eMinutes Blog

Why New York is Never the Right Choice for Jurisdiction

For decades, attorneys have advised against forming New York corporations for businesses with employees.  When I was admitted to the New York bar after practicing corporate law in California for more than a decade, I was surprised to learn that 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.  One of the primary advantages of incorporating a small business is the protection that the corporate form gives to shareholders’ personal assets, but New York guts the liability protection by statute.  See, Why in the World Would Anyone Incorporate in New York?

Fortunately, Sec. 630 does not apply to foreign corporations doing business in New York.  Instead of forming a New York corporation, lawyers routinely advise their clients to form a corporation in Delaware and then qualify the corporation to do business in New York.     See, armstrong-v-dyer-268-ny-671. (New York Court of Appeals holds that §630 doesn’t apply to foreign corporations).

For the last decade or so, another way to avoid the risk of Sec. 630 has been to form a New York LLC rather than a corporation.  As Sec. 630 only applies to corporations, business owners could form LLCs without any risk of wage claim liability.   Although forming a LLC involves a publication cost that does not apply to corporations, forming a NY LLC avoided the extra costs associated with forming a Delaware corporation (resident agent fees, annual Delaware franchise tax).

The NY LLC party is now over.  A recent amendment to Sec. 609 of the NY LLC law now holds members of LLCs liable for wage claims in the same way that shareholders have faced potential liability under Sec. 630.

Between the high cost of publishing and the potential for wage claims, for a business with employees, there’s just about no good reason to ever form a New York LLC.

 


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