Legal Information

Business Formation and Maintenance

 What business structure is appropriate for your business?

             Choosing a business structure is a decision that is particular to each business.  Owners should consult with an attorney and an accountant prior to forming a business to avoid unwanted expense in the future.  Business owners should discuss how to properly file and maintain their business entities in compliance with state and local laws.  This is especially important for home improvement contractors, who have special licensing requirements.  Some of the business entities available in New Jersey are as follows:

             1.         Sole proprietorship

             This is a business entity operated by a single person.  It is convenient because it requires little formality or expense to operate.  The individual operates his/her business and claims all income and expenses on his/her personal tax return.  This business structure does not protect the individual from personal liability for the debts and actions of the business.  Operating as a sole proprietorship (or any other business structure) does not exempt an individual from the Contractors Registration Act. 

             2.         General Partnership

             This business structure is operated by two or more partners.  Formalities and expenses of maintaining the entity can be less demanding than with corporations.  The income and expenses of the partnership are passed through to its partners, who claim their share of income and losses on their personal tax returns.  The partners do not enjoy the protection from personal liability that is available with some other business forms.  A Partnership Agreement should be drafted at the outset.

             3.         Limited Partnership

             A limited partnership is similar to a general partnership.  A limited partnership, however, has both general partners and limited partners.  The general partners remain personally liable for business debts, while the limited partners do not.  Limited partners are restricted from taking an active role in the operations of the partnership.  Their involvement is limited to investment purposes.  As with general partnerships, limited partnerships should have a Partnership Agreement.  This business structure allows multiple people to operate a business with less formality that corporations.

             4.         C-Corporation

             A C-Corporation has a legal identity apart from its owners, who hold stock in the company.  Corporations have specific filing and maintenance requirements, which include yearly reporting, shareholder and board of director meetings and the keeping of meeting minutes.  Daily operations are conducted by officers of the corporation, who are governed by the board or directors. The written rules of the corporation are called Bylaws.  Unlike owners of sole proprietorships, and general partners in partnerships, Owners of C-Corporations enjoy protection from personal liability for the debts of the corporation.  However a risk of “double taxation” exists because C-Corporations are taxed on their income.  Shareholders of the corporation may be taxed again for money that they receive from the corporation.  Shareholder Agreements should be drafted.  C-Corporations can have an unlimited number of members.  C-Corporations are generally formed by owners who expect to grow the business to many members in the reasonably foreseeable future.

             5.         S-Corporation

             An S-Corporation is similar to a C-Corporation, except the owners select a special tax status allowing them to pass through corporate income to the owners.  The owners report their share of corporate income or losses on their returns and avoid the potential for double taxation described with regard to C-Corporations.  S-Corporations are limited to seventy-five members.  All members must be citizens or permanent residents of the United States.  Owners of S-Corporations should have a Shareholders Agreement. The formalities required for S-Corporations are similar in many ways to those of C-Corporations.             

            6.         Limited Liability Company

             New Jersey’s Limited Liability Company Act allows owners to enjoy the limited liability of a corporation without the burden of some of the formalities.  The owners of a Limited Liability Company (LLC) are called members.  An LLC should have an Operating Agreement setting forth the rules of the LLC and relationship between the members.  There is no maximum or minimum amount of members for LLCs in New Jersey.  LLCs have fewer restrictions on types of members than S-Corporations.  LLCs are more flexible than S-Corporations as to what relationships between owners are allowed, and financial management.

 When can a business owner be personally liable for the debts of a business?

             Owners of certain businesses, such as sole proprietorships and general partnerships, are personally liable for the debts of their business. However, many business owners choose to operate in the form of a corporation or limited liability company to avoid such personal exposure.  However, owners of corporations and limited liability companies should be aware that their protection from personal liability is not absolute.  In particular, owners should be aware that they owe a fiduciary duty to their corporation or LLC. This generally means that they have a duty of loyalty to their company and must refrain from gross negligence or bad faith when handling company matters.  Owners should be careful to deal and make decisions in the best interests of their business as opposed to the interests of themselves or third-parties.  Otherwise, they could be personally responsible for damage to the company or other shareholders for the consequences of their actions.   

            Corporate and LLC owners must also be careful to maintain the formalities required by law for their particular business structure.  This is especially important for corporations and LLCs with few or only one owner.  Corporations and LLCs are business entities that are given recognition by compliance with New Jersey statutes. If the entities fail to comply with the requirements of the statutes, they run the risk of being deemed to have no separate identity from their owners.  In such circumstances, the owners could be personally liable for the acts and debts of the business.   Some important ways to reduce the possibility of personal liability include the following:  Keep business finances, assets and operations separate from personal finances assets and operations in all respects; follow the required business formalities where applicable, such as filings, meeting, minutes, registrations and issuance of ownership certificates; and always refrain from activities that could be interpreted as disloyal to the business entity, especially without full disclosure to all owners, and especially if personal benefit would be derived from the action.

Business owner relationships: disputes, addition of owners, owner breakups, mergers and dissolutions.

Business owner relationships should be addressed in writing at the outset of the business and any time the ownership changes.  This is accomplished by Shareholder Agreements, Operating Agreements or other similar types of contracts.  Often, businesses are started between friends and/or family members with good intentions.  As the company grows and time passes, it is common for disputes to arise even among well intentioned people.  Solid written Agreements can save money, time and relationships.  Knowing up front how income will be split, how ownership interests will be valued, what is expected of each owner, what shall occur in the event of a breakup, merger or addition of owners is very important.    

 Common Issues Involved with Daily Operations and Business Growth

 As home improvement contractor businesses operate and grow, the owners face many legal challenges that are common to the industry.  Having a relationship with an attorney that is familiar with your business can save time, money and client relationships.  An attorney can be available to take phone calls if an emergency arises or if a problem arises on the job. An attorney can spot areas where your business may not be complying with government regulations or where your business practices and documents do not provide you with adequate protection. An attorney can advise you as to new developments in the law that would affect your business. 

 Below is a list of some of the common issues that home improvement contractors face as their businesses operate and grow.  This website welcomes discussion and input from home improvement contractors on any of the below issues.  Input as to other issues and hot topics within the industry are also welcome.  Please communicate any area in which additional information would be helpful to assist with your business or to make this a better website for home improvement contractors.

Formation of a business entity

Maintenance of a business entity

New Jersey government compliance

Compliance when your business grows into multiple states

Relationships between business owners, breakups, dissolutions, addition of owners

Public offerings of ownership

Collection issues

Resolving client disputes

Protection from liability with business documents: contracts, change orders, invoices and correspondence

Employee/employer issues

Insurance issues

New developments in the law.

New Jersey Regulation of Home Improvement Contractors, and Penalties for Non-Compliance

 The Contractor’s Registration Act

       N.J.S.A. 56:8-136 et seq. is known as the “Contractors Registration Act.”  Regulations N.J.A.C. 13:45A-17.1 et seq. were adopted pursuant to this act further outlining requirements for home improvement contractors in New Jersey.  Below is a summary of some of the requirements of the Act and Regulations.

 According to the Act and the Regulations, no person may engage in the business of selling home improvements unless registered with the Division of Consumer Affairs.  The registration and fee are annual requirements.  Amendments must be filed within 20 days after any change in registration information.  The Act applies to all home improvement contractors doing business in New Jersey, regardless of the state of incorporation or the location of their home office.  A person who knowingly violates any of the provisions of this act is guilty of a crime of the fourth degree.

 A home improvement contractor’s license may be refused, suspended or revoked for numerous reasons, including if the home improvement contractor has done any of the following:

 (1) Has obtained a registration through fraud, deception or misrepresentation,
(2) Has engaged in the use or employment of dishonesty, fraud, deception, misrepresentation, false promise or false pretense;
(3) Has engaged in gross negligence, gross malpractice or gross incompetence;
(4) Has engaged in repeated acts of negligence, malpractice or incompetence;
(5) Has engaged in professional or occupational misconduct as may be determined by the director;
(6) Has been convicted of any crime involving moral turpitude or any crime relating adversely to the activity regulated by this act. For the purpose of this subsection a plea of guilty, non vult, nolo contendere or any other such disposition of alleged criminal activity shall be deemed a conviction;
(7) Has had his authority to engage in the activity regulated by the director revoked or suspended by any other state, agency or authority for reasons consistent with this section;
(8) Has violated or failed to comply with the provisions of any act or regulation administered by the director;
(9) Is incapable, for medical or any other good cause, of discharging the functions of a licensee in a manner consistent with the public=s health, safety and welfare.

The Act requires that every home improvement contract for a purchase price in excess of $500, and all changes in the terms and conditions of the contract, must be in writing. The contract must be signed by all parties, and must clearly and accurately set forth all terms and conditions of the contract, including but not limited to:

(1) The legal name, business address, and registration number of the contractor;
(2) A copy of the certificate of commercial general liability insurance required of a contractor pursuant to section 7 of this act and the telephone number of the insurance company issuing the certificate; and
(3) The total price or other consideration to be paid by the owner, including the finance charges.

 

A home improvement contract may be cancelled by a consumer for any reason at any time before midnight of the third business day after the consumer receives a copy of it. Home improvement contracts must contain a conspicuous notice printed in at least 10-point bold-faced type as follows::

"NOTICE TO CONSUMER
YOU MAY CANCEL THIS CONTRACT AT ANY TIME BEFORE MIDNIGHT OF THE THIRD BUSINESS DAY AFTER RECEIVING A COPY OF THIS CONTRACT. IF YOU WISH TO CANCEL THIS CONTRACT, YOU MUST EITHER:
1. SEND A SIGNED AND DATED WRITTEN NOTICE OF CANCELLATION BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED; OR
2. PERSONALLY DELIVER A SIGNED AND DATED WRITTEN NOTICE OF CANCELLATION TO:
(Name of Contractor)
(Address of Contractor)
(Phone Number of Contractor)
If you cancel this contract within the three-day period, you are entitled to a full refund of your money. Refunds must be made within 30 days of the contractor's receipt of the cancellation notice."

Also every registered contractor who is engaged in home improvements must secure, maintain and file with the director proof of a certificate of commercial general liability insurance in a minimum amount of $500,000 per occurrence.

All home improvement contractors must prominently display their registration numbers within their places of business, in all advertisements distributed within this State, on business documents, contracts and correspondence with consumers of home improvement services in this State, and on all commercial vehicles registered in this State and leased or owned by registrants and used by registrants for the purpose of providing home improvements, except for vehicles leased or rented to customers of registrants by a registrant or any agent or representative thereof.

The Consumer Fraud Act

       N.J.S.A. 56:8-1 et seq. is known as the New Jersey Consumer Fraud Act.  Regulations, N.J.A.C 13:45A-17.1 et seq., were adopted pursuant to this Act further outlining requirements for home improvement contractors in New Jersey. 

 Any person who suffers any ascertainable loss of moneys or property, real or personal, as a result of a violation of this Act may sue for damages.  The Act dictates that courts shall award threefold the damages sustained by any person in interest. In all actions under this section, including those brought by the Attorney General, the court shall also award reasonable attorneys' fees, filing fees and reasonable costs of suit.

Home improvement contractors are often unaware of the risks that they face with regard to the Consumer Fraud Act.  Home improvement contractors often assume that since they do not operate “fraudulently” according to the common understanding of the term “fraud,” that they need not be concerned with this Act. 

       However, as mentioned above, specific Consumer Fraud Act regulations have been adopted to regulate the practices of home improvement contractors. The regulations are detailed and often do not require dishonesty or actual fraud for a home improvement contractor to be potentially liable for threefold damages and attorneys fees.  All home improvement contractors should be aware of the items outlined in the regulations.  Some of the items are as follows:

No seller contracting for the making of home improvements shall commence work until he is sure that all applicable state or local building and construction permits have been issued as required under state laws or local ordinances

 The seller shall furnish the buyer a written copy of all guarantees or warranties made with respect to labor services, products or materials furnished in connection with home improvements.

 All Home improvement contract requirements in excess of $500.00 must be in writing signed by all parties.  This includes all changes in the terms of home improvement contracts.

All terms of home improvement contracts must be clearly set forth including the following:

 i. The legal name and business address of the seller, including the legal name and business address of the sales representative or agent who solicited or negotiated the contract for the seller;

ii. A description of the work to be done and the principal products and materials to be used or installed in performance of the contract. The description shall include, where applicable, the name, make, size, capacity, model, and model year of principal products or fixtures to be installed, and the type, grade, quality, size or quantity of principal building or construction materials to be used. Where specific representations are made that certain types of products or materials will be used, or the buyer has specified that certain types of products are to be used, a description of such products or materials shall be clearly set forth in the contract;

iii. The total price or other consideration to be paid by the buyer, including all finance charges. If the contract is one for time and materials, the hourly rate for labor and all other terms and conditions of the contract affecting price shall be clearly stated;

iv. The dates or time period on or within which the work is to begin and be completed by the seller;

v. A description of any mortgage or security interest to be taken in connection with the financing or sale of the home improvement; and

vi. A statement of any guarantee or warranty with respect to any products, materials, labor or services made by the seller.

 If a person other than the seller is to act as the general contractor or assume responsibility for performance of the contract, the name and address of such person must be disclosed in the oral or written contract, except as otherwise agreed, and the contract shall not be sold or assigned without the written consent of the buyer;

 No home improvement contract shall require or entail the execution of any note, unless such note shall have conspicuously printed thereon the disclosures required by either State law (consumer note) or Federal law concerning the preservation of buyers' claims and defenses.

The Door to Door Home Repair Sales Act

N.J.S.A. 17:16C-95 et seq. is known as the New Jersey Door to Door Home Repair Sales Act of 1968. A summary of some of the main point s of this Act is below: 

Three day rescission period allowed

This Act allows homeowners three business days to rescind a home repair contract in excess of $25.00 if the contract was entered into at a place other than the place of business of the home repair contractor.

To rescind, the home owner must furnishes to the home repair contractor a notice of intent to rescind the home repair contract by certified mail, return receipt requested, postmarked not later than 5 p.m. of the third business day following the day on which the home repair contract is executed.  The homeowner is then required to release the contractor's goods and materials, if any, being held at the homeowner’s property.

After rescission, the home repair contractor has ten days to

(1) Pick up, at his own expense, any goods subject to such contract, delivered to the owner;

(2) Refund to the owner all amounts of money paid by the owner (less reasonable charges for any damages to such goods which occurred while in the possession of the owner); and

(3) Redeliver to the owner any goods traded-in to the home repair contractor on account of or in contemplation of the home repair contract (less any reasonable charges actually incurred in making the goods ready for sale).

 The home repair contractor is required to maintain a record of the receipt of any owner's notice of intent to rescind a sale under this act for at least 18 months after the receipt of such notice of intent to rescind.

Written receipt required at the time of contracting

According to the Act, two copies of a receipt must be delivered to the homeowner at the time of contracting, containing the following information:

(1) The home repair contractor's name and place of business;
(2) A description of the goods and services sold; and
(3) The amount of money paid by the owner or the cash value of any goods delivered to the home repair contractor at the time the home repair contract was entered into.
(4) A notice in 10 point or more bold type stating:

"NOTICE TO OWNER: YOU MAY RESCIND THIS SALE PROVIDED THAT YOU NOTIFY THE HOME REPAIR CONTRACTOR OF YOUR INTENT TO DO SO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTMARKED NOT LATER THAN 5 P.M. OF THE THIRD BUSINESS DAY FOLLOWING THE SALE. FAILURE TO EXERCISE THIS OPTION, HOWEVER, WILL NOT INTERFERE WITH ANY OTHER REMEDIES AGAINST THE HOME REPAIR CONTRACTOR YOU MAY POSSESS. IF YOU WISH YOU MAY USE THIS PAGE AS NOTIFICATION BY WRITING 'I HEREBY RESCIND' AND ADDING YOUR NAME AND ADDRESS. A DUPLICATE OF THIS RECEIPT IS PROVIDED BY THE HOME REPAIR CONTRACTOR FOR YOUR RECORDS."

 

Penalties for non-compliance

If a homeowner violates this Act by failing to retrieve materials or to refund appropriate amounts to a homeowner, the contractor shall be responsible for the amount of damages, plus reasonable attorney's fee and costs of the action.

 Further, any home repair contractor who willfully destroys, within 18 months after its receipt, record of an owner's notice of intent to rescind a sale; or who willfully fails to pick up the goods and refund the purchase price within the 10 business days; or who willfully fails to deliver a receipt setting forth all the information required by section 6 of this act; or who otherwise violates the Act, shall be a disorderly person and, upon conviction thereof, shall be subject to a fine of not more than $500.00 for each offense.

The rights and remedies set forth in this Act are in addition to the other penalties allowable by other statutes and laws.

Home Repair Financing Act

N.J.S.A. 17:16C-62 et seq. is known as the New Jersey Home Repair Financing Act.  It is a lengthy Act with numerous requirements.  It provides requirements for home repair contracts involving financing of the price of a home improvement contract and/or payment of the sales price of a home improvement contract over an extended period of time.  If you, your sales staff or your employees anticipate in entering into a home improvement contract that shall be paid by financing or over a total period of ninety days or more, please contact an attorney.

The Act provides additional requirements for what items must be in the written contracts.  It provides restrictions on what must not be a part of the written contract.  The Act provides restrictions as to what financing and payment arrangements may be made, and what documentation must accompany contracts.  The Act requires records to be maintained, bonding in certain circumstances, notice requirements to the Commissioner of Banking and Insurance in certain circumstances and additional licensing in certain circumstances.  Fines and other penalties are imposed for failure to comply wit this Act.

The text of this Act may be viewed on this site.  It is recommended that all home improvement contractors consult an attorney prior to entering into contacts subject to this Act.

Business Documents for Home Improvement Contractors

Client Contracts, Contract Amendments, Invoices, Correspondence

 New Jersey’s statutes and other laws require many particular items to be included in the communications between home improvement contractors and homeowners.  These communications include contracts, contract amendments, invoices and correspondence.  Many of the requirements are summarized in the articles that are a part of this website.  Many of the requirements can also be found in the sample statutes and laws that are apart of this website.  Large penalties exist for certain violations, such as fines, damages if violations cause harm to a homeowner, and sometimes responsibility for threefold damages, attorney’s fees and costs of suit.  The penalties can vary depending upon the particular violation and the effect that the violation actually has upon the homeowner. 

It is important that home improvement contractors use documents that comply with the requirements of the industry.  Use of appropriate documents benefits home improvement contractors in several areas:

1)         Avoidance of penalties and fines imposed by government;

2)         Greater ability to collect monies owed and to enforce all provisions of contracts;

3)         Save time, expense and client relations as a result of less ambiguity in contracts.  Fewer areas for disagreement with homeowners;

4)         Less exposure to liability to unscrupulous homeowners who threaten to use the laws as a “sword” against home improvement contractors, rather than a “shield;”

5)         Increase image of professionalism for the home improvement contractor;

6)         Increase consumer confidence and image of home improvement contractors as a whole throughout the state.

It is recommended that home improvement contractors contact an attorney to draft and/or review business documents for content and compliance.

Collection Issues

How to Improve Collection Success

 Poor collection can greatly reduce the profitability of an otherwise successful business.  Collection efforts are sometimes time consuming and detrimental to contractor/client relations.  Collection efforts can be unpleasant when disagreements arise between the contractor and the homeowner.  Each business may find success with collection using different strategies.  Some helpful hints that home improvement contractors may consider are as follows:

1)         Make sure your contract documents are clear and your invoicing procedure is regular and clear.  Lack of clarity can cause misunderstandings between well intentioned people.  Lack of clarity can also diminish clients’ confidence that they are being billed fairly.

2)         Make sure your contracts and other business documents comply with the law.  It is sometimes extremely difficult to collect when a misunderstanding arises and the home improvement contractor’s business documents are non-compliant.  Non-compliance with the law gives homeowners an opportunity to use the laws as a sword against a contractor rather than a shield. 

For example, imagine a project in which a misunderstanding arises between the contractor and the homeowner when only a few minor punch list items remain on a significant job.  The homeowner could withhold an unfair amount as a “hammer” and require that the contractor provide unnecessary service or additional service to obtain release of the large sum of money.  A contractor with a non-compliant contract may seek to recover the amounts owed in court.  However, a sophisticated homeowner may counter sue claiming that the non-compliance with the law relating the contractor’s business documents has caused some harm.  The contractor may then be faced with a counter suit demanding threefold damages (Consumer Fraud Act) and the payment of the homeowner’s attorney’s fees, costs and other penalties. 

3)         Space payments appropriately throughout completion of various stages of a job so that the final payment is not too large.  This would decrease losses in the event that a homeowner unscrupulously withholds final payment.

4)         Some home improvement contractors may desire to include provisions in their contract allowing for resolution of disputes by mediation or arbitration.  Mediation and arbitration can provide avenues for less costly and time consuming resolutions.  They can often be handled without damaging the contractor/client relationship.  Further, the parties can have some control over who will mediate or arbitrate the issues, providing the possibility that the mediator or arbitrator will have a desired expertise or position of trust.

5)         It may sometimes be beneficial to take advantage of the lien claim process available to home improvement contractors.  This issue is presented in more detail in another article on this website.

The above ideas may be helpful in increasing the collection efficiency of home improvement contractors.  These ideas and others should be discussed with an attorney prior to implementation to see how they fit with each contractor’s particular situation.   

Construction Lien Law for Home Improvement Contractors

Construction Lien Law for Home Improvement Contractors

 N.J.S.A. 2A:44A-1 et seq. sets forth the legal process by which a home improvement contractor may place a lien on a homeowner’s residence for unpaid services and material.  This is a very strong collection tool because a homeowner can not transfer title in his/her home without first addressing outstanding liens on the home.  It also serves as a method of obtaining a valuable asset to collect against where a homeowner claims to have no other assets available to pay an outstanding invoice.   

The statute dictates that contractors must file a lien claim within ninety days following the date the last work, services, material or equipment was provided for which payment is claimed.  However, special rules apply for contracts involving construction to residential buildings.  The rules decrease the time for home improvement contractors to act.

 Contractors desiring to file a lien on a residence pursuant to a residential home improvement contract must first file a Notice of Unpaid Balance and Right to File Lien Claim in accordance with the statute.  Then the contractor must file and complete an arbitration process outlined in N.J.S.A.44:A-21.  The demand for arbitration is filed with the American Arbitration Association.  The process allows submissions from all parties.  The arbitrator renders a decision as to whether a lien claim is appropriate, and in what amount. The arbitrator must render a decision, absent unusual circumstances, within thirty days from the date that the demand for arbitration was filed.  A lien claim can not be filed until this arbitration process is complete.

 Home Improvement contractors should remember that they should initiate the lien claim process as soon as possible after the last contract work was performed at that site.  If a home improvement contractor waits beyond sixty days, the ability to file a lien claim could pass due to the time elapsed during arbitration, which could take up to thirty days. 

 Home improvement contractors should also be aware that lien claims can not be sustained based upon unsigned or otherwise unenforceable home improvement contracts.  Therefore, good contracting and invoicing procedures increase the likelihood of the success of a lien claim.

Collection of Taxes from Homeowners

Collection of Taxes from Homeowners

Home improvement contractors should be aware of their tax collection responsibilities associated with the services and materials that they supply.  Generally, when a home improvement contractor’s work qualifies as a “capital improvement,” the home improvement contractor is not required to collect sales tax for the materials or services involved in installing the improvement.  Examples of capital improvements may include installation of new siding, new cabinets, new driveways, trees, shrubbery, new fences, new roofs, new gutters, new decks, new wall-to-wall carpeting over a sub-floor, new HVAC systems, new in ground swimming pools and others.  Although a home improvement contractor is not required to collect sales tax relating to such items, the contractor must obtain a properly completes ST-8 form called a “Certificate of Capital Improvement,” for all such work. 

Conversely, home improvement contractors must collect sales tax for repairs and maintenance that do not amount to a capital improvement.  Example of repair and maintenance work would be fixing loose bath tiles, fixing a few roof shingles, patching driveway potholes, fixing leaks in a cellar, mowing lawns, trimming trees and non-initial painting the interior or exterior of a home. 

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