New York Small Business Law

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**

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**

New Phone Tools all over the Place

If you are a regular reader of Techcrunch and other tech and media blogs, this is probably old news to you.  There are a number of cool new phone tools and services that can make life much easier for small businesses and professionals.

GrandCentral gives you one phone number that rings all your phones, so you never miss a phone call again.  You can also store messages, forward messages, listen in to the caller before you pick up, and tape incoming phone conversations.  Most of it is free.

Jott transcribes your voice messages and sends the transcript to your email or another person's e-mail (called jottcasting) along with the original voice message.  Finally, hands-free notes and e-mail.  The service is free.

For a fee, 2ReCall lets you tape outgoing phone calls by routing your call through a 1-800 number.

Be careful when taping phone conversations, in some states it might be illegal without letting the other person know.

NextNY Blog

NextNY, a group of young (and young at heart) people who have a stake in the future of tech and new media in New York City, revamped their blog.  From an announcement:

This blog covers NY technology, entrepreneurship, startups, digital media, events, personalities, companies, success stories, and brings together the leading voices of the industry.

In true "Web 2.0" fashion, this blog builds on user-generated content that's already out there. It's an aggregator, automatically pulling in posts from authors' individual blogs.

Anyone who blogs about the technology and digital media industry in New York is welcome to join up and post their content. It doesn't  matter whether you're a venture capitalist, programmer, designer,  entrepreneur, or journalist, as long as you have an interest in the NY technology and digital media industry.

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**

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.

New Business Law Blog in New York

There is a new business law blog in New York, "Business Partnership Central" by Paltrowitz and Kaufman LLP officially launched on February 28.  Welcome to the New York blogging neighborhood.

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**

Buying out a Business Partner

Wesley Deaton, a North Carolina Business Lawyer, wrote two good posts on his Business Law Blog on buying out a business partner.  He recommends the following:

1. Get mutual releases

2. Get a release of company liabilities

3. Put the proper corporate filings into place

4. Plan ahead for a possible buy-out

Read:  Buying out a Business Partner, Part 1

             Buying out a Business Partner, Part 2

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