….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.

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 LLCYou 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

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.


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.

How to take care of your LLC publication

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 up to $1300 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).

You can save on publication cost if your principal office is located outside of New York City, where the newspaper ads are much much cheaper.  While it is a whopping $1300 in Manhattan, it can be a mere $200-300 in upstate New York.  And nobody will stop you from relocating your principal office to New York City once the publication is done.  You do not have to publish again if you relocate your office.  You also don’t have to publish again, if you change the name of your LLC (another  publication question classic).

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

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 duplicate copy of your filing receipt.  If you formed your LLC online, they will have sent it to you by email.

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 (see phone listing here) will ask you to fax them your filing receipt before giving out the names of the newspapers.

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.

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”.  See here for more information from the Department of State.

When do you have to accomplish the above steps?

Within 120 days after the formation of your LLC.

What happens if you don’t publish?

Your LLC looses the authority to do business in New York State.  In practical terms, you won’t be able to sue anybody in New York courts and the Department of State won’t issue a “good standing certificate” for the entity.  You can fulfill the publication requirement at any time and your LLC will regain good standing.

Can I have somebody do it for me?

Yes, absolutely.  There are companies specializing in publishing LLCs.  They can often do it cheaper than you can do it on your own, due to some direct arrangement with the newspapers.  All they need from you is pretty much the filing receipt and your credit card information.  One of these companies I’ve been using for a while myself:  Interstate Filings

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

Articles on choice of business entity are a dime a dozen.  Here is one that stands out from the crowd:

FAQ on Choice of Entity.

(Another big firm resource free for the taking)

See also Choosing between an S corporation and an LLC – The New York Perspective, by Yours Truly.


Picture this:

Amy formed Ace LLC, a Nevada Limited Liability Company, for her New York business.  She thought that LLCs are cheaper to form in Nevada, would incur fewer taxes and save her from complying with New York’s costly LLC newspaper publication requirement .

Ace LLC was about to enter into an important transaction with Widget Inc.  In the course of due diligence, Widget Inc.’s advisers demanded to see a “certificate of good standing” for Ace LLC.  Amy could not provide such a certificate, because an inquiry with New York’s Department of State showed that Ace LLC did not exist in New York and had filed none of the paperwork necessary for foreign entities.  As a result, Ace LLC was not authorized to do business in New York.

Thankfully, Widget Inc. was of the patient kind and allowed the deal to go forward after Ace LLC cleaned up its act and gained good standing in New York.  Ace LLC applied for authorization to do business in New York and arranged for publication in two newspapers.   Amy was upset to learn that she would have saved money in the long run by forming a New York limited liability company or corporation in the first place.  Since she was doing business in New York, there were no tax savings.  The application for authorization to do business was an additional expense and Ace LLC had the ongoing cost of paying a Nevada registered agent.

Lessons learned:

1. If you do business in New York, form a New York entity (see related post, Should We incorporate our Small Business in Delaware?)

2. If you are a foreign entity and do business in New York,  apply for authorization to do business in New York.  See Section 802 of the New York Limited Liability Company Law.

3. Forming a Nevada, Delaware or any other foreign LLC does not save you the cost for the newspaper publicationSection 802 of the Limited Liability Company Law requires that within 120 days after the filing of the application for authority, a foreign LLC must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the LLC.

One of the FAQ on corporations on the website of New York’s Department of State reads:


Can I incorporate nationally?


No. There is no mechanism in the United States to incorporate on the federal level. A company interested in incorporating (or forming a partnership or limited liability entity) must contact each state’s licensing authority individually.

It would have never occurred to me that this is a "frequently asked question."  It does make perfect sense to ask, though.

As an attorney, or any professional for that matter, you sometimes have
to step back and realize that you cannot take knowledge for granted. 
Never stop explaining.  Always encourage questions.

For more FAQs on corporations, click here.

Small Foreign Businesses considering doing business in the United States are well advised to seek legal counsel in smaller law firms, since large law firms don’t really want or need their business.   However, there is no reason why you shouldn’t use big firm resources, such as this great guide:

Doing Business in the United States of America, an introductory guide for business persons from other countries who
may be interested in establishing or acquiring operations in the U.S.

Courtesy of Thelen Reid & Priest LLP.

Buy-sell agreements are like prenuptial agreements for people in business together; Buy-sell agreements set forth what is going to happen when things go wrong and business partners want to, or have to, separate.  As with prenuptial agreements, people tend to overlook their importance or simply don’t want to deal with the subject; after all, they are in love!

But as Iowa business attorney Rush Nigut points out in his most recent post:

"The time to enter into a buy-sell agreement is at the beginning of
the business relationship when everyone is excited and getting along.
It is often very difficult to negotiate a deal when something has gone
wrong.  Without a buy-sell agreement, owners may end up in court and
the business may suffer." 

A buy-sell agreement can stand on its own or be a set of provisions in another agreement, such as a shareholder agreement, operating agreement or partnership agreement. 

A buy-sell agreement usually covers the following issues:

Right of First Refusal
If an owner wants to leave, does he have to sell his interest to the remaining owners before selling to an outside party?

How to Value the Business
If there is a sale of an owner’s interest, how is the value of the interest to be determined?

Payment in case of a sale of an interest
If there is a sale of an owner’s interest, is the purchase price to be paid in installments? with interest? or in a lump sum?

Death, Disability, Divorce, Retirement of an Owner
What is going to happen in case of death, disability, divorce or retirement of an owner? 
Related Post:  Going into Business Together – Don’t Rely on a Handshake

If you need help in preparing a buy-sell agreement, you should contact a licensed attorney in your area.