New York Small Business Law

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**

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**

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.

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.