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25 • 2009

Why in the World Would Anyone Incorporate in New York?

One of the primary advantages of incorporating a small business is the protection that the corporate form gives to shareholders’ personal assets. In New York, however, this general rule is subject to a significant exception. Under N.Y. Bus. Corp. L. §630, the ten largest shareholders in any non-public company (except for investment companies) can be held liable for wage claims made by corporate employees. All types of compensation are covered by the statute, including (but not limited to) salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds.

As if that’s not bad enough, liability under §630 is “joint and several.” This means that an employee or former employee can enforce the corporation’s entire liability to him against just one of the ten largest shareholders. That unfortunate shareholder can then attempt to recover those wages that exceed his pro rata share from his fellow shareholders.

While this rule sounds pretty harsh, §630 does contain a few limitations on an employee’s ability to stick corporate shareholders for unpaid wage claims. First, the employee must give notice to the target shareholder(s), within 180 days after his services with the company are terminated, that he intends to collect under §630. Second, an action to enforce a liability arising under §630 has to be started within 90 days after “the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services.” In plain English, this means that, in order to recover, (1) the employee must have obtained a judgment against the corporation for the wages; and (2) the corporation must have failed to pony up.

New York’s highest court (the Court of Appeals) has held that §630 doesn’t apply to foreign corporations (that is, corporations incorporated in any other state). See, armstrong-v-dyer-268-ny-671. So, instead of incorporating in New York, a small business located in there should consider incorporating in another state, then qualifying to do business in New York as a foreign corporation. Delaware-which is widely considered to have some of the most favorable corporate laws in the nation-is a popular choice among both large and small businesses. Among other things, Delaware law (unlike New York law) doesn’t make a corporation’s shareholders liable for unpaid wage claims.