New York Small Business Law

Lack of Shareholder Agreement leaves Dentist's widow empty handed

As New York Business Divorce reports today, the lack of a shareholder agreement caused a New York widow of a dentist, who was practicing dentistry in a professional corporation, to be left with nothing.  

Despite the fact that the deceased dentist was a 75% shareholder in the dentist professional corporation and his widow had found a dentist purchaser for the dentist practice offering $530,000, the minority dentist shareholder was able to defeat her and will likely be able to force her to sell her late husband's share in the business for $0.  

The reason for all this was the fact that shareholders of professional corporations must all be licensed to exercise the profession of the corporation, in this case dentistry.  If one dentist dies, his non dentist heirs, here the widow, are severely limited in their rights to exercise rights of a shareholder.  

However, all of this could have been prevented by a properly drafted shareholder agreement including provisions dealing with the death of any shareholder and his heirs' rights.  The shareholder agreement would have preempted the New York default provisions contained in the business corporation law.  These default provisions caused the widow's dilemma.  

Read New York Business Divorce for a full analysis of the case.

Corporate Record Keeping - Company Records Explained

Filing a certificate of incorporation  in New York is the beginning point of a corporation (or articles of incorporation in Delaware).  Unfortunately, this is where it often ends for many small business owners.  Too many neglect the additional paperwork that is needed to keep the corporate house in order and keep the corporate shield of limited liability intact. I have written about corporate books before (as I had almost forgotten), but this is a new take on it and a much needed update, since I suspect there are still many small business companies out there that have nothing of this set up properly.  If you don't want to learn how to do it, have a business lawyer explain it to you, or better, make a business lawyer keep your records as a secretary of the corporation.  The lawyer or his or her assistant can do this very quickly and efficiently.  

While no fancy leather bound binder and seal is required, one should have some sort of binder with the following tabs and papers:

1. Articles/Certificate of Incorporation

Under this tab, in New York, one files the certificate of incorporation, in Delaware, the Articles of Incorporation, usually a certified copy of the one registered with the Department of State, Division of Corporations.  This is a public document and anybody can order a copy to look at it.  Along with with the certificate of incorporation, you should file the filing receipt, which you received from the Division of Corporations right after filing the certificate or the articles.

2. Bylaws

Each corporation must have by-laws, which are the rules that govern the inner workings of the corporation; how many officers/directors are allowed, how are they elected/removed; how are meetings of shareholders to be conducted...and so forth.   The by-laws of a corporation are not public, but they must be in your corporate binder.  If, against my advice, you used a non attorney formation service, they may have sent you a set of standard by-laws, which may or may not be all you need.  

3.  Minutes

The tab called minutes should contain all records relating to shareholder meetings or consents and director meetings or consents.  At a minimum, at the start of the corporation, it should have papers documenting the "organizational meeting."  This is where the "incorporator", the person who signed the certificate of incorporation and filed it in Albany does certain things:  Adopts By-laws of the corporation and appoints the first director(s) of the corporation.  This "meeting" can be done in writing and be a one page document signed by the incorporator, See example here.

Then there should be minutes of the first meeting of the directors, where the directors approve the actions of the incorporator, decide to open a bank account, authorize the issuance of shares...and so forth.   See this example.

As the corporation lives on, this tab will also hold all annual shareholder and director meeting minutes and any other meetings where the corporation made certain decisions through its directors and shareholders.

4. Stock Certificates 

In most cases, if you don't have a stock certificate showing your name on it, you don't any piece of the corporation.  No matter what anybody told you how much of the company you own, you must have a share certificate showing it.  If you are the sole owner of the company, you can put your stock certificate here.  This tab will also hold blank certificates that can be issued to new shareholders at a later time.

5. Stock Transfer Ledger

 A Stock Ledger is a register that tracks any issuance of stock, by listing the number of shares issued, date of issuance or transfer, the name and address of the shareholders and so forth.   

 

**This post is for informational purposes only,  For legal advice contact a business lawyer**

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**

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 here 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.