Business Law

I would like to open a business. What forms of business ownership should I consider before embarking on a new business? (NY)

There are several different types of business entities that can be considered under New York business law. Business entities available in New York include sole proprietorships, partnerships, corporations, and limited liability companies. Laws governing businesses in New York further divide corporations into a variety of bodies depending on the level of liability the business or the owner(s) is willing to absorb, wishes to avoid, or safeguarded against and the type of business itself. Potential business owners should confer with their accountants and lawyers to determine which entity will most closely match their objectives in accordance with New York business law. Underlying risks, along with tax and accounting issues will play a prominent role in a business owners' final determination on which business model they will ultimately decide to follow. This is a very important issue that is vital to the future success of any business in New York and should be decided only after adequate consultation with experienced professionals who have a working knowledge of the laws within the New York business community.
(Courtesy of Association of the Bar of the City of New York)


I would like to represent a foreign company in New York. What are some of my concerns regarding New York Commercial Law? (NY)


This is a very complex question. A variety of aspects of the company may be affected by the commercial laws of New York. The following are a small sample of the possible issues that may need to be addressed: Is the foreign company a legitimate business?
Would I be submitting to a foreign country's laws?
Am I permitted to engage in this type of business in the United States?
What do I need do in the United States to engage in such a business?
What tax issues would affect me and the foreign company, here and abroad? Do I become an agent of the foreign company and if so, what liabilities would I incur?
How am I to be paid?
Who assumes the risk of collection and if the product is defective would I be liable?
The variety of questions above stress the need for assistance from a professional who understands New York Commercial Law to correctly ascertain which questions apply to the particular case and the possible solutions to those concerns.
(Courtesy of Association of the Bar of the City of New York)


A foreign company has sent me a contract to represent them. Should I sign it? (NY)


It is always best to consult an attorney before signing any contract, especially with a foreign entity. An attorney is needed to review the contract as the commercial laws of New York and those of the foreign country may apply. This may create liabilities here and abroad that would make such an endeavor unprofitable and possibly infringe the liberties of the signatories.
(Courtesy of Association of the Bar of the City of New York)


How do I know if goods purchased abroad are going to be delivered? (NY)


There are various banking mechanisms in New York to assure delivery against payment with commercial laws in place to guarantee reimbursement upon a failure to deliver. One example would be bills of lading against letters of credit.
(Courtesy of Association of the Bar of the City of New York)


What happens if the goods shipped here are defective? (NY)


Under New York Commercial Law, there are specific procedures to follow to obtain satisfaction when products traded are deemed defective. One would need to speak to an attorney who specializes in commercial law from New York to competently represent the interests of those concerned. (Courtesy of Association of the Bar of the City of New York)

I have been asked to deposit money in the US for a foreign based company. Are there laws barring or restricting such actions in New York? (NY)


Federal regulations enacted after September 11, 2001 have made international transactions more stringent and liabilities more structured. These restrictions combined with similar commercial laws in New York have caused banks to be more concerned as to the origin of deposits and actual customers. It is suggested to discuss these concerns with the bank where the money will deposited and with competent counsel familiar with the commercial law in New York. (Courtesy of Association of the Bar of the City of New York)

Can I carry amounts in excess of twenty thousand dollars over seas? (NY)


Although there are no commercial laws in New York prohibiting the transportation of money there are regulations with US Customs and foreign custom offices that require the reporting of such activities. These need be addressed and it is best to contact an attorney to learn of the requirements and possible ramifications before deciding upon such an action.
(Courtesy of Association of the Bar of the City of New York)


How should my business be organized?

This really is the $64,000 question. It is also a question without a clear answer, because different businesses may organize themselves in different ways. The key to the inquiry is to determine exactly what you want to do, and then pick the format that best suits the enterprise.
It's sort of like buying a suit of clothes and making sure it fits correctly. You can't just pull it off the shelf. You probably have to alter it a bit. In the area of business organization, the key "tailors" if you will are your lawyer and accountant. They can provide tremendous help in assisting you to choose the best format for your personal business purposes.
The basic types of business organization include:
Sole Proprietorship (sometimes called a "dba")
Partnership
Limited Liability Company ("LLC")
Corporation (often called "Inc" or "S-Corp")
To summarize the differences between these various forms of business, a corporate entity provides protection from creditors, but is more formal. It also may involve double taxation. A partnership can be either a general partnership or a limited partnership, with the limited partnership providing some insulation from individual liability (for limited partners). A sole proprietorship is the cheapest way to go, also the most flexible, but it offers no insulation from personal liability.
The benefits and trade-offs of each form of business organization is discussed in more detail in separate "Common Questions".


What is a Sole Proprietorship (sometimes called a "dba")?


A sole proprietorship is the simplest form of business organization. It involves an individual operating a business in his own name or under a "dba" (doing business as), such as "John Jones, doing business as Jones Plumbing." In this format, the owner, John Jones is personally liable for the debts of the business and is liable for all contractual obligations. If Jones Plumbing does not perform on a contract or does not pay a supplier, John Jones's personal assets are at risk. That is the downside. The upside is that this format requires virtually no legal formalities. There are no "Articles of Incorporation," no "ByLaws," no meeting requirements, no state registration with the Department of Corporations. At most, you may have to file a fictitious business name statement to register the name "Jones Plumbing" with the county where you are headquartered, but beyond that (and procurement of a basic business license from the local jurisdiction), you are off and running. Bottom line: simple, but with personal exposure.

What is a Partnership?


There are two basic types os partnership: general partnership and a limited partnership.

- General Partnership
A general partnership is similar to a sole proprietorship in that no registration is required other than a business license and registering a fictitious business name (if one is used). A typical format is "John Jones and Bill Smith, doing business as Jones & Smith Plumbing." In a partnership, assuming it's a general partnership, both partners share the profits and losses equally. Both general partners are personally liable for the partnership's debts, just like in a sole proprietorship.

- Limited Partnership
A limited partnership is a slightly different breed of cat. In a limited partnership, there is a general partner, who controls the enterprise and bears personal liability for obligations and debts. But the limited partners are exposed only to the extent of their investment. They do not have personal liability beyond the potential loss of the money they have invested. This provides some insulation from the general debts of the business. Limited partnerships must be registered with the state, but generally operate much looser than a corporation. It's sort of an in-between arrangement, a cross between a corporation and a general partnership.


What is a Corporation (sometimes "Inc", or "S-Corp")?

A corporation is a formal entity that exists separately from the individuals who are employed by it.
For example, a plumbing company with owners John Jones and Bill Smith may decided to incorporate their business as "Smith & Jones Plumbing, Inc." What this means is that they have formed a separate entity - a corporation know by the name of "Smith & Jones Plumbing, Inc. - that exists separately and apart from themselves personally. If the corporation enters into a contract, only the corporation is liable for a breach of that contract. The individuals are not liable.

The same thing holds true if the corporation borrows money from a bank. Only the corporation has to repay the loan (although in many cases, the lender will require individual officers to personally guarantee the corporate obligation). The point here is that the corporation is a separate entity. Many people prefer this type of set up because of the insulation from personal liability. But the legal protection comes at a price. The corporation is more expensive to set up and maintain. You will have to register with the Secretary of State. Prepare Articles of Incorporation. Prepare and administer corporate ByLaws. Have a Board of Directors. Hold meetings, pass resolutions to authorize corporate activities, and so forth. It does not have to be overly cumbersome, but it is more complicated than a simple sole proprietorship and requires significantly more record keeping. There is also a potential "double tax" on profits. The corporation, as a separate entity pays corporate taxes on earnings, and when salaries and dividends are distributed to individual employees or shareholders, they in turn pay taxes on those distributions.


What is a Limited Liability Company ("LLC") ?


This is a relatively new phenomenon that has worked out very well in the states where it has been implemented. It is a cross between a partnership and a corporation. Commonly called an "LLC," This format allows the owners to be insulated from personal liability, and yet offers considerable flexibility: the business can be operated much in the same way as a partnership. LLC owners are called "members" rather than "shareholders." An LLC is taxed like a partnership.

What is a "close corporation"?


A "close" corporation is one that is not publicly traded. Most of the corporations are in fact "closely held." The stock is owned by family members or other individuals who control the business. If there is a desire to raise significant capital (funding for business purposes), you might want to consider selling stock to the public. This is known as a "public offering," and is quite involved, very expensive, and it drastically changes the way a company does business, for once you "go public," you are no longer a closely held concern, but rather a public company that has obligations to the general public (strangers) who will be investing in your business.

What are "S" and "C" corporations?


A "C" corporation is a normal corporation, subject to double taxation, as noted above. An "S" corporation is a special type of entity that functions like a normal corporation but is allowed to pass the tax straight through to individual shareholders, who account for the tax on their individual returns. The IRS Regulations governing "S" corporations can be complex, and you should consult with an experienced lawyer and accountant if you are contemplating this type of format.

What is a "professional corporation"?


Just what the name implies: it is a corporation utilized by persons in certain professions. Commonly called "PCs," professional corporations can exist for doctors, lawyers and accountants. Individual shareholders are relieved of personal liability for the corporation's debts, but they do remain liable for individual malpractice.

What about a "joint venture"? What is that?

This is a term that is used a lot, but many people misunderstand just what it is. A "joint venture" is no more or less than a partnership for a specific project. For example, John Jones and Bill Smith may both be plumbers and both may want to work on the plumbing subcontract for a 45 story office tower being built in a metropolitan area. Neither one of them has the resources to do the job alone, so they decided to join forces and do this one job together. They can form a joint venture, perhaps called "Smith & Jones Plumbing, a joint venture," with the specific agreement begin to share the work (and the profits and the liability) in connection with the office tower job. Once that job is completed and the accounting completed, the joint venture ends.

What are the tax rules for sole proprietorships, partnerships and corporations?


It would fill a book (many books actually) to fully discuss this subject. As noted above, corporations may well involve some "double taxation" because the corporation as a separate entity pays taxes as well as the individuals who receive money from the corporation. One shorthand rule is that whenever you have a separate entity, that entity must file a tax return. THIS applies to partnerships and corporation. There are special forms that the IRS uses for partnership and corporate tax returns. A sole proprietorship, in contrast can account for taxes as part of the individual owner's personal return.

What about banking? Do I have to set up a separate account for my business?


Yes. IF there is a separate entity, it should have its own bank accounts and tax reporting and accounting should be done separately for those accounts. Even if you are operating a sole proprietorship, it is highly recommended that a separate bank account be utilized, as it makes record keeping much easier.

Which organizational format is best for the transfer of my business? For example, what if I want to pass the business on to a son or daughter? What if I want to sell it to a third party?

Once again, this is an issue that can fill a book. A competent lawyer and/or accountant should always be consulted on an issue like This. Without engaging in an overly lengthy discussion, suffice it to say that many people have found a corporate format the easiest to pass along a business to other family members. You simply transfer the shares. The corporate entity never dies until someone decides to liquidate it. IF the President or Chief Executive Officer dies, his/her stock simple passes by will to the next generation. The corporation lives on, run by different people. In contrast, if there is a sole proprietorship, it dies with the owner. Same for a partnership (indeed many states have statutes that provide that one of the events that can terminate a partnership is the death of a partner - is creates an automatic dissolution of the partnership).

What general rules to I have to be aware of for employees?


Once again, be sure to consult with a good lawyer or accountant as you begin the business. With any "separate entity" business, such as a partnership or corporation, you must obtain a separate tax ID number from the IRS. In general, remember that there are several tax reporting requirements, including payment of payroll taxes, for your employees. In addition, you must register fictitious business names. You must adhere to many other legal requirements, including rules that prohibit workplace discrimination and require workplace safety.

Do I have to provide medical coverage for employees?

There is no legal requirement that an employer provide medical coverage for employees. However, if you are a corporation or partnership, you can't provide coverage for one class of employees and deny it for others. IF there is coverage for anyone, it must extend across the board, without discrimination. As a common practice, most employers offer some form of coverage. In some cases, the employer pays all costs of the coverage, while in other instances, the employer pays part and the employee also pays part. This is something that is either established by the employer, or negotiated between an employer and his/her employees (often through union representatives).



 
 

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