New York Small Business Law

Limited Liability Protection of LLC not absolute

Section 609(a) of the New York Limited Liability Company Law provides that an LLC member is not personally liable for the debts and obligations of the LLC.  That is the beauty of having formed a limited liability company.  If the LLC goes under, you keep your house.

However, as illustrated by a recent New York decision*, this protection is far from absolute.  If you as a member of the LLC do something objectionable under the law, you may be on the line.

A woman got fired by her employer (a New York limited liability company) and claimed violations of New York's Human Rights Law (Section 296 of the Executive Law), because she believed she was fired due to her  disability.  She sued the LLC as well as one of the managing members of the LLC.  The member tried to hide behind the limited liability shield of the LLC and raised Section 609(a) as a defense.   The court would not hear it.  The court  held that section 609(a) "does not extend to violations of [the New York Human Rights Law] by a person with an ownership interest in, or the power to make personnel decisions for, the organization." Pursuant to the court's decision, the LLC member was subject to liability if the fired woman could show that he was involved in the termination of the woman's employment by “encouraging, condoning, or approving it.”

*As reported by the Unincorporated Business Law Prof Blog: Pepler v. Coyne, 822 N.Y.S.2d 516 (2006).

FAQ: Choice of Entity

Articles on choice of business entity are a dime a dozen.  Here is one that stands out from the crowd:

FAQ on Choice of Entity.

(Another big firm resource free for the taking)

See also Choosing between an S corporation and an LLC - The New York Perspective, by Yours Truly.

 

Foreign LLC doing business in New York must publish in New York - and other Lessons

Picture this:

Amy formed Ace LLC, a Nevada Limited Liability Company, for her New York business.  She thought that LLCs are cheaper to form in Nevada, would incur fewer taxes and save her from complying with New York’s costly LLC newspaper publication requirement .

Ace LLC was about to enter into an important transaction with Widget Inc.  In the course of due diligence, Widget Inc.’s advisers demanded to see a “certificate of good standing” for Ace LLC.  Amy could not provide such a certificate, because an inquiry with New York's Department of State showed that Ace LLC did not exist in New York and had filed none of the paperwork necessary for foreign entities.  As a result, Ace LLC was not authorized to do business in New York.

Thankfully, Widget Inc. was of the patient kind and allowed the deal to go forward after Ace LLC cleaned up its act and gained good standing in New York.  Ace LLC applied for authorization to do business in New York and arranged for publication in two newspapers.   Amy was upset to learn that she would have saved money in the long run by forming a New York limited liability company or corporation in the first place.  Since she was doing business in New York, there were no tax savings.  The application for authorization to do business was an additional expense and Ace LLC had the ongoing cost of paying a Nevada registered agent.

Lessons learned:

1. If you do business in New York, form a New York entity (see related post, Should We incorporate our Small Business in Delaware?)

2. If you are a foreign entity and do business in New York,  apply for authorization to do business in New York.  See Section 802 of the New York Limited Liability Company Law.

3. Forming a Nevada, Delaware or any other foreign LLC does not save you the cost for the newspaper publication.  Section 802 of the Limited Liability Company Law requires that within 120 days after the filing of the application for authority, a foreign LLC must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the LLC.

Can you incorporate nationally?

One of the FAQ on corporations on the website of New York's Department of State reads:

Question:

Can I incorporate nationally?

Answer:

No. There is no mechanism in the United States to incorporate on the federal level. A company interested in incorporating (or forming a partnership or limited liability entity) must contact each state's licensing authority individually.

It would have never occurred to me that this is a "frequently asked question."  It does make perfect sense to ask, though.

As an attorney, or any professional for that matter, you sometimes have to step back and realize that you cannot take knowledge for granted.  Never stop explaining.  Always encourage questions.

For more FAQs on corporations, click here.

This Week's Blog Clippings

Posts that caught my attention during the last week:

International Hiring Practices Abroad Scrutinized
U.S. companies hiring employees in a foreign country (for jobs in that country) have to follow U.S. anti discrimination laws. 

Online Small Business Growing
Inc.com reports that within the next four years 82 percent of the nation's small businesses will be online.  Don't belong to the 18% without an online presence.  I find businesses (including attorneys) without an online presence suspect.

Second Life, the new Hot Place for Business or Not?
One of these days I will enter my Second Life.  So far it seemed too much of a time commitment.  If you just would like to know what all the hype is about and what big companies are doing to make a buck in Second Life, read this article.

Remote Control Mail:  Check your Postal Mail on the Web
Finally, somebody made this service available.  All that is missing now is a service that can print, stuff and mail my paper mail on the web.

Attorneys, more commonly called Lawyers

In case you were wondering what lawyers do, check out this video that looks like it was produced in 1985.  Note the lady doing legal research with actual books!  I am thankful today that I live and practice law in 2006! 

Doing Business in the United States

Small Foreign Businesses considering doing business in the United States are well advised to seek legal counsel in smaller law firms, since large law firms don't really want or need their business.   However, there is no reason why you shouldn't use big firm resources, such as this great guide:

Doing Business in the United States of America, an introductory guide for business persons from other countries who may be interested in establishing or acquiring operations in the U.S.

Courtesy of Thelen Reid & Priest LLP.

International Sales Contracts - Don't overlook the United Nations Convention on Contracts for the International Sale of Goods

Gone are the times when small businesses had only local dealings.  Many small businesses sell or purchase goods internationally.

When drafting an agreement for an international sale of goods, you must be aware of the potential applicability of the United Nations Convention on Contracts for the International Sale of Goods (CISG). 

The CISG applies to:

international transactions, i.e. the buyer and the seller are from different countries and such countries are a party to the CISG.  For example, a seller in the United States and a buyer in Germany would make a transaction an international transaction;

regarding commercial goods, i.e. not goods for personal, family, or household use, not partially to be manufactured goods, not goods sold by auction, not securities or other financial instruments, and so forth (See Article 2 and Article 3 CISG);

where the agreement expressly states that CISG applies to the transaction or,

(and this is what many people, including attorneys,  overlook)

where the agreement has a gap with respect to a particular issue or there is a conflict between the UCC and the CISG,  the CISG may act as the default law, even if the contracting parties had no intention of applying the CISG or didn't even know of its existence.

To avoid the default application of the CISG, parties can choose to waive its applicability (see Article 6 CISG) by including language into the sales agreement similar to this:

This agreement is governed by the Uniform Commercial Code as in effect in the State of New York, and is not governed by the United Nations Convention for the International Sale of Goods.

Should you opt out of the CISG?  It depends.  The CISG differs in numerous aspects from the UCC.

At minimum, your counsel should be aware of the CISG, compare its rules to the UCC and make a decision based on such differences and the particular circumstances of your transaction.  One benefit of the UCC:  people are more familiar with it. 

Covenant of Good Faith and Fair Dealing no help to Borrowers

As a borrower you may find yourself in a situation where you negotiated and entered into a loan agreement but are still denied a loan advance, because your lender just doesn’t feel like it.  Or at least that is the picture that presents itself from your end of the table.  Most likely the lender will point you to language in the loan agreement that states that the lender is allowed to exercise sole discretion in approving or disapproving loans or making any other decision under the loan agreement.

Fuming at the thought of all the wasted cost and time that went into the negotiation and execution of the loan agreement (and your financial homework to get approved for a loan in the first place), you may think to yourself that lenders should not be allowed to jerk innocent businesses around like that.  Unfortunately, if your loan agreement contains the above-mentioned language, there is little you can do after the loan agreement has been executed.

Even though New York law recognizes a covenant of good faith and fair dealing whereby contracting partners are supposed to refrain from unreasonable and arbitrary exercise of contractual terms, such covenant is construed very narrowly and will probably not help the frustrated borrower.  New York courts have held that where the express terms of a loan agreement allow a lender to exercise discretion in the decision to advance a loan, the lender has a right to deny the loan, even if the decision is unreasonable or arbitrary.  Courts have even gone so far as to hold that where a contract allows a lender to act in a certain way and sets no boundaries on the lender’s right to do so, a lender is not prohibited from unreasonably or arbitrarily exercising such right.

Thus, the time to prevent arbitrary and unreasonable decisions by lenders is during the negotiation stage.  Look for any clauses that allow the lender to exercise discretion and try to negotiate these provisions out of the agreement. You may also want to add provisions that state that any necessary consent by the lender “may not be unreasonably withheld” and that rights may only be exercised “acting reasonably.”  While you may not succeed in getting all such language removed (or added), you may be able to scale back the lender's discretion to a manageable risk you are willing to take.

Thanks New York Times for Pointing this out

"Step 1 in Starting a Business: Hire a Lawyer."