W-2 employees.

•  IRS common law rules look at behavioral control, financial control, and the type of work relationship.

•  The DOL uses an economic reality test, to determine if a worker is a W-2 employee and covered by the Fair Labor Standards Act. This law entitles workers to minimum wage, overtime, and other protections.

•  The EEOC offers a set of criteria for W-2 employees as well, such as whether work is performed on the employer’s premises or the employer provides tools and materials to complete the work.

The Takeaway

The differences between W-2 employees and 1099 contractors is largely based on the relationship that worker has to your business and the work they do for you. The classification you choose will have a big impact on your business and how your workers are paid. For this reason, it’s important to consider it carefully and to avoid potential financial and legal penalties.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop for small business loans and compare financing options for your business in minutes.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Do 1099 employees pay more taxes than W-2 employees?

1099 employees are responsible to pay the full federal employment tax amount of 12.4% for Social Security and 2.9% for Medicare. W-2 employees only pay half that amount.

Can a worker be both 1099 and W-2?

There are a couple scenarios in which you may have a W-2 and a 1099. It is common for workers to work for multiple employers. One may hire a worker as an independent contractor with a 1099, while another may hire a worker as an employee with a W-2. It’s possible to receive both from the same employer if a worker performs two completely different duties for the company with one qualifying as a W-2 employee and another as independent work.

What benefits do W-2 employees receive?

W-2 employees pay less in employment taxes and may receive greater access to employer benefit plans, such as retirement accounts.

Is it better to be a 1099 contractor or W2 employee?

Both 1099 contractors and W-2 employees receive benefits that may be advantageous. For example, 1099 contractors may be able to write off more expenses on their taxes, while W-2 employees pay less in employment taxes.

Can a company switch me from W-2 to 1099?

If your role changes at your company, your employer may switch you from a W-2 employee to a 1099 contractor.

Photo credit: iStock/Anchiy

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q424-113

Creating a Limited Liability Company (LLC) in New Jersey is one of the first steps to officially launching your business within the state. You can have one or more owners (called members) as an LLC and receive personal liability protection in case your LLC is ever sued or faces bankruptcy. That means you won’t risk losing any of your personal assets like your home or car if your business has legal or financial issues in the future, which is one of the primary differences between an LLC and sole proprietorship.

Looking for easy ways to open a company in New Jersey as an LLC? Here’s everything you need to start your new business in the Garden State.

Pre-Formation Checklist

Before you learn how to start an LLC in NJ, follow a few steps to set yourself up for success over the long run.

•  Write a business plan: The state of New Jersey provides a free online business plan template. If you need help, the state also offers free business counseling through the New Jersey Small Business Development Center Network.

•  Research local regulations: Depending on your industry and location, your county or municipality may have additional regulations you must adhere to in addition to state laws.

•  Get additional help: On top of the NJ SBDC Network, the state also recommends resources like the Small Business Administration, SCORE Mentors, Women’s Center for Entrepreneurship (Northern New Jersey), and LAEDA Southern New Jersey.

Once you’ve done the prep work, you can formally start the process of forming your New Jersey LLC.

Name Selection Requirements

The first step is to research available business names in New Jersey. You can’t use a name for your LLC that is already taken by another business in the state. Perform a search through the NJ Department of the Treasury’s database of business names.

While not required, you should also make sure your preferred business name isn’t trademarked through the U.S. Patent and Trademark Office.

Once you select an available name, you can reserve it for up to six months for a $50 fee. You can officially register your business name once you have your Certificate of Formation from the state.

Registered Agent Selection

Another part of the LLC formation process in New Jersey is to identify a registered agent. This is a person or company tapped to receive legal documents for the business. It can be you or someone else as long as the registered agent has an address in New Jersey.

Hiring a registered agent service is beneficial in several scenarios:

•  You have a home-based business and don’t want your address published

•  You live outside of New Jersey or operate in multiple states

•  You want a professional to help you stay in compliance with state regulations

Business License Research

In addition to forming your LLC in New Jersey, you may need additional licenses in order to remain in compliance. Typically, local jurisdictions require you to get a general business license, and certain industries may also be subject to additional licensing from the state.

Search the New Jersey Licensing and Certification Guide to see what permits, licenses, and certifications may be required at the state level for your business.

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Filing Requirements

With much of the preliminary work complete, it’s time to start completing forms for your New Jersey LLC.

EIN Registration

An employer identification number (EIN) is required before you submit your formation documents with the state of New Jersey. An EIN is like a social security number for businesses and is obtained through the IRS, even if you’re a single-member LLC with no employees.

The fastest way to get your EIN is to apply through the IRS website during the available hours, which are Monday through Friday, 7 a.m. to 10 p.m. EST. There’s no fee and it takes just a few minutes to get your number online.

Certificate of Formation

Once you have your EIN from the IRS, you can form your NJ LLC online using the state’s Business Formation tool. Be prepared to have the following information on hand to complete your form:

•  Business name

•  Business structure

•  Employer identification number (EIN)

•  Business description and address

•  Registered agent information

After the state approves your registration, you’ll receive a Certificate of Formation along with a state Entity ID.

Recommended: Business Lines of Credit

Operating Agreement

While an operating agreement isn’t required in New Jersey, it can be a useful document to have on hand as you grow your business. The main purpose of an operating agreement is to outline how the LLC will make financial and business decisions. It’s especially helpful when there are multiple members.

For instance, it could outline the process of how to buy out a business partner and how and when to apply for LLC business loans.

It could also explain how you will handle lending personal funds to your own LLC.

Costs and Timeline

The Certification of Formation for an LLC in New Jersey costs $125. There is also a $100 fee if you need to file an amendment or a correction. The state doesn’t offer a timeline for how long it takes to process a standard formation request, but there are expedited services available for an additional fee.

However, these faster turnaround times don’t apply to online applications. Instead, you’ll need to make your request in person at the Trenton office, via fax, or courier service. Here are the additional fees for a faster processing time:

•  Same-day fax filing: $50

•  2 hour service fee per document: $500

•  1 hour service fee per document : $1,000

Post-Formation Requirements

After receiving your Certificate of Formation, you also need to register for taxes with the NJ Division of Revenue & Enterprise Services using Form NJ-REG.

Once that is complete, you can obtain a Business Registration Certificate, which allows you to apply for public contracting opportunities and New Jersey grants and tax credits. You can also take advantage of federal tax benefits of an LLC, such as pass-through taxation.

Maintaining Your LLC

Another responsibility to remember after forming your LLC is to file an annual report each year, which costs $75. It’s due on the last day of the month in which you formed your business. The annual report process is simple and involves confirming your business and registered agent addresses are current.

Recommended: Business Equipment Financing

The Takeaway

Now that you know how to create an LLC in NJ, you’ll feel confident every step of the way as you launch your new business. You’ll also be prepared for growth opportunities when you have a strong foundation in place.

Explore SoFi’s small business loan network to get the financing you need at the right time.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How much does it cost to form an LLC in New Jersey?

It costs $125 to get a Certificate of Formation in New Jersey. You can also pay additional fees to reserve a business name in advance and expedite the processing time.

How long does it take to get approved?

New Jersey does not provide a clear timeline on how long it takes to process a business formation application. However, you can get same-day service for an extra cost.

Do I need a lawyer to form an LLC in NJ?

No, you aren’t legally required to use a lawyer when forming an LLC in New Jersey. However, it may be wise to hire one if you have multiple members and need to create an operating agreement that covers everyone’s best interests.

What are the ongoing requirements for NJ LLCs?

Each year, you need to file an annual report with the state in order to confirm your business address and registered agent details. This service costs $75. You also need to comply with any relevant business license regulations and state and federal tax filing deadlines.

Can I form an LLC if I live outside New Jersey?

Yes, New Jersey offers an out-of-state business registration. It’s designed for companies that have operations in NJ, only have employees or sell goods in New Jersey, or want to apply for contracts with any level of the New Jersey government.

Photo credit: iStock/LeoPatrizi

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q424-110

Small business capital, by definition, is usually money from an outside source that a small business needs to fund operations, business purchases, and growth. Small businesses can acquire capital though business loans or in funding sources,, such as grants, that do not need to be paid back.

Continue reading to learn how to determine your business’s financial needs and the sources to turn to to help fund them.

Assessing Your Business’s Financial Needs

Your business’s financial needs will likely depend on a variety of factors, including where you are the life of your business. For a startup, your financial needs are equal to the cost of starting your business. This will likely include several one-time costs such as beginning inventory and supplies, advertising, and permits, licenses, and related fees.

If you’re an established business, you may be looking at a couple of different things. Working capital is the amount of money you need to keep your doors open. It’s essentially the difference between your business’s current assets and its current liabilities. If your company’s liabilities are greater than your assets, you may have trouble keeping up with your financial obligations and may need an infusion of capital.

Beyond working capital, you may need to find a source of capital if you are looking to pursue a project to help you grow your business, such as opening a new location. Your financial needs will be equal to the cost of this project.

Recommended: Guide to Trade Working Capital

Traditional Business Loans

There are several types of small business loans you may apply for to help cover your capital needs, including:

SBA Loans

An SBA loan is a small business loan that is offered through lenders, including banks, and is partially guaranteed by the U.S. Small Business Administration. To be clear, the SBA itself does not lend money directly, but its guarantee helps reduce risk to its lending partners. For that reason, SBA loans may offer competitive rates terms.

Business Line of Credit

Having cash on hand to cover day-to-day business expenses, bigger purchases, and emergencies can be important to your business operation. Rather than take out a loan as the need arises, you may consider a business line of credit. A business line of credit is a revolving credit line that allows you access to cash as you need it up to a certain limit. As you repay what you borrow, those funds become available to borrow again. You will only pay interest on the amount you borrow.

Equipment Financing

If you find that you need to purchase new equipment to help grow your business — whether it’s a tractor, a dentist chair, or a new computer — you may want to consider equipment financing. The equipment itself often acts as collateral, so this type of loan may offer lower interest rates than other conventional loans. Repayment options will vary, but typically span a few years.

Startup Loans

Startup loans help new businesses get off the ground. These loans may be easier to qualify for in some ways. For example, they may be willing to lend to borrowers with relatively low revenue streams. However, because startups are often unproven, lenders may require that you offer more collateral to back the loan.

Working Capital Loans

As we mentioned above, working capital is the money your business needs to operate on a daily basis. If you have negative working capital, you may want to pursue a working capital loan to help you cover expenses, such as payroll, monthly bills, debt payments, inventory, and operational expenses.

Recommended: 7 Things to Know About Small Business Cost of Capital

Alternative Financing Options

In addition to loans from traditional lenders, such as banks, there are other ways you may seek a cash infusion to help your business grow.

For example, you might consider crowdfunding or a peer-to-peer (P2P) loan where an individual or a group of people loan you money via a P2P platform.

You might also explore venture capital, which is private equity financing that might be provided by high-net-worth investors, investment banks, or other financial institutions.

Equity Financing

Another way to raise capital is to sell shares of your company to investors. By purchasing those shares, investors are also purchasing ownership rights of your company. When a company is private, equity investors might include individuals, such as angel investors, venture capital firms, and corporate investors. It is also possible to raise equity financing through crowdfunding.

When a company goes public through an initial public offering (IPO), they are offering shares that can be purchased on public stock exchanges.

Government Grants and Programs

In additional loans and other financing options, small business owners have access to grants for new and existing businesses that can provide capital. Grants are gifts of money that do not need to be repaid.

The federal and state governments offer a range of small business grants. Some may be designed for companies that focus on specific fields such as science of technology, while others might be focused on community building, for instance.

Preparing Your Business for Funding

Securing funding is easier with a strong plan. First, define your needs, including how much funding you’re looking for and how that money will be used. Next, make sure you have a strong business plan that demonstrates your business idea, goals, and projected revenue. With these supporting materials in hand you can begin researching funding options and applying for loans, grants, and other sources of funding. Once you receive funding, it’s critical to track how it is used, and the return on your investment.

Small Business Funding

When it comes to funding, the right option for you will depend on your needs. And it may be that over the life of your business, you’ll need to pursue several different types of funding to meet your goals and objectives.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the different ways to obtain capital for a business?

You may obtain capital for your business through small business loans or alternative methods, such as grants, equity financing, venture capital, or peer-to-peer lending.

How do I determine how much business capital I need?

The amount of business capital you need will depend on your goals. Startups may need to cover all the costs of getting a new business off the ground. Existing businesses may need to cover the cost of working capital, a piece of equipment, or other growth related projects, such as opening a new location.

What is the difference between debt financing and equity financing for business capital?

Debt financing is when you borrow money and agree to pay it back with interest over time. Equity financing, on the other hand, is when you raise capital by selling shares of your company.

What types of businesses are eligible for small business loans?

Eligibility will depend on the type of loan you’re considering. For example, to qualify for an SBA loan, manufacturing companies typically must have 500 employees or fewer, while most non-manufacturing businesses will need annual receipts under $7.5 million.

How can I improve my chances of securing business capital from investors?

A strong business plan that demonstrates clear financial projections and strong market potential can help woo potential investors. It is also important to demonstrate that you have the experience, tools, and resources you’ll need to successfully carry out your plan.

Photo credit: iStock/djiledesign

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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