New York Incorporation Comes With Disadvantages For Small Businesses

NY Corporate Disadvantages

If you reside in or near New York, it may be convenient to incorporate a business in New York. But before you do, you should know some of the disadvantages that come along with New York incorporation.

Business owners tend to desire the protection that incorporation gives to its shareholders’ personal assets. But you should know of a significant exception to that rule in New York. Under N.Y. Business Corporation Law § 630, the ten largest shareholders in any non-public company can be held liable for wage claims made by corporate employees. This includes salaries, overtime, vacation, holiday, severance pay and a whole host of other inclusions.

To compound matters, liability under this law is “joint and several,” meaning that a claimant can enforce a judgment against just one of the ten largest shareholders, who would then have to seek contributions from his or her fellow business owners – which can lead to all kinds of strife within a corporation.

This exception is not without its own limitations. There are legal hurdles, like notice requirements and time limits on acting to invoke this provision. Additionally, in order to recover, the employee must have already obtained a judgment against the corporation itself and the corporation must have failed to pay the judgment.

But there is a way to avoid this whole statutory scheme.

New York’s Court of Appeals has held that NY BCL § 630 doesn’t apply to corporations incorporated in any other state. This is one of many reasons why businesses located in New York consider incorporating in another state (like Delaware, which lawyers consider to have the most favorable corporate laws in the nation) and then register to do business in New York as a foreign corporation.
*Gene Berardelli may be contacted at:

Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.

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