New York Small Business Law

Can a Limited Liability Company issue Share Certificates?

Yes, but they would typically be called membership certificates or units.

In my experience, small businesses rarely issue such membership certificates.

Typically, when two or more people form an LLC, they form the entity by filing the necessary paperwork with the Department of State and then enter into an operating agreement between themselves and the entity.  The operating agreement will state something to the effect that A,B and C each contributed x amount of money (or services or property) to the LLC and received membership interests in the percentages expressed on some annex to the operating agreement.  No actual paper certificates will be issued.

However, that doesn't mean that an LLC cannot issue certificates similar to share certificates of a corporation.  An LLC is very flexible and you can choose to structure your LLC almost like a corporation by including appropriate provisions in the operating agreement. 

While membership certificates would add an extra layer of formalities to an LLC, they could offer some advantages:

It may be easier to create a security interest in a certificated membership interest, and

you can put a "legend" on the certificates that alerts third parties that the certificate is subject to transfer restrictions in the operating agreement.

Related Post:  The LLC Operating Agreement - Keep it Simple

**This post is for informational purposes only and does not constitute legal advice**

Incoming Google Search: is it legal to sign a contract as an LLC that is not yet formed?

I guess it isn't illegal, unless you think doing something stupid should be illegal.

But I can see how this can happen.  You are presented with the perfect business opportunity and are pressured to enter into a contract.  You know that you should probably wait until your LLC has been formed, but you cannot wait until "FileYourLLC.com"  actually gets around to doing it (you opted for the "basic" LLC formation package which indicated 2-3 weeks processing time).

So you figure, why not sign in the name of the LLC, nobody is going to ask later.  Bad idea.  If you sign for your LLC despite the fact that the LLC has not been formed, you are likely personally liable on whatever obligation you signed for.  You may or may not be able to get the other party to the contract release you once the LLC has been formed.

So, if at all possible, wait until your LLC has been formed by filing the articles of organization with the Department of State.  If you are really in a hurry and are ready to pay extra filing fees for expedited handling, you can form an LLC within 2 hours, so there is really no reason to risk personal liability on any contracts entered into before the LLC came into existence.

**This post is for informational purposes only and does not constitute legal advice**

I think I pierced my Corporate Veil - Is this Fatal?

Don't go to the emergency room yet.  Your awareness of something going awry in your corporation maybe the first step to recovery.

First off, you can't really "pierce" your own corporate veil.  "Piercing the corporate veil" is lawyer talk for somebody else trying to make you personally liable for your corporation's debt.

Usually a corporation protects you from the corporation's creditors.  The corporation is considered a separate entity.  If the corporation enters into a contract, only the corporation is liable, not you personally, even if you are the sole shareholder, director and officer of the corporation.

Now, this corporate separateness can sometimes lead to injustices.  For this reason, courts came up with the "piercing the corporate veil" doctrine that says if someone really abuses and disrespects the corporate form to screw creditors, he or she might not be able to prevent personal liability, if the creditor can show facts and circumstances that fulfill the "piercing the corporate veil" doctrine.

Very generally speaking, a corporate veil will stay intact, if the corporation complies with all corporate formalities, if the corporation is kept sufficiently distinct from the shareholders (no intermingling of funds and assets) and if the corporation is not just a plot to defraud creditors. 

Most likely, one small incident of non-compliance with corporate formalities or accidental co-mingling of personal funds with business funds if corrected in due course is unlikely to be enough to be the basis of a piercing the corporate veil claim and you should not loose sleep over it if it happened.

However, it should not happen in the first place and be avoided at all cost in order to prevent any potential claims.  Do not pay business expenses from your personal account, do not pay personal expenses with business funds; do not neglect to record corporate resolutions and meetings; do not forget to issue shares properly; do put adequate capital into your corporation; do not hide behind the corporate entity for your own personal shady dealings.  If you are a one person corporation, the formalities and separateness may seem artificial, but you have to get used to it, in order to protect your corporation's liability shield.

If in doubt what is and isn't o.k. under the doctrine, check with an attorney. 

**This post is for informational purposes only and does not constitute legal advice**

How to convert an LLC into a Corporation

There are times in the life of a business when one business form has to be converted into another.  For example, a startup may have initially decided to form an LLC in order to pass through the LLC's losses to the owners' tax returns, thereby allowing them to deduct such losses from their other non business related income.  Now the startup is seeking venture capital financing and the venture capital investors won't invest in an LLC (as is often the case).  Consequently, the business needs to convert to a corporation.  How is this accomplished?

If you are dealing with an LLC formed under the laws of Delaware,  look in Section 18-209 et seq. of the Delaware Limited Liability Company Act.  This provision allows for a merger* or consolidation** of a Delaware LLC with a Delaware corporation or a corporation formed under any foreign law.  If all of the procedures are followed, you will end up with a corporation where you used to have an LLC.

If you have an LLC formed under the laws of New York, look in Section 1001 et seq. of the New York Limited Liability Company Law.  Under these provisions, a New York LLC can also merge or consolidate with a New York corporation or a corporation formed under any foreign law.  Again, you will end up with a corporation where you used to have an LLC.

If you are considering a conversion of an LLC into a corporation, make sure to check with your accountant, attorney and/or tax adviser.  There may be important tax and other legal consequences to consider before making the move of converting an LLC into a corporation.

* A merger generally means that two business entities (A and B) become one business entity, either A or B.  If A survives, B ends and vice versa.

** A consolidation generally means that two business entities (A and B) become one new business entity, C.  A and B end.

**This post is for informational purposes only and does not constitute legal advice**

Do I have to repeat the LLC Publication if I change the Name of the LLC?

A reader asked this question in response to my post: Taking Care of the LLC Publication Requirement:

"I was hoping you could illuminate something for your readers. If a business were to file a pub requirement under one name (i.e. Acme, LLC.) but then decided that they wanted a different name and started a DBA name (i.e. Taylor Capital) would another NYS publication requirement need to be filed under the DBA name?"

Answer:  No.  The publication requirement has nothing to do with choosing to use a name for your business that is different from your legal name, i.e. choosing to "do business as".  If you want to use a different business name after you properly complied with the publication requirement for your LLC, you can do so, as long as you follow the "doing business as" rules.

P.s.  I welcome questions from readers and will try to address them in the blog where appropriate.  However, none of my posts constitutes legal advice, you cannot rely on my blog as a substitute for legal advice, and there won't be an attorney-client relationship between us.

**This post is for informational purposes only and does not constitute legal advice**

Business Entity Overview

CCH has a good overview over the business entities available to the business owner.  Be mindful, though, that choice of entity is influenced by your state laws.  For example, the overview states that corporations are usually cheaper to form than LLCs.  This is not true in New York.

Usual price tag for forming a limited liability company in New York (City): $1300, excluding legal fees.

Usual price tag for forming a business corporation (or s corporation) in New York: $195, excluding legal fees.

**This post is for informational purposes only and does not constitute legal advice**

LLCs and Derivative Actions - Tzolis v Wolff

What can a member of an LLC do if managers or members of the LLC engage in conduct that harms the LLC? 

A New York Appellate Court has held (Tzolis v Wolff, 2007 NY Slip Opinion, Appellate Division, First Department) that a member of an LLC has standing to bring a so called "derivative action." 

Derivative actions are typically brought by shareholders on behalf of a corporation to demand that the corporation take action against directors, officers, or others for actions that have harmed the corporation.  Some LLC statutes of other states also give LLC members the right to bring such actions. 

The decision of the New York court is remarkable, since the New York LLC statute does not provide for such right and the First Department declined to follow prior rulings of the Second Department which stated that members of an LLC did not have the right to bring a derivative action. 

From the decision:

We respectfully decline to follow the Second Department given 1) the historic judicial recognition of the common-law right to bring a derivative action on behalf of a corporation or a limited partnership, both of which share many of a limited liability company's characteristics; 2) the principles of statutory construction, which provide that only a clear statement of legislative intent may override the common law; 3) the fact that most states provide a statutory right to bring a derivative claim and 4) the unpersuasive rationale of those decisions which have rejected derivative claims for limited liability company members.

 

What happens if I don't file newspaper ads for my LLC?

A reader had this question in response to my post "Taking Care of the LLC Publication Requirement":

If I own an LLC just to protect the company name and I don't file the newspaper ads, is the only issue that I lose the ability to do business in NY?

Yes, if you fail to publish and file the certificate of publication in the required time frame (120 days after formation), the LLC's authority to carry on, conduct, or transact business in New York will be automatically suspended.

What does that mean in practical terms?

Nobody really knows.  The law was amended in June of 2006 and the part about "carry on, conduct, or transact business" is new.  Would have been a nice gesture by the law makers to leave us some pointers, but no such luck.

I think, at a minimum, this follows from failure to publish:

The LLC will not be able to sue in New York courts, but can still be sued.

The LLC will not be able to obtain a "certificate of good standing" from New York's Department of State.  The LLC may need such a certificate in order to get a larger loan or to participate in a major business transaction.

But, you can be sure of the following: The members (owners) of the LLC will still be protected by the limited liability shield of the LLC.

Any contract between the LLC and any other party does not become invalid, because the LLC failed to publish.

Once the LLC  takes care of the publication requirement, the law provides that the LLC regains its authority to "carry on, conduct, or transact business in New York."

End-of-Year Resolution: Clean up your Corporate House

In order to maintain its limited liability shield, a corporation must adhere to corporate formalities.  Aside from properly forming the corporation, issuing stock, appointing directors and officers, holding annual meetings of directors and shareholders, you are well advised to keep an organized and up-to-date corporate record book.  (Look her for five reasons to keep your corporate minute book up-to-date.)

While you can purchase fancy corporate binders such as the one pictured here, it is not required and you can keep all documents in whatever binder you have at hand.

Make sure that your corporate record book contains:

• The corporation’s certificate of incorporation, including any amendments thereto;

• The statement of the incorporator;

• The corporation’s bylaws, including any amendments or restatements;

• The corporate minutes of all shareholders’ and directors’ meetings;

• The share transfer ledger (also known as stock register), including the names and addresses of all shareholders, the number and class of shares held by each and the dates when they became the owners of record thereof.

To update your corporation’s record book, you need to prepare corporate minutes documenting any required shareholder or board meetings (see Section 602(a) BCL), as well as approving important transactions by the corporation since the last time the book had been updated.  Technically, it is preferable to prepare minutes before the corporation entered into an important transaction, but, let’s face it, nobody is perfect.  As long as you ratify actions at some point, you should be fine.

Many companies authorize their attorneys to keep custody of the record book in order to be sure that the record book is maintained properly.  However, if you think your time is less valuable than your lawyer’s time, do it yourself, for example with the help of this book: The Corporate Minutes Book: A Legal Guide to Taking Care of Corporate Business.

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).