corporation

What is the Business Judgment Rule?

by Fred Abramson on March 13, 2013

There is no shortage of  examples of corporate wrongdoing. Officers and directors have been using the business judgment rule as an excuse for corporate malfeasance since the stone age. The defense is used in complex cases, such as mortgage backed securities indiscretions, to the relatively mundane where officers are accused of purchasing New York Knicks season tickets out of the corporate till for personal use.

New York Knicks logo

The business judgment rule, which began as a minor exception, is now so strong a winning argument that the only fun left is trying to prove that it  does not cover absolutely all forms of corporate stealing. 🙂

WHAT IS THE BUSINESS JUDGEMENT RULE? 

If you are an officer or director  of a corporation then you are responsible for managing and directing the business and affairs of the corporation. The larger the business, the more challenging the issues the officers face. Should your fashion tech start-up expand and open up a store? What if the lease is in a building that your family owns and the terms are unfavorable for the company?

If you own a business and have partners and shareholders, you don’t want to be scared that you will be subject to an expensive lawsuit if things don’t work out. However, if the officers and directors are acting against for personal gain and against the interest of the other shareholders, who should be to blame?

The courts have given large leeway to the decisions the directors and officers must make.

Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence.

When lawsuits focusing on the businesses judgement rule are commenced, they are usually highly fact driven and subjective. Was the CEO acting in good faith or did she have dual allegiance? In the example regarding the fashion tech start-up, the issue regarding dual allegiance is relevant but you may not win on that alone.

If you are an office or director and there comes an issue where your business judgement may be called into question, I would suggest that you disclose any potential conflicts up front. Open communication and fostering a business environment based on trust is the best preventive medicine.

The Law Office of Frederic R. Abramson represents business in New York. If you have questions about corporate governance and the business judgement rule, feel free to call me at 212-233-0666. 

Creating Bylaws for Your New York Corporation

by Zachary Nathanson on June 1, 2011

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How can I set internal rules within my company to help resolve disputes in the future? The answer is your next step in forming your corporation or start-up. After creating your articles of incorporation, you must now create bylaws. Bylaws are contained within a single written document and dictate the operating standards and procedures of your business entity. They are your way to set internal guidelines and procedures for your new company.

The standards set out in your bylaws will follow through the life of your business entity determining what it can do. You are not required to file bylaws with the Secretary of State in New York, but you must keep a copy of them at your principal place of business. Typical bylaws will contain the following:

  • Documenting your identifying information, such as: the name of your organization and where your office(s) are located
  • The number of corporate officers and directors: you should include the members of your organization including your board of directors and the range or specific number of those directors.
  • The election of your board of directors and how they will function.
  • Committees: the specific roles of any special committees including formation, how their appointed, and their duties.
  • The shares and stock classes that the corporation can issue.
  • Information concerning director and shareholder meeting protocol, the extent to the liability arising out of the performance of their duties, conflicts of interest, and corporate record keeping.
  • Specific procedure in amending bylaws and articles of incorporation.

Bylaws cover far more specific topics than the Articles of Incorporation including the corporation’s organization and structure. They are what give your company direction. What difficulties are you finding when creating your LLC’s or corporation’s bylaws?

The Law Office of Frederic R. Abramson represents start-ups in New York. If you have any questions regarding bylaws feel free to contact our office at 212-233-0666

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Choosing a Business Entity in New York

by Zachary Nathanson on May 2, 2011

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When you start a new business or start-up in New York, there are some major legal hurdles you’re going to encounter. It’s important to examine these issues carefully because they’re often confusing. Each issue should be discussed with an attorney because they can affect your business costs, tax structure, business organization, and liability. In forming a new business you need to choose a business entity type. There are four general types of business entities in New York: sole proprietorships, partnerships, S-corporations, and LLCs.

  • Sole Proprietorship: This is a type of business where one person owns all the assets of that business. In a sole proprietorship those assets that belong to you as an individual and not a single shareholder or a corporate parent. With this type of business entity there are low start up costs, there’s less paperwork involved, and there are no corporate taxes. The big problem with sole proprietorships is that you are personally liable for all your debts. Creditors can go after your personal bank account or even your house to absolve your debts.
  • Partnerships: A partnership is where two or more people jointly own and carry a business for profit. Under this type of entity, those entered in the partnership agree to share the business’s profits and/or losses. Unlike corporations, the company does not itself pay any tax, but the partners pay through their income or losses on their individual tax returns. In a partnership both partners are jointly and severely liable for business debts. Creditors can go after you for the debts of your partnership.
  • S-Corporations must make sure there are no more than 100 stockholders, and each must have consent. S-corporations are taxed through the owner’s income without taxing the entity itself, much like in a partnership.  All profits pass on to the owner without any tax from the shareholder to the owner, unlike in a corporation. The stockholders must be a U.S. citizen or a resident and can only have one class of stock. The owner of an S-Corporation can potentially use this structure to pay himself a smaller salary and pay less in taxes, however this can pose significant problems with the IRS. In a case in Iowa the head of an S-Corporation paid himself far less than his qualifications suggested. The IRS filed a case and succeeded in their suit.
  • Limited Liability Corporations (LLC) are a hybrid business entity where its members are treated as shareholders of a corporation but for tax purposes the members are treated as if they’re in a partnership. In LLC’s the owners are not personally responsible for the debts as they are in sole proprietorships and partnerships. Under certain circumstances an individual may be liable: if a member personally guarantees a debt, if the personal funds are intertwined with the funds of the LLC, if there is little capitalization or insurance, or if it fails to pay taxes or violates a state law. A major issue with LLCs is their cost that include formation fees, filing fees, and annual state fees. There are, however, lower insurance costs.

The Law Office of Frederic R. Abramson represents start-up businesses in New York State. If you have any questions about choosing a business entity in New York, contact me at 212-233-0666

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LLC New York Business Taxation

by Fred Abramson on March 3, 2010 · 1 comment

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The IRS allows owners of LLC’s to make the decision themselves about how they want the company to be taxed.  The LLC can be taxed as in two general ways:

  • As a pass-though entity, like a s-corporation, sole proprietorship
  • Like a c-corporation

What is a pass though entity?

Usually business owners planning on forming a LLC at the startup stage decide that the LLC should be a pass through entity. What this means is that the corporation itself does not pay any taxes.  All tax profits and losses are reported by each business member on their tax return.  Like a sole proprietor, each owner files a schedule c.

If your LCC has more than 1 member be aware that each member must file the IRS Form 1065 and must be the same one used by the LLC.

How to Change your tax treatment

What makes LLC’s unique is the ability of its members to change the way it is taxed. You can elect to be taxed as a S or a C corporation.  To make this change, you only have to check the box that you wished to be taxed in form 8832 and simply file it with the IRS.  You can make this election at any time.  You will now be required to file corporate tax returns.

If you are interested in the entity being taxed as an S, simply file IRS Form 2553.  Be aware that to file as an S corporation, you have to meet its conditions.  Unfortunately, if you wish to change the way your LLC corporate taxed back to a partnership, you will have to wait five years to do so.

If you have any questions regarding starting a business in New York and tax issues related to it, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.

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