Polish_google

A Polish Google search that resulted in a click to my blog asks:  "foreign corp doing business in NY requires registered agent"

Here is the belated answer:  Nie

New York law does not require a foreign corporation (i.e. a corporation not organized under the law of New York) that does business in New York to designate
a registered agent to accept legal papers on its behalf.   See New York Business Corporation Law Section 1304.

However, foreign corporations doing business in New York must file an application for authority do business in New York with New York’s Department of State.  As part of the application for authorization to do business in New York, a foreign corporation has to designate the Secretary of State as agent to receive process on its behalf.

For information on the process, what constitutes "doing business in New York" and related questions, read this brochure by the Department of State.

Against popular belief, attorneys must actually follow certain rules
of ethical conduct.  In New York, these rules are set forth in 22 New York Codes, Rules and Regulations Part 1200.

One set of rules requires attorneys to avoid conflicts of interests among their clients.  Attorneys are not allowed to accept or continue representation of a client that will adversely affect the attorney’s judgment on behalf of or dilute his or her loyalty to another client.  In addition, when an attorney is retained by an organization (such as a corporation), the organization is the client and not its members, mangers, shareholders or partners. 

These issues regularly arise for attorneys when they are asked to represent a start-up, because often they are asked by the unsuspecting founders to represent each of them individually and the to be formed entity.  As an example,  two founders may want to hire one attorney to form the corporation, draft a shareholder agreement between them and review a lease that the corporation is about to enter into.  That makes for three clients, each of the founders and the corporation.  Even if all interests are aligned at the moment, conflicts between the parties could arise at any point in time.

In an ideal world of free legal representation, each founder should have their own attorney and the new business entity should have its own attorney. Well, that’s not the real world.  It’s hard enough to convince start-ups to get an attorney early on in
their business venture, try convincing them to spend the little cash they have on several attorneys!

Having said that, your attorney may be able to represent multiple clients with differing interests if (and that is a big if):

a disinterested lawyer would believe the lawyer can represent both
clients competently and the parties consent after there has been full
disclosure of the implications, advantages and risks.

So if your start-up agrees to be represented by one attorney, be aware of the potential conflicts and expect your attorney to explain and disclose these conflicts to you. Unless you specifically consent to multiple representation, your attorney is not authorized to represent you and the other clients.   Know also that anything you tell your attorney will not be confidential from the other respective clients.  If you feel at anytime that your interests are not represented fairly due to the multiple representation, you should seek out independent counsel.  However, you should also expect the first attorney to point out such conflict the moment it arises and withdraw from the multiple representation at such time.

For an in-depth discussion of the ethics issues involved in multiple representation regarding corporate and transactional matters, look at the  Formal Ethics Opinion 2001-2   issued by the Association of the Bar of the City of New York.


 
            

If your goal is to limit liability of your business and deduct business losses from your non-business income, your choices for a business entity basically boil down to a New York limited liability company (LLC) or an S corporation (which is a New York corporation that has elected pass-through tax treatment by filing Form 2553 with the IRS).

Despite the hype over the relatively new LLC, many  small businesses still prefer to become an S corporation when it comes to choosing an entity for their venture.  Why?

Even though each situation is unique, these small business owners probably like the fact that:

Everybody is more familiar with the corporate form

LLCs are a new type of entity and everybody is still going through a learning curve.  Many people, including accountants and lawyers, like to stay on familiar grounds.

Owners of an S corporation may save on self employment taxes

Any individual who carries on a trade or business and derives income from it has to pay self-employment tax on the income  in the amount of 15.3%.  An S corporation (unlike an LLC) can declare certain income as salary to the owner (subject to self-employment tax) and certain income as profits distributed to the owner (not subject to self-employment taxes).  However, the allocations of salary to distribution have to be reasonable. 

An S corporation is cheaper to form than an LLC

In New York it is cheaper to form a corporation ($125 filing fee) than to form an LLC ($200).  In addition, an LLC is required to publish its formation in public newspapers which adds additional cost of about $1000. 

I am not saying that the above reasons warrant the choice of an S corporation, because too many factors go into the choice of an entity.  I simply noticed that many small businesses are still carried on as S corporations and was wondering why.  After some talking to accountants and small business owners, I came up with the above reasons.

However, before you make the decision to go with the famliar S corporation, be clear about the following limitations of S corporations:

    • Shareholders of an S corporation must be U.S. residents or U.S. citizens;
    • S corporations cannot have more than 100 shareholders;
    • S corporations can only have one class of stock, i.e. all shareholders must have the same rights when it comes to profits and losses of the corporation (this is often disliked by potential investors);
    • the possibilities for deductions of entity losses on the shareholder level are more limited than in an LLC;
    • A conversion of an S corporation to an LLC may have negative tax consequences, whereas a conversion from an LLC to a corporation is likely tax neutral.

Finally, I said it before, choice of entity is not an easy subject and
deserves to be discussed with your accountant and/or small business
attorney.

See the tax law governing s corporations in subchapter s of Title 26 of the United States Code.

More often than not, a small business operating out of New York is well advised to incorporate in the Empire State.

While you could theoretically incorporate in any of the 50 states (including Delaware), incorporating in another state such as Delaware adds additional costs and almost no benefits to the small business corporation.

Let’s look at the usual statements offered in favor of Delaware:

You don’t pay income taxes in Delaware

That may be true, but you will pay taxes in New York if you do business in New York regardless of your place of incorporation.  All corporations doing business in New York are subject to New York’s so called "franchise taxes, " (see Section 209 New York Tax Law).

More than 50% of all corporations listed at the New York Stock exchange are incorporated in Delaware

True; but just because big company does it, small company doesn’t have to do it.   If you have no plans of going public any time soon or attracting big shot investors who might want to take the corporation public at one point, there is no benefit gained here.  Even if you do want to go public, being a Delaware corporation is not a prerequisite.

Delaware is the most sophisticated jurisdiction when it comes to corporations

Granted, Delaware  and its laws are known to be very business friendly.  According to Delaware’s Department of State, Division of Corporations website:

The Delaware General Corporation Law is the most advanced  and flexible business formation statute in the nation.  The Delaware Court of Chancery is a unique 210 year old  business court that has written most of the  modern U.S. corporation case law. Delaware’s State Government is business-friendly
and accessible.  Our Division of Corporation is a model state-of-the-art efficiency and our staff provides prompt, friendly and professional service to clients,  attorneys, registered agents and others. These factors have all contributed to making Delaware a premier legal home to companies around the world.

Sounds all very nice and dandy, but a small business corporation doing business in New York is unlikely to encounter situations where the differences in New York law and legal system to Delaware law and legal system really matter.

It saves you money to incorporate in Delaware

May be the actual fees for incorporation are cheaper in Delaware than in New York (I didn’t check), but that is where that argument ends.  If you incorporate in Delaware, but do business in New York, you face additional expenses not due from a domestic New York corporation:

1.  A foreign corporation has to get authorization to do business in New York (Section 1304 Business Corporation Law).  The fee is $225.

2. A foreign corporation has to pay a license fee to do business in New York (Section 181 (1) New York Tax Law).  The one time fee depends on the number of issued shares (par value or non par value).

3. A foreign corporation has to pay an annual maintenance fee of $300 (Section 181 (2) New York Tax Law).

4. A Delaware corporation has to appoint a registered agent in Delaware who is responsible for receiving governmental and legal papers for the corporation.

****Legal Information is not Legal Advice****

Httpwwwflickrcomphotosburps2955578As a business owner you will encounter conflicts; particularly with your fellow business partners.   As in any relationship, it helps to deal with these conflicts rationally.  Easier said than done, I know.

My favorite blog about blogging (Problogger by Darren Rowse)  has a post about "10 steps to conflict resolution."   Darren recommends:

    1.  Set a time and place for discussion;
    2.  Define the problem or issue of disagreement;
    3.  How do you each contribute to the problem?
    4.  List past attempts to resolve the issue that were not successful;
    5.  Brainstorm. List all possible solutions;
    6.  Discuss and evaluate these possible solutions;
    7.  Agree on one solution to try;
    8.  Agree on how each individual will work toward this solution;
    9.  Set up another meeting.  Discuss your progress;
    10.  Reward each other as you each contribute toward the solution;

All good advice when it comes to conflicts with your business partners.  I would like to add one piece of advice:  Contemplate the cost of the conflict.  What are you giving up by focusing your energy on winning the conflict?  How much would you gain by resolving the conflict as soon as possible? You will be surprised how much energy and money can be wasted on inefficient conflict resolution.

In the legal arena it also helps tremendously if you agree on a method of conflict resolution BEFORE any conflict arises.   Rather than bringing the conflict to court which can be extremely costly and time consuming, you may want to agree to mediation or arbitration of any future conflicts.

Mediation is a process in which a mediator helps the parties to reach a solution to their conflict.  The mediator does not have the power to decide the conflict. Think couples therapist without the couch.

Arbitration is a process where an arbitrator comes to a final decision (an award) that is binding on the parties.  Think judges without the court house, bureaucracy and robes.

The agreement to arbitrate or mediate could be in your partnership agreement, shareholder agreement, operating agreement or any other agreement that deals with the relationship between you and the other business owners.

Example of a Mediation Provision

If a dispute arises out of or relates to this contract or the breach thereof and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.

Example of an Arbitration Provision

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

The above provisions are just examples and you could agree to more details of your dispute resolution.  For example, you could agree on the number of arbitrators to be appointed, how they are to be appointed and by whom, and where the arbitration is to take place.   You do not have to use the American Arbitration Association; however, many businesses do, since they have offices all over the country and are (in their own words)  "the world’s leading provider of conflict management and dispute resolution services." 

For further information consult this very helpful guide to arbitration and mediation published by the American Arbitration Association:  A Guide to Mediation and Arbitration For Business People.

Finally, for the legal eagles, you can find New York law dealing with arbitration in Sections 7501 through 7514 of the New York Civil Practice Law and Rules.

****Legal Information in not Legal Advice****

Picture courtesy of  entr’acte’s protected under creative commons license  attribution – noncommercial  – share alike 2.0

       

 

If you are determined to pay no more than $99 dollars for your business incorporation, why not do it yourself?

Here is how:

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Great – you have found people who share your vision to own and grow a business. But don’t forget that going into business with other people requires you to think ahead and be clear about the relationship. This is your livelihood and future. Do not think for a minute that conflicts can be resolved as you go along. Even the best of friends can end up in serious conflict over issues that might seem minor.

While you may be tempted to save the money that an attorney might charge to document your agreement, think about the thousands of dollars you may have to pay to litigate a conflict or the money you might lose because such a conflict keeps you from operating a profitable business.

Regardless of the legal entity you may choose for your business, think about every issue that might be relevant for your particular situation, and have your attorney draft the appropriate legal papers. Naturally, you cannot foresee every possible disagreement that might arise in the future. Beware of business partners who need to agree on every minute detail of the business-to-be. (That could be a hint that going into business with that particular person might not work out for you in the long term.)

Following are some of the basic issues you need to agree on with your fellow business partners.

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