New York Small Business Law

What licenses do I need to start an Online Business?

"Starting an Online Business: Licensing Requirements" caught my eye the other day.  I would like to add my own two cents to this topic from a New York perspective.

An online business is no different from any other business when it comes to licenses and permits.  Depending on the type of business you conduct, online or offline, you may need certain permits and licenses from three different authorities: the Federal Government, your State Government or your local authorities.

Federal Government permits and licenses are rarely necessary, except for certain types of rather dangerous activities, like drug manufacturing, selling of alcohol and firearms and so forth.

On the state level, as a New York business, you can find out what kind of licenses and permits are required by going to New York's Online Permit Assistance and Licensing web portal, short OPAL.

On OPAL, among the many choices of different business types, there is one type of business labeled "Online Retail Business."

If you go through the questionnaire, you will find out that you need to obtain a Certificate of Authority to Collect Sales Tax.  OPAL also advises that the sale of certain goods may require additional licenses and suggests that you contact GORR (New York State Governor's Office of Regulatory Reform) at 800-342-3464.

On the local level, as a New York City business, you can find information about permits and licenses here.  As far as I can see, they do not require any particular license for the sale of new goods on the internet.

With respect to using your home as a home office in New York City, I wouldn't worry about any permit or license, as long as your business doesn't disturb your neighbors.  But if in doubt, you should consult the New York City Zoning Code, or your town's zoning code, if you don't life in NYC.

By the way, don't hesitate to call all State and City agencies and ask your way through to somebody who seems knowledgeable and get all the information you need.  While there is no guarantee that people give you correct information (is there ever?), these government employees are being paid to help you (for free) and are often very helpful.

Then there is other paperwork that a new business may need to file, even though I wouldn't call that a permit or a license.

For example, corporations and multi-member LLCs must apply for a federal identification number. 

In addition, any business that conducts its business under a name other than the name of the individual owner, must apply for a "fictitious name certificate" or "business certificate."  In other words, Daphne Danzig selling widgets as Daphne Danzig does not have to get a business certificate.  But Daphne Danzig selling widgets under the name "Ace Widgets" needs to apply for a certificate.  If Daphne Danzig is in New York City, she can get her certificate at the county clerk, 60 Centre Street, for more info see here.  For an entire post on business certificates, see my earlier post on "doing business as".

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

How to use Special Terms in your LLC's Name

As you may know, there are naming rules (Section 204 NY limited liability company law) when it comes to choosing a name for your LLC.  Most  names are o.k. if not already taken by somebody else, but some terms are tricky and require special dispensation.

For example, try filing articles of organization for this LLC:  "Life Exchange, LLC".  You will get a nice letter from the Department of State informing you that they are unable to file this name, because it is not allowed to use "exchange" in the name of an LLC without the approval of the Attorney General.  And they are right; it says here in Section 204(h) NY limited liability company law:

"The name of each limited liability company as set forth in its articles of organization [......] shall not, unless the approval of the attorney general is attached to the articles organization [.......] contain the word "exchange" or any abbreviation or derivative thereof.  Such approval shall not be granted by the Attorney General if in his or her opinion the use of the word "exchange" in the limited liability company's proposed name would falsely imply that the limited liability company conducts its business at a place where trade is carried on in securities or commodities by brokers, dealers or merchants."

Is that the end of your name?  No, you can go ahead, write a letter to the Attorney General and describe the business you are planning to conduct under the name "Life Exchange, LLC".  I am assuming it's some kind of life coaching, re-birthing center type of activity.  If you explain it right, there should be no doubt that you are not trying to establish a New York stock exchange in your backyard and they will happily give you the approval.

Many people have successfully done it already, as you can find out by searching the New York State corporate database with the term "exchange."  There are plenty of businesses using the term "exchange" that have nothing to do with trading stocks or commodities.

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

Professionals starting a Corporation or Limited Liability Company in New York

A professional cannot form a regular corporation or limited liability company to sell his or her professional services.  This is well known about lawyers and doctors, but it is also true for nurses, psychologists, and any other profession designated in Title 8 of the education law.

These professions have to form a special kind of corporation or LLC, a so called professional corporation or a professional limited liability company.

A professional LLC or corporation is not that different from a regular LLC or corporation when it comes to the structure and tax treatment.    There are just some special rules with respect to the formation, the purpose and the shareholders of a professional LLC:  Look here for professional LLCs and here for professional corporations.

When a professional forms a professional corporation to sell his or her services, the sole purpose of that corporation must be the rendering of professional services.  All his or her fellow shareholders must be authorized to practice in the same profession. 

Now, many people think that when they form a professional entity, they are protected from their own malpractice.  Wrong.  The New York limited liability company law specifically states in Section 1205:

"Each member,manager, employee or agent of a professional service  limited  liability company  shall  be  personally  and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or  her  or  by any  person  under  his  or  her  direct  supervision  and control while rendering professional services on  behalf  of  such  limited  liability company."

What's the point of forming an entity then in the first place?  Well, you can still shield yourself from liability of the other members of the professional LLC or anybody who was not under your direct supervision.  Plus, your house and car won't be on the line, if something happens that is unrelated to your professional liability, such as a visitor falling on the shiny floor in your lobby.

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

An Artist goes into Business

A reader of my blog had the following questions which I am happy to address in a legal information kind of way.  (Disclaimer: This is not legal advice, nor is there an attorney-client relationship between me and the reader or anybody else reading this.)

“I have a degree in art. I am unable to find a full-time job, so I am thinking of doing freelance work to pay my bills.”

Good idea.  Being an entrepreneur can be rewarding and a way out of unemployment.  By the way, did you know that you may be able receive unemployment payments and start a business at the same time?  Check out the so called self-employment program. 

“How do I distinguish what is considered freelance, and what is considered "being a business"?”

There is no meaningful distinction.  If you sell things or services for your own profit, you are considered operating a business, no matter what you call it, freelancing, a profitable hobby, moonlighting, independent contractor, doing gigs on the side…..This is true, even if you have a day job and a regular paycheck from an employer.

“When would I have to register myself as a business?”

"Registering" can mean different things in this context.  If you start a business under your own name, there is no need to register that business.  You are automatically a sole proprietor.  If you operate a business under a name different from your own name, you need to register that name and the business by filing for a "business certificate" with the county clerk in the county where your business is located.

Then, of course, if you have income from your business, you need to pay taxes to the local and federal tax authorities.  As a sole proprietor, you would file your income from your business on Schedule C of your federal tax return.  Then you also have to pay self-employment tax, the equivalent of social security and Medicare taxes for the self-employed.

“If I wanted to operate under something like "Arty, the artsy Artist," is that what I would register as a name?”

If that suits your fancy, go for it.  As mentioned above, if you want to operate a business under a name different from your individual name, you must obtain a business certificate from the county in which your business is located.

“I believe I would be considered a sole proprietorship, because I would not have any employees, or business partners.”

Only partly true.  You can have employees, even though you are a sole proprietorship.  If you operate your business with another person, you would automatically be considered a partnership.  Only one person can operate as a sole proprietor.

“Everything is so confusing...because what if I make no commissions, or find no clients?”

Can’t help you there.  That is the risky side of being in business.  Potential huge rewards are the other side.

"I don’t know where I fit in as an artist who wants to explore several avenues to see which is the right route for me."

Even though artists are special in so many ways, when it comes to business, there are just like any other business man or woman.

I am starting a Business - What can I do to minimize Risk and Sleep through the Night?

If you have ever started a business, you know what it is like to wake up in the middle of the night and be worried sick.  Being in business exposes you to a lot of risk.  The key is to plan for risk and minimize it where possible, so that you can find the sleep you need to succeed.

Here are the ten most common strategies to minimize risk when operating a business:

1.  Forming a Business Entity

The right business entity can shield your personal assets from creditors of the business. 

The right business entity can also shield business assets from personal creditors of the owners of the business.

2. Removing Assets from the Business Entity

Since business assets are exposed to attack by creditors of the business, it is wise to remove as many assets as possible from the business entity, or not even put business assets into the entity in the first place.  A combination of business entities, a regular withdrawal of business assets, and a smart funding of business entities with owner loans and liens can minimize the risk that important business assets are open to attack by creditors. 

3. Hiring Independent Contractors instead of Employees

Employees can get business owners into trouble.  Some of the liability issues are avoided by outsourcing business tasks to independent contractors.

4. Entering into Founder Agreements with your fellow Business Partners

Properly drafted founder agreements, such as shareholder agreements, operating agreements or partnership agreements can prevent sticky situations with co-owners and provide clear rules with respect to forced buyouts of owners, exist strategies for owners, vesting of owner equity and so forth.

5. Keeping your Books and Records in Order/Complying with Formalities

Co-mingling personal assets with business assets, neglecting to hold and document required corporate meetings, neglecting to properly document transfers of assets in and out of the business can be the death of any properly structured limited liability shield and asset protection strategy.  Creditors who can show neglect in such respects may be able to pierce the corporate veil of the limited liability entity and reach your personal and business assets.

6. Solid Business Contracts

Business Contracts that properly spell out the deal you want, provide for dispute resolution mechanisms and identify the proper parties can prevent many misunderstandings and hassle with your customers and suppliers.

7. Using the Law to your Advantage

Getting proper protection for your intellectual property to the full extent of the law can prevent theft and infringement of such property by third parties.

8.  Complying with the Law when raising Money

Being aware of and following state and federal securities laws and regulations when raising money can keep you out of serious (even criminal) trouble.

9. Assembling the Right Team to Look out for your Business

To paraphrase Seth Godin in How to Succeed in Business to Business, you need people who will be consistently on time, on budget and most importantly, people who don't cause you to loose sleep.  That your lawyers, accountants and other advisers are brilliant at what they do, should be a given.

10.  Getting Insurance

Despite the best business entity structure, adviser teams and other strategies, there remain risks that can be insured.  Even limited liability business entities have many exceptions to the limited liability shield.  A good business insurance broker can tell you about the risks that can be insured.

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

Must Read for hungry Startup Entrepreneurs: How not to Hand out Equity

Learn how a young startup died an early unnecessary death due to a faulty capital structure in "A Fatal Paper Cut."

Great post, but IMHO, bad title.  Had I not found it through Ask The VC, I would have never read the post based on the title.

Don't sweat your B Plan

Don't think you are doomed to failure, if you neglect to craft the perfect business plan.  Apparently, appearance and credibility is more important than a business plan, as reported by this research report:

"The researchers also found that whether or not an entrepreneur had created a business plan for their start-up venture had no bearing on the success of that venture. Newberg speculates that perhaps investing a lot of time creating the perfect business plan document takes time away from executing the ideas described in the document. He also suggests that entrepreneurs may become too attached to their initial conceptions or misconceptions once they are formalized by inclusion a business plan. Because things change so rapidly for an emerging venture, it is important to be flexible, Newberg explained.

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

Do I need a Federal ID Number for My Sole Member LLC?

No, for federal income tax purposes a sole member LLC is normally considered a "disregarded entity."  Unless you hire employees, you can use your social security number for all purposes.

However, for security reasons, you may want to get Federal Tax Identification Number (also known as Employer Identification Number or Employer ID Number) in order to reduce the number of people who have access to your social security number.  In addition, it is a good idea to keep the LLC's business strictly separate from your personal affairs in order to protect the LLC's limited liability shield.  Having your SSN on all of your LLC's bank accounts and other documents could give the impression that your personal affairs and your business are not separate.

You can get your Federal Tax Identification Number and more information here.

How to save Taxes with an S Corporation

One of the main reasons for choosing an S corporation over a limited liability company is the possibility to save self-employment taxes.  Members of an LLC have to pay 15.3% self-employment tax on their share of the LLC's income (for the first $94,200).  Shareholders of an S corporation can split the S corporation's earnings into salary and distribution of dividends.  As a result, they only have to pay self-employment tax on the salary.  However, the IRS is on to them and has gotten more aggressive in demanding that you pay yourself a decent salary.  In other words, if you are a cosmetic surgeon in private practice, you won't get away with declaring 30,000 as salary and 500,000 as distribution of dividends.

Talk to your accountant to get his or her opinion on your tax situation.

Stephen L. Nelson, accountant in Redmond, Washington, explains better than I ever could how you could save taxes using an S Corporation.

Choosing between an S Corporation and an LLC - The New York Perspective

Many small business owners eventually have to decide between a limited liability company and an S corporation when choosing a formal legal structure for their business.  Unfortunately, it is not that easy to understand the characteristics of each business entity.  There is just so much information out there that is too complicated, confusing or plain misleading.

To somewhat alleviate this situation, I just wrote a short FAQ about the differences, similarities and other aspects of S corporations and limited liability companies from the New York perspective.  You can read it on my website.