If there is one agreement that every independent contractor will encounter in this gig economy, it is the service agreement.  If you are not selling or buying widgets, you are most likely providing services.  Either you will have an agreement to present to your clients, or your clients will present you with their agreement, which you will have to review.

Freelance Isn’t Free Act

Before going into more detail about service agreements, note that there is a law protecting every freelancer in New York City: The “Freelance Isn’t Free Act” which became law last year.  Under the new law, agreements for services with freelancers have to be in writing (if for $800 or more); there are protections for retaliation; payment is due in 30 days unless something else is agreed upon in writing and you have a right to complain and possibly get attorneys fees if there is a breach.  See this helpful guide for freelancers which explains the law and all your remedies.

Now about Service Agreements

What needs to be in your standard service agreement?  What should you look out for when reviewing a service agreement presented to you?  The following assumes that you are the service provider and not the customer of the services.

Description of Services

The agreement has to describe the services to be provided in clear, unambiguous terms.  Often you see language stating that services shall be provided as set forth in an attachment to the agreement or in a “statement of work.”

The statement of work has to set forth a description of all elements of the services to be provided.  There cannot be any question about what you are supposed to do, when you are supposed to do it and when you are finished with everything.  Many times these statements of work are not very precise and the parties rely on “working it out” later.  Don’t make that mistake.  If a dispute arises, you want to rely on the descriptions of your obligations.

You have to look out for inconsistencies between the statement of work and the main agreement.  Ideally, it all syncs up.  As a protection, the service agreement should state that in case of conflict, the main agreement, not the statement of work, controls the question.

Payment for Services and Expenses

How much are you going to be paid for your services and when?  Do you have to send an invoice? Will there be interest on unpaid fees?

Are you being reimbursed for expenses?  If so, do expenses require pre-authorization by the customer?

Warranties

It is often requested, and seems reasonable, that the service provider warrants that the services are provided in accordance with the statement of work, in a timely and professional manner using industry standard skills.  These are all terms that will be interpreted by the courts and basically mean that you have to provide decent work.  Ideally, you do not want to agree to provide services according to the highest standards or to customer’s satisfaction.

You may want to provide that in case of a breach of your warranty, you will only re-perform the services. This would be the exclusive remedy of the client; they can ask you to do the service again, or, if you won’t, terminate the agreement.

At the end of your warranty section, you must include language along the lines of

“OTHER THAN THE WARRANTIES PROVIDED HEREIN, CONTRACTOR MAKES NO WARRANTIES AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXPRESSLY DISCLAIMED”

Limitation of Liabilities

This is a big one.  You have to have language that limits your liability, ideally you would agree to limit damages to direct damages, meaning no consequential, incidental, indirect, exemplary, special or punitive damages;  and you want to limit your total liability to a maximum cap; it could be the fees paid under the agreement or a certain fixed number.

Client Obligations

Sometimes your services are not really possible unless you get cooperation from your client.  If this is so, put it into the service agreement.  You may want to state that you have to have access to the client’s business, that you need content from the client or need the client to cooperate to get permits and licenses.

Intellectual Property

If your services involve intellectual property, this is an area where you may want to get a lawyer involved.  You have to make sure that you retain ownership of your pre-existing intellectual property and that you don’t inadvertently transfer such ownership to the client.  The client, on the other hand, may want to obtain a license to all intellectual property that is necessary to enjoy the benefits of the services that you are providing.  You also have to make sure that you don’t restrict yourself in using certain intellectual property on other clients after you are done with the current project.

Confidentiality

Most service agreements contain language about confidentiality.  More likely than not, you the service provider, will come in contact with the client’s confidential information.  You want to make sure that your obligations to keep the client’s information confidential are not too strict, so as to make you liable for inadvertent breaches.  Make sure that it is clearly and narrowly defined what constitutes confidential information, ideally only information that has been clearly labeled as confidential.  There should be time limitations on secrecy.  You should only be responsible for yourself, not for anybody else’s disclosure of confidential information.

Termination

You should have a provisions that provides that you can terminate the agreement and thus your obligation to perform services, if the client fails to pay your fees.

Relationship of Parties

You want to include that the relationship with your client is nothing more than that of an independent contractor; this avoids any interpretations that you are in some kind of partnership, joint venture or liable for the actions of the client.

Choice of Law and Courts

Ideally you want to have the law of your home state apply to the service agreement; and have the other side agree to the courts closest to you.  In my humble opinion, do not agree to exclusive arbitration.  It is too expensive and limits your rights to discovery and appeal.

 

 

 

Ok, I’ll make this quick and dirty.  LLC, C-corp or S-corp for your small business you ask?  I think most small businesses still go with the LLC for the flexibility and to take advantage of the flow through taxation.   Below is a rundown of the main differences.  But be mindful that the recent tax changes pose a whole different set of issues that MUST be discussed with your trusted accountant.  For an explanation of the new tax considerations, see here.

Formation

LLC

C-corp

S-corp

For $200 file articles of organization with Department of State

For about $1300, arrange for publication of LLC and file certificate of publication

For $125 file certificate of incorporation with Department of StateSame as c-corp.  But State and Federal s-corporation tax election required
Draft and execute an operating agreementDraft and execute bylaws, shareholder agreement and issue sharesSame as c-corp

Ownership and Transfer

 One or more membersOne or more shareholdersOne to 100 shareholders, only US residents or citizens
Full membership is not transferrable unless allowed under operating agreement; otherwise only economic transfer permittedShares are transferable unless restricted by shareholder agreement.

There may be registration requirements under securities laws

Same as c-corp
Multiple classes of membership with different rights allowedMultiple classes of shares allowed (common shares/preferred shares)Only one class of shares allowed

Liability

Members are not liable for obligations of LLC

The ten members with the most ownership are liable for unpaid wages of the LLC’s employees

Shareholders are not liable for obligations of the corporation

The ten shareholders with the most ownership are liable for unpaid wages of the LLC’s employees

Same as c-corp

Management

Managed by members unless the formation docs specify management by managersManaged by a board of directors and officerssame as c-corp

Taxes

Flow through entity; the members are directly taxed on the profits and losses allocated to themThe corporation is taxed as a separate entity and the shareholders are taxed again when they receive dividends (aka double taxation)Flow through entity

Formalities

Few if any, biannual statement, no annual meetings requiredregular shareholder meetings; owner payroll taxessame as c-corp

In closing, forming any of the entities above is pretty easy and there is no reason why the small business owner couldn’t do it on his/her own.  However, if you are in business with another person(s), don’t try to save money by drafting your own shareholder agreement or operating agreement, or maybe worse, not have one at all.

 

Guess what, it really matters to have a great attorney when you are selling your business.  Let me explain.

I wrote before about my involvement in typical buying/selling business transactions; it’s an old post, but it has not changed, see “Buying a New York Business”.  As you can see from that post, the legal documentation required for a business sale can be substantial.  It is crucial that it all fits together and there are no inconsistencies or careless mistakes.

There is the Asset Purchase Agreement, or the Stock Purchase Agreement (depending on the structure of the sale), numerous exhibits to those agreements, promissory notes, security agreements (to secure the installment purchase price), guaranties, bills of sale, consulting agreements (if seller stays on for some time) and others.  These documents can be many pages long.

I have seen many parties gloss over the details (including attorneys), not think through all the worst case scenarios and not be concerned with precision.  This can be very costly.  More than once, I have dealt with business transactions (where I was not the attorney) where a little more attention could have saved the seller of the business hundreds of thousands in legal fees.  The situation is usually as follows:

The sale of the business closes.  Buyer may or may not have bought a great business.  For some reason, the business does not do as well as hoped or the buyer has buyer’s remorse for any number of other reasons.  What will the buyer do?  March into his lawyer’s office and ask “how can I get out of this?”  And the lawyer will go through the agreements and documents with a fine tooth comb to find any loophole he can use to renegotiate the deal or even sue.   When there are three or more agreements that need to fit together and be consistent it is not that difficult to find something….if….a careless attorney represented the seller in the first place.

For example, the careless attorney could have drafted a broad and imprecise definition of the assets being sold.  You may think, how is that possible?  It is, especially when the assets are not that easy to identify, which is the case with certain intellectual property.  Are we selling the entire IP or only parts of it, what parts? Are we giving a license to what we are not selling?  Then if there are numerous provisions relying on that first definition, in numerous documents, you can get dizzy very fast.  The attorney who has anything less than a laser focus on these issues will make mistakes.  Anything that has to be clearly defined, narrowed or specified is a potential problem.

Another pet peeve of mine is the rushed closing. The closing is the last step in the selling process.  The parties and their 
attorneys get together to exchange money and property and take care of
all the remaining paperwork.   Often in the middle of a closing, the opposing attorney wants to make changes and says “let’s just throw it into a side letter” and then they start dictating to their secretary.  This is a minefield for mistakes and oversights.  I know people want to get stuff done and move on, but you may pay the price later.  I like to go into the closing prepared for any such scenarios and not have to make last minute rushed changes.

Lawyers get trained and paid to be a little paranoid. They have to foresee the worst case scenario, in the interest of the client.   If they are good at that, they are providing a great service to the client.  Of course this has its limits.  The lawyer’s paranoia cannot be so profound that it gets in the way of making the deal happen.  Great lawyers know how to strike a balance.

Finally, somewhat unrelated, the folks over at Biz Buy/Sell have an incredible resource for the business seller.  A whole free book explaining the process of selling your business.  I read it over again recently and highly recommend it when you are starting the process of selling your business.  But since their SEO is probably better than mine, you may have already found it.

 

  • What is a New York Limited Liability Company (“LLC”)?
  • Who can form an LLC?  How do I form an LLC?
  • How much does it cost to form an LLC?
  • What ongoing requirements are there for maintaining an LLC?
  • How does an LLC pay taxes?  Is an LLC a good choice for my new business?

Read on for answers to  such common questions about  New York LLCs.

What is a New York Limited Liability Company (LLC)?

An LLC is a business entity created by the New York Limited Liability Company Law (“NY LLC”).   Often people say that an LLC is a hybrid between a corporation and a partnership; an LLC offers its owners (called members) protection from business liabilities like  a corporation would, but functions more like a partnership:  it is not considered a separate corporate entity and its membership interests are not freely transferable.  While LLCs do offer limited liability, it is not a shield from personal wrong doing.

Limited liability companies are one of the most created business entities in New York.

Who can form an
LLC?

Any individual (including a non-resident alien, i.e. a foreigner), a corporation, a partnership or another LLC can form an LLC alone or together with other members.

How do I form an LLC? 

1. Choose a name.

The name must contain the words “Limited Liability Company” or the abbreviation “L.L.C.” or “LLC”.  For more name requirements, look up Section 204 NY LLC.

2. File Articles of Organization

You have to file so called “articles of organization” with the New York Department of State division of corporations (Sections 203 & 209 NY LLC).  The Department of State now offers online filing and a step by step guide; choose “Articles of Organization for a domestic limited liability company”.

3. Publication of LLC Formation

Within 120 days after the articles of organization have been filed, you have to publish the fact of the LLC’s formation “once in each week for six successive weeks, in two newspapers of the county in  which  the office of the limited liability company is located, one newspaper to be printed weekly and one newspaper to be printed  daily”  (Section 206  NY LLC).   The newspapers are designated by the county clerk.  In New York County, you actually have to call  the county clerk’s office and a real person will tell you where to publish.  After publication, the newspapers will send you an “affidavit of publication” which you will have to file with the Department of State together with your certificate of publication (sample form from the Department of State).

Pro tip:  Don’t do the newspaper publication on your own, use a service that specializes in doing them and gets special rates from newspapers, such as Interstate Filings.

Many starting LLC businesses used to forgo the required newspaper publication due to its high cost (about $1200 in New York County, see below).  Be warned, though; what used to be relatively inconsequential under the law  now has serious consequences due to a recent change in the publication law.  If you fail to publish the formation of your LLC, your LLC’s authority to “carry on, conduct or transact any business” in New York may be suspended.  Still this not as dire as it sounds, see consequences of failure to publish here.

4. Adopt Operating Agreement

Finally, at the latest within 90 days of formation of your LLC, you have to adopt an operating agreement for your LLC (Section 417 NY LLC).   The operating agreement sets forth the rights and obligations of the members, management of the LLC, distribution of profits and losses, dissolution of the LLC, and so forth.  For the love of god or anybody you believe in, if your LLC has more than one member (i.e. you), get yourself to a lawyer and have a proper operating agreement drafted.

While many one member LLCs neglect to adopt an operating agreement (and nobody really knows what the consequences of such neglect are), it is highly advisable to adopt a well prepared operating agreement in cases where there are more than one member.  What goes into an operating agreement: See here.

How much does it cost to form an LLC?

Filing fee for the articles of organization: $200;
Filing fee for certificate of publication: $50
Fee for a certified copy of your filed articles of organization: $10 (you will probably need this to open bank accounts)
Fee to newspapers for publishing notices (for a New York County LLC): about $1299

What ongoing requirements are there for maintaining an LLC?

LLCs  must file a biennial statement every two years with the Department of State setting forth the address to which the Secretary of State shall mail a copy of any process accepted on its behalf (Section 301(e) NY LLC).  Since your LLC is on record with the Department of State, the Department will automatically send you a form for a biennial statement once the time to file has come.  But you can also take care of the biennial filing online.

LLC are not required to hold annual member meetings.  However, in order to preserve the limited liability protection of an LLC, it is a good idea to pass written resolutions documenting member meetings and decisions  and keep personal and LLC business strictly separate.

How is an LLC taxed? 

An LLC normally does not pay federal taxes, instead income received by the LCC is allocated to the members and taxed at their individual rates.

Similarly, an LLC normally does not pay New York State income taxes, rather the members pay taxes on their allocated share of LLC profits.

Is an LLC a good choice for my new business?

It might well be.  However, choice of entity is a complicated issue which is highly dependent on your situation.  Nonetheless, some benefits of LLCs over other entities are:

1. You only pay one level of tax.  If your business were a corporation, the corporation would have to pay corporate tax; in addition,  upon distribution of profits to you, you would have to pay another level of tax on the distribution.

2. LLCs are very flexible when it comes to capitalization (the process of funding the LLC).  An LLC can issue any type of equity or debt to its members.

3.  You can “pass through” losses of the LLC to yourself (and the other members); these losses can be used as a deduction on your (and the other member’s) non LLC related income.

4. You can convert an LLC to a corporation at a later time with relatively minor consequences, whereas a conversion from a corporation to an LLC can raise ugly tax liabilities.

 

 

Updated October 10, 2018

 

Many small business contracts provide that any dispute arising from the contract must be arbitrated rather than litigated in a state or federal court.  Unfortunately, these provisions are often included without a second thought to their practical meaning and whether small business arbitration is beneficial.  Before agreeing to arbitrate your small business dispute know this about arbitration:

What is Arbitration?

Litigation of disputes normally takes place in the various courts of New York State.  As an alternative, people can agree to resolve their disputes outside of the traditional courts and authorize arbitrators to hear and decide their case.  Technically, one could authorize any third party to be an arbitrator.  Such an arbitrator would then decide your dispute based on his or her understanding of justice and fairness.  However, most contracts provide that disputes are to be arbitrated by specified arbitration associations, such as the American Arbitration Association or JAMS.  Most arbitration associations have arbitrators ready to spring into action and provide for a set of rules to be applied by the arbitrators in deciding the case.

Cost of Small Business Arbitration

Small Business Arbitration can be pretty expensive.  If your claim against your adversary is rather small, the cost of arbitration may be too steep.  To get the arbitration going, you have to pay the arbitration association’s fees, which can be quite costly.  Look at the fee structure of the American Arbitration Association here.  The filing of a complaint in supreme court will cost you a “mere”  $210 and might be all you need for now to get serious settlement negotiations going.    On the other hand, litigation can quickly get very expensive in the long run.  The parties in litigation may spend huge sums of money on discovery (production and review of evidence) and motion practice.  An arbitrator may be able to control such expenses by only allowing limited discovery and motion practice.

Small Business Arbitration is Non-Public

The public has no access to your arbitration dispute, whereas civil and supreme court litigation is a matter of public record.  The court papers can be seen by anyone with a rudimentary knowledge of the court system and court databases.  Anybody can appear to a hearing or trial in your small business dispute.  Depending on your outlook on publicity, this may play for or against you.

Discretion of Arbitrators

An arbitrator has much more discretion on how to lead the dispute proceedings, what evidence to allow and what law to follow.  Arbitrators are more inclined to let “fairness” and equity rule, even if not entirely within the constraints of prior case law.   This can make your arbitration case rather unpredictable.

No Appeal

An arbitration award is usually final.   There are only very limited possibilities of appealing an arbitration award.

We can help you with your small business arbitration.

Most people, if they think about freedom of speech at all, imagine it is some kind of complicated legal construct standing on the far side of daily life. In fact, we experience free speech moments every day, from the protesting cry of a child who does not wish to go to school, to the disagreement we have with the cop about to write a ticket. The following court cases illustrate the more unusual circumstances under which courts have attached First Amendment significance to everyday actions and things:

Bike-riding as Free Speech

In a series of cases involving mass bicycle rides by the “Critical Mass” group in New York City, courts have found that riding a bicycle is symbolic speech protected by the First Amendment, City of New York v. Times Up, Inc., 11 Misc. 3d 1052(A) (NY County 2006).

Sleeping as Free Speech

In Community for Creative Nonviolence v. Clark, 490 U.S. 730 (1989), the Supreme Court acknowledged the possibility that sleeping, in a politically motivated encampment of homeless people on the Washington Mall, might be a form of First Amendment-protected expression. A New York case has since taken the additional step and made this finding.

Flashing Headlights as Free Speech

In Elli v. City of Ellisville, 997 F. Supp. 2D 980 (Eastern District Missouri 2014), a federal district court found that the expressive behavior of flashing your headlights to warn oncoming cars of a speed trap warrants First Amendment protection.

A Clothesline of Rags as Free Speech

In People v. Stover, 12 N.Y.2d 462 (1963), New York’s highest court acknowledged that a “clothesline, filled with old clothes and rags” in a homeowner’s front yard was a First Amendment-protected form of “’peaceful protest’ against the high taxes imposed by the city”.

Feeding People as Free Speech

The Court of Appeals for the Eleventh Circuit held in August 2018 that Fort Lauderdale Food Not Bombs’ “outdoor food sharing is expressive conduct protected by the First Amendment”. The organization’s intent was “to communicate its message that….’society can end hunger and poverty if we redirect our collective resources from the military and war and that food is a human right, not a privilege, which society has a responsibility to provide for all.’… Providing food in a visible public space, and partaking in meals that are shared with others, is an act of political solidarity meant to convey the organization’s message”. Fort Lauderdale Food Not Bombs et al. v. City of Fort Lauderdale No. 16-16808 (11th Cir. Court of Appeals August 22, 2018).

Free speech is not a legalistic construct irrelevant to daily life, but seamlessly interwoven with the activities we perform and the objects we use every day.

If you have a free speech controversy; if your work is being censored or suppressed or you are being punished by a government authority for something you said, contact us and we may be able to help.

How do you evaluate small business litigation; whether to bring a law suit or not?

Metaphysical Overview

The small business owner considering litigation, or being sued, should at the outset take what I refer to as a “metaphysical” overview of the problem. The two constants of litigation are that it is time-consuming, expensive and the outcome is uncertain (any lawyer who guarantees you will win a case is exaggerating or inexperienced).

A civil law suit can easily take over a year and has to go to various lengthy stages.  There will be initial court papers, answers from the defendant, investigation of each party’s evidence (discovery), pre-trial testimony (depositions), special pre-trial requests to the court to make decisions about the case (motions), numerous appearances and conferences and finally the trial.  This takes a lot of time and legal fees.

Thus, before you launch, it is important to know what you are trying to accomplish and if it makes financial sense.

If someone has breached a contract with you or otherwise inflicted some legally recognizable harm, as a matter of thoroughness and due diligence you should always consider the option of doing nothing.

If someone caused you $7,500 in damage, which was a one time situation and won’t repeat, it won’t encourage anyone else to do the same, and it will cost $15,000 to litigate, it may be good economics to walk away. On the other hand, legal harms which may result in the destruction of, or significant ongoing harm to,  your business, such as someone wrongfully appropriating a major project or client, may leave you no choice but to litigate.

If you are being sued, the “metaphysics” is similar. There is a subset of cases which can be settled for a few thousand dollars, would cost more to litigate, and cause no reputational or other ongoing harm if you settle, regardless of whether you believe you are liable or not.

In both situations, you owe it to yourself as a rational businessperson to know what your goals are. Litigation, as unusual or even extraordinary as it may seem, is a tactic that businesses use to achieve goals, so, just like a marketing campaign or other large expenditure, it should have an objective business reason. If you can say, “if we don’t sue, we will have no business left” or  “we will take a significant hit to revenue because our subcontractors will learn they can cut us out of the loop”, these are potentially sound business motives. If, however, the reason you arrive at is “I am angry” or “I want to teach that idiot a lesson,” you should think twice before going ahead.

Can you collect a Judgment?

Finally, you always have to have an eye on the collectibility of a judgment in your favor.  If the defendant has no assets, a judgment is worthless.  You may be able to glean some clues about the defendant’s financial affairs by searching for other law suits against it, getting a business credit report or doing some asking around in the defendant’s business circles.

See also, when and how to discuss settlement in your litigation.

You put it in writing, you aced the negotiations, and you are ready to execute the contract.  Don’t let down your guard at the last minute!  The following points are worth noting when executing a contract in New York.  While neglecting to follow the below points may not result in an invalid or unenforceable contract per se,  following below “good practice” can help to avoid problems later on.  Remember, spending a little extra time to get it right the first time – a minor expense;  staying out of court – priceless.

1.  Don’t let technology (or anybody else) fool you

If the contract has gone through several rounds of negotiation and revisions, don’t assume that the last circulated “execution copy” is what you think it is.  Before you sign, be one hundred percent sure that you know exactly what you are signing (you’d be surprised how many people neglect this one). Microsoft Word “Tools” – “Track Changes” – “Compare Documents” is your friend here.

Under New York law, you are generally bound by a contract which you signed even if you have no knowledge of its content.   Unless  fraud or other  wrongdoing is involved, you are presumed to know the contents of the contract.

2. Date the Contract

While a contract need not be dated to be valid and enforceable, it is kind of foolish to not date a contract.  Dating helps to identify a contract years later and puts the contract into chronological context.

FYI, you can predate a contract under New York law.  If you provide that your contract is entered into “as of” a date earlier than the date of execution, the agreement is effective retroactively “as of” such date.

3.  Both parties should execute the contract

It might come as a surprise to you, but in New York , unless a signature is required by statute, you don’t necessarily have to sign an agreement for it to be valid.  If you and the other party in some other way indicate consent to the contract, you are both bound.

However, nothing beats a solid signature from both parties when it comes to proving that a contract was entered into by the parties with an intent to be bound thereby.  Better yet, put a provision into the contract that provides that the contract is not binding unless signed by both parties.

The signatures of each party to the contract do not necessarily have to appear on the same page of the contract, as long as you both agree that only the signature pages together constitute a complete executed agreement.  To that end, parties to a contract sometimes include a provision that states “the parties may execute this contract in counterparts, each of which
is deemed an original and all of which constitute only one agreement.”

4. Initial last minute hand written changes to the contract

Any last minute change to a contract that is done by hand should be initialed by the parties to the contract.   Better though, insist on a revised contract reflecting the change.

5.  Sign in your correct capacity

If you are signing for an entity, make sure that the signature block properly identifies you.  For example, if you are signing as president of a corporation, the signature block should read substantially like this:

ABC Corporation

By: _________________
Name: Joe Smith
Title: President

Signing correctly on behalf of a corporation prevents later claims that you are personally liable under the agreement.

6. Check the other party’s authority to sign

For example, if the other party to the contract is a corporation, you want to be sure that the corporation is in existence, that the person signing on behalf of the corporation is authorized to do so, and, particularly in larger transactions, that the corporation approved the contract by consent of its shareholders or directors.

7. Get an original executed copy of the contract for your files

Each party should have an original executed copy of the contract for their files.  In other words, if there are two parties to the contract, you have to execute two identical contracts.  One copy goes to you, one copy goes to the other party.  Each copy constitutes an original contract.

Once the contract is executed, Can I get out of that Contract?

How do I review Contracts in the first place?

8. Get an experienced Attorney to help you

If the contract involves a large amount of money or binds you for a long time to come, I highly recommend to get an attorney to help you.  I have reviewed and negotiated thousands of agreements and can spot issues that you may not notice.  Feel free to contact me to discuss your contract.  Contact Info right below this post.

What is a Promissory Note?

A Promissory Note (also known as “note” or “negotiable instrument”) is a written statement that money is owed to you by the author (also known as “maker”) of the statement.  You can transfer the note to other people, who can then demand payment from the person or entity that owed money to you originally.  Your attorney might say  that  the note is “negotiable.”  Another benefit of a note:  You can enforce the note in court without further evidence of the underlying reason why money was owed to you in the first place.  You also don’t have to worry that the debtor will raise issues in court based on the underlying transaction since the court won’t consider any of those issues.

If you want to look up the code that governs promissory notes in New York, look here:
Article 3 New York Uniform Commercial Code.

Where do you encounter Promissory Notes?

Promissory notes are often given (“issued”) in the context of loans or other financings.  For example, when you buy a business, the seller may finance the purchase price by letting you pay in installments.  At the closing of the business sale, the seller will most likely demand a promissory note from you covering the outstanding amount of the purchase price of the business.  But whenever you lend money to a business partner, a friend, or any other person, it is a good idea to get a promissory note as security for the repayment.

How do you create a Promissory Note?

You need:

  • Something in writing from the debtor.
  • The writing must be signed by the debtor.  “Signed by the debtor” includes methods other than original signatures, such as email signatures, symbols, and so forth, as long as the debtor had the intention of signing the writing (see Section  1-201(37) New York Uniform Commercial Code).
  • The writing must state that your debtor unconditionally promises to pay you a certain amount of money at a certain time or upon demand by you.  Other than the promise to pay, there are very few other obligations by the debtor allowed in a promissory note.  If your debtor insists on inserting provisions beyond the  promise
    to pay on the promissory note, be sure to consult with your attorney.
  • Even though a promissory note is considered a contract, it does not require the signature of the creditor in order to be enforceable.

Example of a Promissory Note

A simple promissory note may look like this:

For value received, the undersigned, Bob Borrower, by this Promissory Note unconditionally promises to pay on July 1, 2024 to Leni Lender, the principal sum of THREE HUNDRED THOUSAND DOLLARS ($300,000).
This Promissory Note may be prepaid in whole or in part without penalty at any time.
The undersigned also promises to pay interest on the outstanding and unpaid principal amount of this Promissory Note, from the date hereof until repayment in full, at a rate per annum equal to five point five percent (5.5%), computed annually and payable in arrears upon the earlier of prepayment in full and maturity.
The undersigned hereby waives diligence, demand, protest, presentment, notice of dishonor or any other notice or demand whatsoever.
IN WITNESS WHEREOF, the undersigned has duly executed this Promissory Note as of April 27, 2021.

__________________
Bob Borrower

 

How do you enforce a Promissory Note?

The beauty of a promissory note is that you basically just need the piece of paper that constitutes the note.  You don’t need any further evidence.  The debtor cannot raise defenses based on the underlying transaction that was the reason for the note.

In addition, the law gives you an expedited way to get a judgment on your promissory note.  You would file a “notice of motion for summary judgment in lieu of complaint,” which gives you a much faster day in court than a regular complaint.  This motion would be accompanied by your affidavit and a copy of the note.  This is a simple action that should not cost you an arm and a leg, even if you have to hire an attorney to do it for you.

We charge flat fees for the enforcement of a promissory note in default.  Get in touch with us to find out if we can help you enforce your promissory note in default. 

 

Business Partnerships Can go Bad.  Picture this:

own a restaurant with three other people.  Lately, all we’ve been doing is fighting over almost everything.  Now it seems that everybody turned on me.  I have not seen any money from the business.  Meanwhile, everybody else uses the restaurant as their own piggy bank.  What can I do?

A business break-up of a business partnership can be as stressful and emotionally draining as the breakup of a marriage.  And there is always a child involved….the business.  So when your business partnership has gone bad, you really want to find out where you are standing and what rights you may have vis a vis the other business partners and the business.

The Agreements

Whatever your gripe against your business partners may be, the first question is always: What does the agreement say?  You have to check whether you have an agreement with your business partners and what it says concerning your problem.   If the business is run as a corporation, check your shareholder agreement;  if it is an LLC, check the operating agreement.

If you do not have anything in writing (like many small businesses, unfortunately), you have to look to the default rules of the respective New York laws dealing with your specific entity.     For LLCs, it is the New York Limited Liability Company Law, and for corporations, it is the New York Business Corporation Law.  These laws also apply if your agreement is silent with respect to your issues.

The following assumes that the default rules govern your relationship and that it is organized as a New York corporation or a New York limited liability company.  So always remember that your particular agreement may have different provisions.

Making Bad Business Partners Responsible for their Actions

As business partners, you owe each other and the business loyalty, honesty, and support.  Each of you is held to a higher standard than ordinary people.  This is called “fiduciary duties.”  Business partners cannot steal or embezzle from the business; they cannot grossly mismanage or withhold good deals from the business.  If this is happening, you have a court action for “breach of fiduciary duty.”  This action can take the form of asking for damages or making the bad business partners stop the offending conduct.   In most cases, the damages are being done to the business and not to you personally. Thus, such an action would be in the name of the business.  In other words, you are the plaintiff, but you are bringing the action for the benefit of the business.  So if you win the action in court, the money damages go to the business, not to you personally.  But you are entitled to get your attorneys’ fees back from the amount of money granted by the court before it goes to the business.

Forced Business Partnership Break-Up

I just want to leave this behind me.  They should buy me out and  let me go.  I am doing them a favor, because somebody will get hurt if we don’t come to a resolution soon.

Unfortunately, as a minority shareholder of a corporation or a member of an LLC, you may not be able to convince your estranged business owners to let you go and buy you out.  Unless your agreement provides for some withdrawal/buy-out remedy, you will remain a member/shareholder until the business dissolves or until the other owners agree to buy you out.

Is there a way that I can force a break-up of the business?  If they don’t want to compensate me for leaving in peace, we should just close shop and call it a day.

Under certain circumstances, you may be able to take your dysfunctional business family to court and ask the judge to dissolve the business and then distribute the assets to the owners.   If you can succeed with such a drastic step depends on the facts of your situation and whether you are a shareholder in a corporation or a member of an LLC.

Forced Dissolution of a Corporation

If you (alone or together with other owners willing to go into battle with you) own  50% of the shares in the corporation, you can petition a court for dissolution of the corporation by showing either one or both of the below:

– management is hopelessly deadlocked; or

– management has been guilty of illegal, fraudulent, or oppressive actions toward you.

If your ownership is at least 20%, you can still petition under the second showing above, namely, that the other owners have engaged in illegal, fraudulent, or oppressive actions.  But in those cases, a judge has certain discretions and may conclude that the liquidation of the corporation is too harsh a remedy and that there are other feasible means to give what you are owed and protect your rights.  In that context, a judge may conclude that a buy-out may be a proper remedy for your situation.

Buy-Out Election

If you decide to sue your estranged business owners based on oppression, you may be in for a surprise because your opponents could force you to accept a buy-out of your stake in the business.  The business corporation law gives your opponents the option to buy you out for the fair value of your ownership share.  But they must make that election within 90 days after you have filed your papers.   What is the fair value of your ownership stake?  Unless you agree on such value, it will be a battle of the experts who follow specific rules and methods established over time.

Forced Dissolution of a Limited Liability Company

Many owners of a Limited Liability Company are surprised to learn that their business break-up rights and remedies are much less defined compared to a corporation.   A minority member of an LLC has limited possibilities to force a dissolution of the LLC. The majority members of an LLC are not able to force the minority member to accept a buy-out.

The only remedy for a forced dissolution of an LLC is in Section 702 of the New York Limited Liability Law. A member can force a dissolution whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement.   The New York Limited Liability Law does not provide a buy-out election or all the other specific rights in the business corporation laws.

However, by now, the courts have given some guidance.

For a dissolution under Section 702 Limited Liability Company Law, “the petitioning member must establish, in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.”

If dissolution is justified, courts have now even granted a so-called “equitable buyout,” whereby an LLC member is allowed to purchase the other member’s interest in the LLC.  This is not really a dissolution, as the LLC continues its existence after the buyout.

Is a deadlock or total conflict between the members sufficient for a dissolution?  Not always.  Courts have held that dissolution is not warranted despite disagreements between the members when the limited liability company can otherwise continue to operate in furtherance of achieving its stated business purpose.

The reality is that many dissolution fights over corporations and LLCs or lawsuits for breach of fiduciary duty end in settlement.  In certain situations, a court action towards dissolution or for breach of fiduciary duty or both may be the right strategic move to convince your business partners that they have to come to the table and negotiate with you, rather than spend a fortune on litigation.

Short of dissolution, don’t they have to pay me my share of the profits? I have not seen anything in terms of money.

Right to Profits – Access to Books and Records

Before dissolution, you have a right to profit distributions.  If the other members/shareholders pay themselves, most likely, you have a right to a similar distribution based on your ownership percentage.

I don’t even know how the business is doing financially and how much they are paying themselves. How can I get access to that information?

Each shareholder of a corporation or member of an LLC has a right to inspect the books and records of the business.  Write them a letter and demand to see them.  If they don’t let you, you can take the matter to court.  The law provides an expedited proceeding giving you the right to see the books and records; sometimes, this gets the ball rolling for serious negotiations and makes the parties come to the table.

Can they make all kinds of decisions without my consent?

When it is you and one other owner, certain important decisions have to be made by consent of all owners.  For example, the other business owner in an LLC cannot just take in another member without your consent.

When it is you against more than one other business owner, there is the possibility that they can outvote you, even on certain critical issues.  But they have to follow proper procedure and notify you of all decisions made without your consent.  Finally, they can’t just decide to do whatever pleases them.  If their decision is completely lacking any business judgment or just designed to damage you and your stake in the business, you may have a claim against them based on their breach of fiduciary duties against you.

Call me to discuss your business partnership gone bad.  We help clients with business partnership disputes.

(Also see Access to LLC Books and Records)