New York Small Business Law

Registering a Small Business

I get this search term a lot:  "Registering a Small Business."  People seem to think that they need to register something somewhere in order to conduct business.  Well, yes and no. 

You can start doing business under your own name by just by doing it.  You are considered a sole proprietor running a sole proprietorship.  No registration required anywhere to get that title.

But:

If you conduct business under a name different from your own name, you need to register an assumed business name (aka fictitious business name or DBA for "doing business as") with the county clerk of the county where you conduct the business.  You may have heard people say that you need to obtain a "business certificate" or "business license."  Same thing.

If you decide to establish a more formal business entity to run your business, such as a a corporation or limited liability company, you need to file ("register") certain papers with the New York Department of State in order to form such an entity in accordance with the law.  For example, to form a corporation, you need to file the corporation's "certificate of incorporation." 

Once you formed a corporation or LLC, (in most cases) you need to obtain ("register") a federal tax identification number (aka employer identification number) in order to open a bank account in the name of your corporation or LLC.  Find out more here.

If you formed a corporation, you may want to elect a special tax status for your corporation in order to become an S corporation by filing ("registering") Form 2553 with the Internal Revenue Service.  You have to do a similar election with the New York tax authorities.

If you engage in certain business activities, you may need to apply (again, you may think of "register") for permits and licenses; for example, a liquor license for a restaurant.  To find guidance with respect to the licenses and permits you need for your New York business, check New York State's Online Permit Assistance and Licensing website.

This is no legal requirement, but you really should register for your own domain name in order to give your business the web presence it deserves.

Finally, if you plan to develop a brand identity, you might consider protecting your business name and/or name for your product or service by "registering" a trademark.

LLCs and Corporations - What's the Difference?

The New Jersey Law Blog sheds light on the differences between limited liability companies, S corporations and just plain old corporations (i.e. C corporations) and the reasons why corporations are still the entity of choice in some situations.  What they have to say is just as true for New York businesses:

Several LLC limitations have resulted in the continued viability of the “S” corporation. In an “S” corporation, a shareholder-employee pays self-employment tax on money received as compensation for services, but not on profits that pass through as a shareholder. Thus an owner can still be paid a salary, and only pay additional self-employment tax on the “reasonable compensation” portion of total distributions. The entire distribution drawn by an LLC’s member-employee is treated as a “guaranteed payment” meaning all payouts are subject to self-employment tax. The second factor is that if it is expected that the business will require institutional investment, most institutional investors will require that the business be a “C” corporation (versus an LLC or “S” corporation). An “S” corporation need only “unelect” their flow-through status to be treated as a “C” corporation to raise institutional investment, while an LLC would have to undergo a cumbersome conversion process.

FYI, an S corporation is a regular corporation that elected a special tax status by filing Form 2553 with the IRS.

An Analysis of The United States Small Business Administration

Al Berrios has an interesting take on the Small Business Administration and its various ways of support for small businesses.  Read his analysis here.  Also check out his many articles on entrepreneurship, organization and management on his company's (Al Berrios & co.) website.

Divorcing an LLC - or - Why an Operating Agreement can be Priceless

Divorcing from your business partners in a limited liability company can be just as nerve-racking, costly and life/business interrupting as divorcing your spouse.  What is worse, if you failed to plan for an exit strategy in an operating agreement, you could be unsuccessful and be stuck with the LLC for good.

Peter Mahler, a partner at Farrel Fritz, published an article in the New York Law Journal which reports on business divorce cases in 2006.  One of the cases mentioned in the article is Horning v. Horning Construction LLC.   

Horning had a successful construction business, but felt overwhelmed by the workload.  To ease his plight, he gave two of his employees, Klimowski and Holdsworth, a one-third interest each in a new company named Horning Construction, LLC.  Then Horning contributed the construction business to the LLC.   Even though the new LLC members tried to agree on the terms of an operating agreement, they never succeeded.  Eventually, Horning offered to sell his part of the LLC to Klimowsky and Holdsworth for, what he thought was, a fair price. Klimowsky and Holdsworth declined.  Things got ugly and Horning wanted out, no matter what.

Horning went to court and demanded that the LLC be dissolved.

Klimowsky and Holdsworth objected  and pointed out that the LLC continued to employ more than 40 people, that it met all of its financial obligations, and that it was fully solvent.  They claimed that it would be unnecessary and unjust to dissolve the LLC which would place in jeopardy the livelihood of  more than 40 employees.

Guess what......the court decided that the three of them have to make it work.  No dissolution.  Horning is stuck with two business partners who can overrule him on everything.

The court stated that dissolution of an LLC in the absence of an operating agreement can only be had, if the standard of Section 702 of the New York Limited Liability Company Law is met, i.e., "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement."

The court decided that there weren't sufficient facts to justify a dissolution of the LLC.  In its reasoning, the court stated (emphasis added):

One certainly can sympathize with petitioner's plight. In 2001, he had a thriving corporation and wished to reduce his work schedule. Whether for estate and gift tax reasons, or otherwise, he brought in two trusted men and gave them each one-third ownership of a new venture set up as a LLC. But he did this without prior or contemporaneous execution of an operating agreement giving him fair exit rights in the event of future disharmony. Moreover, during the next few years, despite having failed to secure an operating agreement to protect him, he transferred the business of his corporation to the LLC (something he did not have to do if he was dissatisfied with the parties' arrangements), and the LLC grew substantially, even in relation to the corporation's previous level of business. Despite petitioner's stated frustration with the failure of the members to reach terms on an operating agreement, he was happy to keep doing business through the LLC until he unsuccessfully proposed a buyout to respondents in 2005, the company's most successful year. Only then did he seek dissolution.

 

Cheap Web Incorporations

California business attorney Nina Yablok put an incorporation service to the test and has good reasons for not recommending their services to startup businesses:  corporate services - almost a scam.  Another almost scam on new businesses in New York by web incorporation services:  Talking them into a registered agent for an annual fee.  New York does not require you to have a registered agent and there is no benefit in having one.  So don't pay for one.

Setting up your business entity through a web service may seem cheap at first.  However, remember that it is very important to develop a relationship with a business attorney early in the life of your business.  Many business attorneys make this easy for you by offering flat fee business entity formations and initial free consultations.  Just call a couple of them and ask.  Other benefits of using an attorney for your business entity formation:

- a real person with a law degree takes responsibility for your business entity formation;

- a real person with a law degree is available to answer questions and help you decide what business entity is right for you;

- a real person with a law degree can help you draft an operating agreement or shareholder agreement.  New York requires you to have an operating agreement for your LLC, and a shareholder agreement for your corporation is a very good idea.  Web services do not usually draft these agreements for you.  If they do, you will get a "one size fits all" agreement that can be worse than not having one at all.

- a real person with a law degree will remember you and your business and remind you of follow up legal issues in running a corporation or LLC, maybe even years later.

One good Reason for a Shareholders Agreement........

....keeping control by restricting the transfer of shares.

You, your best friend Jane and Jane's cousin opened a store and online business selling luxury pet supplies under various brand names.  You run the business through a New York corporation.  Each of you has equal ownership in the corporation.  Everything goes well, your products get mentioned on Oprah and you grow beyond your wildest dreams.   One day,  Jane and her cousin can't take the every day stress of being entrepreneurs anymore and seek for an out.   They find a buyer for all of their shares and sell their stake in the venture to Betty Buyer.  Now you are in business with Betty Buyer whom you don't know and don't want to share ownership of a business with.  What is worse, Betty Buyer now has a majority of the shares in your business and can outvote you on every decision.  Obviously, this could be disastrous for you and your business.

An easy and painless way to prevent this scenario from unfolding is to adopt a shareholders agreement right at the beginning of your business venture.  A shareholders agreement can put limitations on the right of shareholders to transfer their shares.  Without such contractual restrictions, shareholders can just sell their shares to whomever they want. 

However, rather than completely prohibiting any transfer of shares, many owners of a corporation opt to provide for a so called "right of first refusal."

Essentially, a right of first refusal provides that if an owner wants to sell her shares to an outsider, she first has to offer the shares to the corporation and the remaining shareholders.  If the corporation and/or the shareholders do not want to buy the shares, she will be allowed to sell the shares to the outsider.

This simple idea can be customized further.  For example, does the corporation have to buy the shares for the same price that was offered to the shareholder who wants to sell, or is there a predetermined price notwithstanding the offer?  What is the predetermined price or how should it be determined?  Does the corporation have to pay for the shares in one lump sum or over time in installments?

Despite what many lawyers may tell you, a shareholders agreement does not have to be long and complicated, so there is no real reason to avoid getting one in place early on.

Dissolving a Mistake LLC

Let's say you formed an LLC, because all of your business friends did, but then it turns out it is really not the right form of business entity for you and your fellow founders.  You haven't started doing business with the LLC, the LLC has no assets, no members, and you just want to make it go away and form a shiny new corporation with the same name.  What to do?  First of all, there is no shame in making a mistake.  Better to fix it early than be sorry later.  No mistakes, no learning experience.  But I digress.

Since you want the new corporation to have the name you used for your LLC, you must dissolve the LLC before you can go ahead and form a corporation with the same name. Otherwise, the name will not be available. Ideally, you want the process to be simultaneous, so that no other person can snap up your business name in between dissolving the LLC and forming the new corporation. 

In order to do that, you have to do a "1-2 Filing" with the Department of State, Division of Corporations.  The filing would contain (in that order):

1. A cover letter explaining that the purpose of the filing is a "1-2 Filing" (that is DOS lingo, I didn't make this up), i.e. dissolving an LLC by filing the articles of dissolution and at the same time forming a corporation by filing the certificate of incorporation.

2. A check for $60.  This is the fee for filing the articles of dissolution for the LLC.

3. The articles of dissolution for the LLC.  You can download a form from the DOS, division of corporation website, it is form DOS 1366.  For the law, look in Section 701 through 705 of the New York Limited Liability Company Law.

4. A check for $135.  This is the fee for filing the certificate of incorporation for your new corporation, including $10 organization tax assuming you chose 200 shares of no par value.

5. The certificate of incorporation for your new corporation.  The form is DOS 1239.

Warning:  This is only an acceptable way of proceeding, if your LLC is really an empty, life-less shell. If you've already done business with your LLC, have entered into agreements in the name of the LLC, accepted members and and contributed money or property to the LLC, you can't willy-nilly dissolve the entity.  Talk to your attorney and your accountant.

Related Post:  How to form a New York Corporation

Naming your Business - Legal Issues to Consider

Good post by Small Business 2.0 on the creative side of choosing a business name: 18 Pithy Insights into Naming your small Business.

Here are a few points on the legal aspects of choosing a name for your New York business.

First it is helpful to understand that "business name" can mean different things in the legal context.  It could mean the legal name of a business, the fictitious (aka assumed name) of a business, or the trademark of a business.  Examples:

Legal Name: Joe formed a corporation with the name Kazooka, Inc. by filing a certificate of incorporation, which states that the corporation's name is Kazooka, Inc., with New York's Department of State.  Kazooka, Inc. is the legal name of the corporation.

Assumed Name:  Kazooka, Inc. operates a dry cleaning service under the name of "Squeaky".  This is an assumed name, because Kazooka, Inc. is doing business under a name different from its legal name. 

Trademark:  Kazooka, Inc. uses "Squeaky" to promote its service by displaying it on store signs, laundry bags, even t-shirts it hands out to its loyal customers.  By doing so, Kazooka, Inc. uses the business name "Squeaky" as a trademark and qualifies for state and federal trademark protection.  Actually, since they are selling a service, it would be called a service mark, but let's not split hairs here. 

1. Legal Name Issues

You need to make sure that the legal name you choose for your business is available in New York and permissible under New York's naming rules.

Availability

In the case of an LLC, a name would be available, if the name is distinguishable from other New York business entities, foreign business entities authorized to do business in New York, business entity names reserved with the Secretary of State, and assumed names registered with the Secretary of State. See Section 204(b) of the New York Limited Liability Company Law.

To find out whether your name is available, you can search New York's business entity database.  However, that database won't show you reserved names or assumed names.

Naming Rules

These rules tell you what the name of your entity must contain and which words or abbreviations are prohibited.

For corporate naming rules, check Section 301 New York Business Corporation Law.
For limited liability companies, check Section 204 New York Limited Liability Company Law.

2.  Assumed Name Issues

If you adopt an assumed name for your business, you have to know your DBA ("doing business as") responsibilities.  You have to register the assumed business name, either with your local county or with the Secretary of State.  See this earlier post on the topic of assumed business names.

Sidenote: If Kazooka, Inc. would have used "Kazooka" instead of "Kazooka, Inc." in its business dealings, the name would not be considered an assumed name.

3. Trademark Issues

You want to make sure that your name is capable of obtaining trademark protection and does not violate somebody else's trademark. 

Names that are descriptive of what your business does, for example, "Dry Cleaning Shop", won't get trademark protection.  But there are many more issues to consider.  If you are dreaming of developing a major brand, consult an attorney.  

Finding out whether your chosen business name would violate somebody else's trademark is similarly tricky.  If "Squeaky" had already been in use by a dry cleaning establishment, Kazooka, Inc. may be in trouble.  Again, consult an attorney.

Taking Care of the LLC Publication Requirement

Setting up a limited liability company in New York requires you to jump through one additional hoop: Publication of a notice of the LLC formation in two newspapers (See Section 206 of the Limited Liability Company Law for exact legal requirements).  Unfortunately, this adds about $1000 to your formation costs.   Forming a foreign LLC (Nevada, Delaware or any other state) won't save you the expense.  As soon as your LLC does business in New York, your foreign LLC has to publish too (See Section 802 (b) of the Limited Liability Company Law).

Anyway, here is what you need to do for a newly formed New York Limited Liability Company:   

1.  Locate your LLC's "filing receipt"

If you don't have your filing receipt, ask the person or company that formed your LLC.  The Department of State will not issue a copy of your filing receipt.

2.  Call the county clerk of the county where your LLC has its principal office

Where is your principal office?  Look in your "Articles of Organization" (Again, you or the formation company/person should have that).  The articles of organization should have language along the lines of "the county within this state in which the office of the limited liability company is to be located is: ______." 

The county clerk will give you the names of two newspapers in which to publish.  If the county is New York (i.e. your principal office is in Manhattan), the county clerk will ask you to fax them your filing receipt before giving out the names of the newspapers. 

3.  Contact the newspapers

The newspapers will usually send you a sample notice, so that you know what to write for publication.  But also check the law to make sure that they got it right.  If one of the publications is the New York Law Journal, you can take care of that notice online. 

4. File a Certificate of Publication

After the publication notices have run for the required time, the newspapers will send you affidavits of publication, i.e. official looking pieces of paper stating that they published your notices.  You have  to send the affidavits of publication to the Department of State along with a "Certificate of Publication".  The Department of State has more information on this, including a form Certificate of Publication for download.

5.  When do you have to accomplish the above steps?

Within 120 days after the formation of your LLC.

6.  What happens if you don't publish?

Your LLC looses the authority to do business in New York State.

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

Orchestrating an effective Adviser Team

At a great networking event sponsored by the National Association of Women Business Owners, I talked to a buy-sell insurance specialist.  This woman sets up businesses with insurance to protect them from the event that a business owner becomes disabled or dies (for an explanation on how that works and why it is important, see this article).  She complained that businesses often presented her with buy-sell agreements that left her little room to get them the insurance they wanted.  Or worse, a business owner dies and the disconnect between the buy-sell agreement and the insurance policy makes it impossible to pay benefits under the policy.  In other words, she complained that (despite her efforts) there was no cooperation between her and the attorneys drafting the buy-sell agreements.

This shouldn't happen.  Get your advisers to communicate with each other.

Only pick advisers who are willing to cooperate in your team of advisers.

Make sure every member of your adviser team knows of the other advisers.

Related Post:  Spotlight on Buy-Sell Agreements