Legal Information for Large and Small Business Owners
Buying a Business
Do I Need a Business Lawyer?
May 30th
When do I need to hire a corporate attorney for my business?
Some scenarios are obvious — you should call a criminal or corporate attorney when you’re being investigated by government officials for tax or securities fraud, when an employee is injured on the job or when a customer is injured by one of your products.
But you should also consider hiring a corporate attorney in other situations, like:
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When you are starting a business.
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When you are buying or selling a business.
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When you are considering dissolving your business.
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When you are hiring senior or key employees.
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When you are hiring employees with access to company secrets or confidential information.
When You Probably Need a Business Attorney
Here are a few examples of when you should consider hiring a good business attorney for your large business or small business.
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The members of your LLC, shareholders of your company, or partners of your partnership want to allocate the profits and losses is a special way in the LLC operating agreement, shareholder agreement or partnership agreement.
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The business partners will be contributing capital other than cash to the partnership, company, or LLC — like intellectual property, know-how, or appreciated property.
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In connection with the purchase of a business that has significant potential liabilities like: environmental issues (state and federal environmental laws impose liabilities on landowners in the chain of title, regardless if they caused the contamination); product liability, employee liability (sexual harassment or employee discrimination claims); excessive debt; or special capital calls.
Please note. If you are a member of a limited liability company, a shareholder in a closely held company, or a partner in a partnership, keep in mind that the company lawyer is representing the company, not you. There are times when members, shareholders or partners decide to form their business or eventually go separate ways. The corporate attorney hired for the business has the business as its client and protects the business’ interests. In the scenario of forming the business, each business partner has its own interest in mind, which may be adverse to the proposed company (for example, if one member is contributing intellectual property to the new business, it may want to have an exit strategy to keep its intellectual property if they part ways). Or in the event of a “business divorce,” where the remaining members, shareholders or partners are buying out other LLC members, company shareholders or partnership partners, the company lawyer has the company’s best interest in mind, which interest is adverse to the departing business partners. Business partners, members and shareholders should be represented by their own corporate attorney to avoid conflicts of interest, or at the very least, the business lawyer needs to advise the partners of, and they have to waive in writing, the conflicts of interest.
If you need help with deciding whether you need to hire a business attorney, you should contact a licensed business lawyer for an initial consultation. As the old saying goes, an ounce of prevention is worth a pound of cure.
Buying a Small Business, Company or LLC in New York
May 27th
This is intended to help outline the general process of buying a small business in New York, explaining the legal aspects of how a corporate attorney can assist in a business purchase transaction (it is not intended to be construed as legal advice for your particular situation).
Your business acquisition attorney is not only your legal expert, but also will facilitate the business purchase process. Your business lawyer will coordinate the processes, interface with all the players, and move the business transaction along, culminating in a successful closing. As your legal expert, your business lawyer will conduct the legal due diligence, negotiate, draft and review the necessary legal documents, and should be intimately familiar with the legal intricacies aspects of your business purchase — keeping abreast of the facts and circumstances of the deal and advise you on any resulting legal consequences, and preparing the strategies to avoid legal problems.
1. Of course, the first step in buying a business is to find a business to buy.
You can find businesses to buy in the classified section of most metropolitan newspapers, on those newspapers’ websites, in the Wall Street Journal, through your own networking efforts – whether in person or on the internet (like LinkedIn or Facebook), or through business brokers. Corporate lawyers generally do not sell businesses unless they act as a broker or finder or happen to know a client or acquaintance who wants to sell a business. There are tons of businesses for sale — the question is whether acquiring the business makes economic sense (and is the right business for you).
After you have identified the possible acquisition target, you (with the assistance of your corporate attorney) need to conduct due diligence on the business (investigate the business, its contracts, customers, financial reports, among other things) and determine what the business is worth and the terms of the purchase. These steps are not mutually exclusive, they are interdependent and occur simultaneously — as you find out facts about the business, these may reflect on the business terms of the deal.
2. The “Term Sheet” — Negotiating the Business Terms of the Purchase
While you are conducting due diligence on the business you intend to buy, you should begin negotiating the terms and conditions of the purchase of the business. This high level “term sheet” outline, would sufficiently detail (without necessarily including all the legalese), some of the following items, among others:
The parties to the business transaction;
Is the transaction to be structured as a stock purchase (buying all of the assets and liabilities of the business) or only purchasing certain assets of the small business (real estate, accounts, intellectual property, among other assets);
The purchase price and what assets or stock is being purchased;
The timing of the payment of the purchase price (lump sum or in installments);
If payment is installments, the amount of the down payment and the interest rate, and the collateral securing the note (also consider conditions to repayment (e.g., only from profits);
Binding and non-binding terms; and
Confidentiality obligations.
The “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”), which could be as short as a page or two, should expressly state that certain obligations are non-binding on the parties. You may want to state that either party could walk away from the deal if they change their mind (maybe after a no-shop period), but you might want to make certain terms binding like reimbursement and confidentiality obligations. As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet).
You should consult a business attorney at some point during the drafting of the term sheet (even if the first draft of the term sheet is prepared by the business person, you should have your business attorney review and/or negotiate it before it is signed). Please see my post “Negotiating the Terms of the Deal — Buying or Selling a Small Business In New York” for a more detailed discussion about putting together a term sheet.
3. Conducting Due Diligence
Due diligence is the process of thoroughly investigating the business being acquired. The outcome of your business due diligence may very well impact the price you are paying and other terms and conditions of the term sheet. You will want to have your financial advisor review prior years’ tax returns and financial reports. You should have your business lawyer review all major contracts (including leases) to see if there are any “atomic bombs” that may be triggered by the sale of the business or that have any surprise obligations or rights (balloon payments, rights of first refusals, right to terminate, rights of consent, etc.). If the business owns or leases real estate you want to review all documentation, leases, surveys, and environmental reports (or order one if there is a possibility that the business in question (or its predecessors) might have contaminated the land. Read “How to Conduct Due Diligence for a Merger or Purchase of a Business“, for more details and a checklist of some due diligence items that should be reviewed by you and your corporate attorney.
4. Preparing the Proper Documentation for the Business Purchase
There are many documents needed when transferring a business: the stock purchase agreement or asset purchase agreement, assignment and assumption agreements, deeds, consents, tax filings, among others. You should consult a New York business attorney to negotiate, draft and/or review these instrumental agreements and documents which are necessary to transfer the business.
The most important document in a business sale is the “purchase agreement” (also known as the “sales agreement” or “acquisition agreement”) — and will be in the form of a stock purchase or asset purchase. To protect yourself as the buyer, your attorney should prepare the first draft of this document. Otherwise, if the seller’s attorney prepares the sales agreement it can be one-sided, or worse yet, if the attorney is not too experienced, it might not cover the terms and conditions to the business sale that properly encompasses the complexity of the business or transaction.
Once the purchase agreement has been finalized, your business attorney can prepare the “closing checklist” of all of the consents, documents, filings, and agreements that need to be prepared and executed, and a list of all contingencies that need to occur on or before the “closing.”
5. The Closing of the Business Purchase
Generally, the closing consummates the transaction (unless of course, there are post closing obligations to occur). At the closing the parties and their corporate attorneys get together to exchange money and property, sign documents, and handle the remaining paperwork.
If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer. There may be important tax and other legal consequences to consider before making the decision.
How to Conduct Due Diligence for a Merger or Purchase of a Business or LLC
Apr 21st
Regardless of whether you are buying a business as an asset purchase, a stock purchase, or a merger, you (and/or your corporate attorney) must conduct due diligence on the target company. Due diligence involves an in-depth investigation of the business. It requires review of a lot of documents by your corporate attorney and a review of the financial reports and tax returns by your financial advisor or accountant. By conducting due diligence on the target business, you and your corporate attorney will have a thorough understanding of the business — being better able to ascertain a fair purchase price of the business, and identify any surprise business liabilities for which you likely will be liable after you become the business owner. Due diligence also is important because, depending on the outcome of the due diligence, you (perhaps with the help of your corporate attorney) may want to incorporate certain seller obligations in the term sheet of the deal (e.g., clearing any liens on the assets of the business, obtaining required third party consents, etc.).
Here is my due diligence checklist of the most common items to investigate when conducting due diligence in the buying or merging of a small business (of course, these are among other things to review depending on the facts and circumstances of the specific transaction):
Legal Due Diligence
1. Corporate Documents (or LLC Documents)
If the target business is a corporation, you (or your corporate attorney) should review the certificate of incorporation, good standing certificate, by-laws, minutes of shareholder and director meetings, shareholder agreements, and any outstanding warrants and option agreements.
If the target business is a limited liability company (LLC), you (or your corporate attorney) should review the articles of organization, good standing certificate, operating agreement, minutes of membership meetings, manager agreement, and any outstanding purchase rights agreements and option agreements.
In New York, you can order a good standing certificate from the New York Department of State, Division of Corporations.
2. Agreements
Major Contracts: You (or your business lawyer) should review all major distributor, supplier and customer agreements, all confidentiality and non-compete agreements, all intellectual property agreements (licenses into and out of the company), and all equipment leases.
Real Estate: You need to review all real estate leases entered into by the target company (whether as a tenant or a landlord), purchase agreements, surveys (if a long term lease or fee owned), title insurance policies (if fee owned); you should ascertain whether any consents are needed for the contemplated business sale (or merger) transaction, how much the rent liabilities are, whether there are sufficient term(s) remaining on the lease(s), among other things.
Insurance Policies: Have your risk advisor or insurance agent review all insurance policies carried by the target business to determine if the present coverage is adequate for the business as it is conducted (or plans to be conducted).
3. Licenses and Permits. Is the target business required to maintain licenses and permits with the local and state authorities (such as a liquor license or other operating permit)? If so, you (or your corporate attorney) need to obtain all copies and determine which licenses may require the seller’s obtaining prior consent for the contemplated sale or merger of the business. To find out what licenses and permits may be required in New York, you can visit the New York State’s Online Permit Assistance and Licensing website.
4. List of all (major) Assets and Liabilities. Regardless of whether you are buying the business as an asset purchase or a stock purchase, you want to be sure of what the target company owns and owes. The target company’s assets may include cash, securities, equipment, inventory, intellectual property (copyrights, trademarks, patents, domain names, and other proprietary rights), notes and accounts receivables, real property (leased and owned). Liabilities may include bank debt, employee benefits and bonuses earned and not yet paid, threatened, pending and current lawsuits, licensing violations, etc. You should be provided with a list of all employees and their current salaries. You should identify which employees are key to a successful transition and continued operation of the business.
5. UCC Liens. Uniform Commercial Code (UCC) information is important to any business or financial institution contemplating entering into a lien transaction as the secured party (the party providing funds or financing collateral). Knowing the current financial status of the target debtor business before extending credit is crucial, and it is the number of active, existing liens already in effect for that particular debtor party that most interests any future lender or secured party. You can search the New York Uniform Commercial Code Bureau files and records to see what financial obligations (including IRS liens) have been incurred by the target business and to see what, if any, liens exist on the selling business’ assets.
6. Customer Problems. You can easily search the internet to see if there is any negative publicity or customer complaints about the target business. The internet is a very powerful tool for viral marketing and unfortunately, for flaming a business. You don’t want to buy a business that is saddled with a lot of negative consumer awareness.
Financial Due Diligence
You should have your accountant or financial advisor review the following diligence materials. She or he should check whether there are any questionable accounting practices.
1. Tax Returns. Up to 5 years’ prior federal, state and local tax returns, including any sale and use tax returns. In New York and in other states, the successor to a business may be liable for tax liabilities incurred in the years prior to its purchase of the business. In order to be certain that you have the same returns that were filed with the taxing authorities, you can have the seller provide the applicable written consent so you can request copies of the actual tax returns directly from the applicable taxing authority.
2. Financial Statements. The seller of the business should provide detailed financial statements (including balance sheets and profit and loss statements) for the prior 3 to 5 years. If the target business is large enough, your financial advisor or accountant might request to review “audited” financial statements that have been prepared and certified by a certified public accountant.
3. Tax Liens. Your accountant or financial advisor should review the any tax liens filed on any assets owned by the target business.
If you need help with conducting due diligence on a business, you should contact a licensed business attorney.
(or your corporate attorney)
How Do I Form a Limited Liability Company in New York?
Apr 14th
Organizers form an LLC in New York by filing the Articles of Organization, pursuant to Section 203 of the New York Limited Liability Company Law, with the Department of State. Organizers prepare, sign and file the Articles of Organization that creates the LLC. Any person or business entity may be an organizer (it does not have to be a business lawyer or corporate attorney). Organizers may be, but need not be, a member of the LLC formed. You can obtain a basic Articles of Organization from the New York Department of State here (note, this form reflects only the basic requirements — Articles of Organization may include other provisions consistent with law).
Of course, if you have any questions on How to Form a Limited Liability Company in New York, it is best to discuss them with a New York Small Business Lawyer.
Negotiating the Terms of the Deal — Buying or Selling an LLC or Small Business In New York
Mar 28th
After you have found your target New York business to acquire, you (and/or your corporate attorney) have to negotiate the terms of the business purchase transaction. In this article I will outline some of the typical terms of a term sheet for the purchase of a small business and some of the things you need to consider.
As I mentioned in “Buying a Small Business in New York”, you need to put together a “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”). This can be done as you and your corporate attorney are conducting your due diligence on the target business.
The term sheet should consist of the broad basic terms of the deal. As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet). The term sheet, will set forth the parties’ mutual understanding of the terms of the small business purchase.
Having a term sheet serves purposes in addition to acting as the blue print of the business deal from which to draft the stock purchase agreement or asset purchase agreement.
The business purchase term sheet communicates to the seller that you are serious about purchasing the small business. Depending on how the term sheet is drafted, while you may have an “out” to walk away from the business acquisition, it shows that you are committed to culminate the purchase;
It can lock the seller into looking for other purchasers of the small business; and
The term sheet helps flesh out the major issues that often arise in a business purchase and sale, so to avoid surprise roadblocks that may pop up along the way to closing;
Here is a list of typical terms and other issues to be addressed in a term sheet to buy a business:
1. The Names and Contact Information for all parties that are involved in the purchase transaction — buyer, seller, buyer’s corporate attorney, seller’s company attorney, names of any business brokers involved in the deal, and the names of the financial advisors and/or accountants. If any of the parties are not individuals, you should have the full entity’s legal information (including state of incorporation, officer’s names and contact information, etc.)
2. Purchase Price and Other Consideration – Will this be a cash deal, or a combination of cash and other real or personal property, stock, or intellectual property?
3. Payment Terms. If a cash deal, will it be paid in a lump sum, or paid in installments? If in installments, will it be tied to profitability, or other contingencies? If seller financed, at what interest rate and term? If financed by a third party, is the deal contingent on obtaining that financing? Will there be a downpayment?
4. Collateral (or security) for the Purchase Price. If the business is being sold with seller financing, the seller may want collateral for your promise to pay back the loan. Perhaps the security interest pledged will be the stock of the company, some or all of the business property or business assets, or some other real or personal property that you own. Of course, if you fail to make the financing payments, the seller will want to then be able to foreclose or repossess the collateral that is being pledged against the seller financing.
5. Structure of the Deal. Will it be an Asset Purchase or Stock Purchase?
Assuming that the business target is a corporation or limited liability company (LLC), you can structure the purchase in one of two ways — either it will be a stock purchase or an asset purchase. There are advantages to both, and both may have significant tax implications. You should structure the transaction after obtaining advise from your financial advisor or accountant.
From a legal perspective a stock sale is quite different from an asset sale. In a stock sale transaction, you are buying all of the stock of the company — so the company’s assets, liabilities, goodwill, contracts, intellectual property, real property stays with the company (assuming that there are no prohibitions of or conditions to transfer contained in any of of the documents relating to same). In a stock purchase, you are buying the company entity “lock, stock and barrel.” That also means you may be buying the company’s headaches as well (like lawsuits, and other contractual obligations). So when you buy the stock of the company, you and your corporate attorney should conduct intensive due diligence into the business’ history, contracts, minute books, financial reports and records.
In an asset purchase, you are cherry-picking and buying the plum assets that you need for your own business (or even a division of the seller’s business). In an asset sale (or asset purchase) the company’s liabilities and other headaches stay with the seller. You can buy all or substantially all of the assets of a business in New York, with little risk that you will be held responsible for the debts and obligations of the business incurred prior to the purchase of the business by you.
6. Transfer Issues. Whether the business is being sold as a stock sale or as an asset sale, you have to be concerned about whether there are restrictions to transferring the assets of the business. When conducting due diligence, you (with the help of your corporate attorney) should determine which assets may need prior consent for the transfer (like business space leases, major contracts with customers or vendors, or bank loans or credit agreements). Depending on how the restriction is worded in the respective contract, a mere transfer of any stock or a controlling interest of the ownership of the business stock, may trigger the obligation to obtain consent.
7. Covenant not to Compete. Generally, how successful the the business you are buying was in the past was a result of the management and ownership of the business. So you might want to consider keeping those employees on after you buy the business for continuity purposes and have them enter into employment agreements or consulting agreements with you. Of course, if you have the expertise to run the business from day 1, then you may want to “buy” the benefit of having the prior management and prior business owners from competing with your newly purchased business. You would want to enter into an agreement with covenants not to compete (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”), to prevent the sellers from immediately soliciting their old customers or competing with you. Under New York law, covenants not to compete (or “non-compete agreement” or “forfeiture for competition agreement”) are valid as long as they are reasonable in duration and scope.
8. Non-binding Nature of the Term Sheet. As I discussed in “Buying a Small Business in New York”, you should consider having a “non-binding” term sheet (e.g., there should be contingencies when you can walk away from the deal without liability). But note, the term sheet should be drafted properly so that certain provisions of the term sheet should be binding, like the provisions regarding limitation of liability and confidentiality, among others (you don’t want the seller to sue you nor disclose your confidential information like financial information).
9. Post-Closing Seller Obligations or Buyer Obligations that Continue after the Sale of the Business. As discussed above, there might be times that you want the seller to continue to provide consulting services to the business after the sale of the business. Maybe you decided to close the deal before all of the non-material consents were obtained or prior to when the applicable taxed needed to be prepared and filed. Any post-closing obligation that need to be written in the stock purchase agreement or asset purchase agreement should be included in the term sheet.
Which is Better – An Asset Purchase or a Stock Purchase of a Company? From first impressions, you might think an asset purchase is more advantageous. Generally, buyers prefer an asset purchase for reasons of tax deductibility and cherry-picking the favorite assets (without being saddled with the liabilities). However, in a stock purchase you can buy the business as a going concern with minimal interference of the business (and sellers prefer to sell the entire business with all its blemishes and liabilities). Of course, the bottom line will be price (an asset purchase will probably be more expensive than buying the stock of a company).
If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer. There may be important tax and other legal consequences to consider before making the decision.
Do You Need an Operating Agreement for Your Small Business LLC? Here is my LLC Operating Agreement Checklist.
Mar 10th
As you may know, a “corporate kit” includes a pre-made form of limited liability company operating agreement. There is no telling how complete these are and whether or not they were prepared by a corporate attorney. Certainly an off-the-shelf operating agreement is not customized for your needs. I recommend having a New York Small Business Attorney (corporate attorney) review and/or draft and negotiate the operating agreement — especially when you have two or more members. Here is a checklist of some of the items to consider addressing in your operating agreement (for that matter, these are some of the items that you should consider addressing in a shareholder agreement or a partnership agreement).
- General Provisions
- Purpose of LLC — Will this be a special purpose entity?
- Scope of activity — Geographic boundaries, etc.
- Limitations on operations — Incurrence of indebtedness, other?
- How many classes of membership? What are the membership rights and obligations of each class?
- Capital Contributions to the LLC
- Have there been any to date?
- Percentages
- Additional contributions
- Ability to call
- Default provisions (straight dilution or penalties?)
- Governance of the Limited Liability Company
- Day-to-day management of the LLC
- Company opportunities
- Conflicts of interest
- Major decisions
- Indemnification
- Resolution of deadlocks
- Arbitration
- Buy/Sell
- Methodology for determining price — By Triggering member, Appraisal, or Arbitration?
- Distributions of Profits / Allocation of Losses
- Timing
- Amount
- Capital vs. profits
- In-kind distributions
- Admission of Additional Member(s) to the LLC
- Any new members contemplated?
- Terms and conditions of admission
- Withdrawal of Member from the LLC
- Ability to withdraw
- Confidentiality
- Non-compete
- Other considerations?
- Transfers of LLC Membership Interests
- Permitted?
- To estate planning vehicles
- To family members/affiliates
- Third party transfers
- Right of first offer/right of first refusal
- Other conditions to transfer
- Termination of the Company
- Fixed term?
- Trigger events?
- Standard (involuntary bankruptcy, court order, etc.)
Of course, it is best to discuss the above New York LLC Operating Agreement Checklist with a New York Small Business Lawyer.
Forming or Buying a Small Business in New York? Links To Start and Grow Your Small Business.
Mar 7th
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Is the name that you have in mind for your startup company available to use? Is the New York company with which you are doing business in good standing? Search the New York Corporation and Business Entity Database for existing business and not for profit corporations, limited partnerships, limited liability companies and limited liability partnerships, as well as other miscellaneous businesses.
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Need to find out whether shares of stock or personal assets of a person or company have liens filed against it? Search the New York Department of State UCC Lien Search Database for Financing Statements and Financing Statement Amendments filed under Article 9 and Revised Article 9 of the Uniform Commercial Code (UCC) and Notices of Federal Tax Liens and notices and certificates affecting such liens filed under Article 10-A of the Lien Law.
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Need to find out if tax warrants have been filed in New York? The New York State Department of Taxation and Finance files tax warrants in county clerks’ offices throughout the state. Search the New York State Department of Taxation and Finance Database for tax warrant-related notices.
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Need to know about the various taxes applicable to New York large and small businesses and individuals? The New York State Department of Taxation and Finance site includes information on sales and use taxes, withholding taxes, corporation taxes, and other taxes.
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Did you know the State of New York LOVES small businesses? Here is the New York State NY♥Small Business site with information on starting or growing your small business in New York. It has links to local county resources, information on industry specific tax and financial incentives, and ways in which small businesses can apply for grants, loans, tax incentives, rebates on energy bills and other financing options.
Of course, you should contact a licensed New York Small Business Lawyer if you have any questions about anything on the websites mentioned in this article or about forming, buying or selling a large or small business in New York.
Why Choose a Limited Liability Company (LLC) over a Corporation For Your Small Business?
Mar 5th
An LLC combines the limited liability advantages of a corporation with the control and tax advantages of a partnership. You can elect to have your LLC taxed as a corporation, or you can elect to have it be a “pass through” entity (taxed like a partnership – the LLC’s income and losses are reported on each member’s individual tax returns). Unlike S-Corps, a New York limited liability company can be owned by non U.S. citizens/resident aliens (and other business entities). A NY LLC can have unlimited number of members.
Note, however, under New York law, LLCs are required to publish the fact of the LLC’s formation in two newspapers of the county in which the office of the limited liability company is located. This advertisement could cost as little as a few hundred dollars for an LLC formed in a less populated county to around $1,300 or so for an LLC formed in one of the five New York City counties (Bronx, Kings, Queens, New York, and Richmond (less populated counties may be a little less costly)).
Of course, if you have any questions, it is best to discuss them with a New York Small Business Lawyer.
What are the benefits of having an LLC?
Feb 2nd
A New York Limited Liability Company has the following benefits:
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Liability Protection Like a Corporation. New York LLC members are generally protected from personal liability for debts and claims of the business. This means that if the business can’t pay a creditor or gets sued, the creditor cannot legally come after the member’s personal assets such as a house or car (unless the owner is hiding behind the corporate entity for his or her own unlawful or unscrupulous personal dealings, in that case the business owner might not be able to prevent personal liability if a creditor can prove facts and circumstance to “pierce the corporate veil”).
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Maintenance. LLCs are less formal than corporations and do not have the same corporate formality requirements such as annual meetings, maintaining minute books, and having corporate bylaws (of course, these items can be addressed in the LLC’s Operating Agreement).
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Management. An LLC provides a lot of flexibility in business organization and management. The owners can be individuals, trusts, partnerships, corporations, LLC and foreign individuals. There are no requirements to have officers — one or more managers can run the LLC (as set forth in the LLC’s Operating Agreement).
Of course, if you have any questions about the benefits of having a New York LLC, you should speak with a New York Small Business Lawyer.
Starting an LLC or a Business in New York? Here is my Business Startup Checklist
Jan 8th
As a corporate attorney, I am frequently asked for a checklist of items to consider when starting a business. Here is a “10,000 foot” overview of what needs to get done in starting or buying a large or small business in New York:
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Choose Your Business Structure
What type of structure is right for your small business? In New York, your choices are: sole proprietor, partnership, corporation or limited liability company. You should speak with your accountant/financial advisor to see what structure is the best for your tax situation and speak with an attorney to discuss various structure options. Also, you will want a structure that is flexible as your business grows. For example, if you hope to attract investors (or even become a publicly traded company in the future) a limited liability company or corporation might be a good structure. Of course, forming a New York limited liability company has the added expense of publishing the formation of your LLC in two newspapers (see my other post about LLC vs Corporation). Keep in mind, a sole proprietorship does not offer the limited liability protection of an LLC or corporation.
You should formalize your structure with a written agreement signed by the business principals and by filing the proper documents with the Secretary of State of New York. Please note, if you are doing business with other people without the proper written agreement in place, you may be in a de-facto partnership without knowing it (e.g., your partner could enter into agreements and monetary obligations in the name of the partnership and all partners would be liable for those obligations).
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Choose a Name for your Business
New York has laws regarding certain naming conventions that must be used.
Corporations must contain the word “corporation”, “incorporated” or “limited”, or an abbreviation of one of such words (click through to Laws of New York (bottom of page) to see Section 301 of New York Business Corporation Law (BCS)). Also, the name of the corporation cannot be the same as any other New York corporation, limited liability company or limited partnership. Search the New York Corporation and Business Entity Database for existing business and not for profit corporations, limited partnerships, limited liability companies and limited liability partnerships, as well as other miscellaneous businesses.
New York regulates or prohibits the use of certain terms in corporate names (or only allows them after approval). For example, certain phrases must have a legend so not to be confused with a “governmental agency”. You cannot use certain terms like “state police”, “urban development”, “chamber of commerce”, “state trooper”, “urban relocation”, “community renewal”, and “tenant relocation”, among other names. Also, certain names have additional requirements or approvals like “bank”, “guaranty”, “insurance”, “trust”, “doctor”, and “lawyer”. (click through to Laws of New York (bottom of page) to see Sections 301 and 302 of New York Business Corporation Law (BCS)).
Caution should be used to not name your small business company in a way that might be confusingly similar to an existing trademark. You should also consider a corporate name that is available as a domain name (however, that may mot be as important if you have a domain that has brand appeal). If your company will be doing interstate business (across state lines), may want to protect your corporate name with a trademark or trade name under federal trademark laws (check out the U.S. Patent and Trademark Office’s FAQs) or state trademark and trade name laws.
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Form Your Large or Small Business. Once you have selected the name of the company, you need to form the business by filing the proper documentation with the New York Department of State. See the Division of Corporations website for FAQs regarding the different entity requirements or engage a New York Business Lawyer as your corporate attorney.
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Enter Into a Written Agreement with your Fellow Business Owners. If you are going into business with other people, you need to enter into a written agreement with them setting forth the rights and responsibilities of the owners — this generally is in the form of an operating agreement (for a limited liability company), a shareholder agreement and corporate bylaws (for a corporation), or a partnership agreement (for a partnership).
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Get a Tax Identification Number and Learn about your Tax Obligations. Speak to your financial advisor or accountant, but generally it is a good idea to have a separate federal tax IS (or EIN) even if you are a single-member LLC (select a “disregarded entity”). Here is the link to the IRS’ How to Apply for an EIN (with separate instructions for Corporations, International Businesses, Partnerships, and Small Business/Self-Employed). Your applying by telephone is sometimes easier than via the online method.
As a New York small business owner, you need to understand your New York State tax responsibilities (Recordkeeping, Hiring employees, Selling products or services, and other New York State taxes). The New York State Department of Taxation and Finance site has a lot of information for those starting or buying a business. Also, you should read the IRS’ “Publication 583 Starting a Business and Keeping Records” is available as a pdf download or viewable on the IRS web site.
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Open a Business Bank Account. Once you have your federal tax ID, you should open bank account(s) in the name of the business. You should consider a bank with “commercial” services — in my experience its better to avoid “retail” banks that don’t have a lot of experience in sophisticate business needs. Generally the bank will need to see your business entity formation documents (including banking resolutions). The bank can provide you with generic banking resolutions, but if you are incorporated, you should include these in your corporate by-laws (with specific banking resolutions and officer powers). If you have questions, you can call a New York Small Business Attorney.
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Get the Necessary Licenses and Permits Necessary for your Business. Go to the New York State’s Online Permit Assistance and Licensing website to see what permits and licenses are required and call a New York Small Business Attorney.
Have a New York Small Business Lawyer review and/or draft and negotiate the important business agreements, including, among other things, the business owners’ agreement (operating agreement, shareholder agreement and corporate bylaws, and/or partnership agreement, as the case may be), office and other commercial space leases, contracts with your customers and vendors, web site development and hosting agreements and any technology/intellectual property licenses.
Of course, it is best to discuss the above New York Small Business Startup Checklist with a New York Small Business Attorney (or corporate attorney).
Welcome to the New York Business Law Blog
Jan 1st
