Liability of New York Shareholders for Unpaid Debt of a New York Company

NY Corporate Disadvantages, NY Incorporation

If you reside in New York or wish to run a business in New York , it may be convenient to incorporate a business in New York. But before you do so, you should know a major disadvantage of incorporating a business in New York.

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 types of pay.

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 for employees, 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 for those doing business in New York to avoid this whole risk.

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 many 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.

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