Shareholders Liable for Unpaid Compensation in New York

The top ten shareholders of private New York corporations and members of private NY limited liability companies (LLCs) face personal liability for unpaid compensation of employees, which includes wages as well as benefits (see Sections 630 of the New York Business Corporations Law and Section 609 of the New York Limited Liability Company Law).  This potential liability exists whether or not the shareholder or member in question has any role in the management of the business or any responsibility for, or even knowledge of, the failure to pay the compensation. Exposure of investors to obligations of a corporation or LLC is unusual in a US context and is inconsistent with investor expectations.

This provision is one of the primary reasons that entrepreneurs are often advised by counsel not to use NY corporations or LLCs to establish new businesses.

Recently, the New York Business Corporation Law has been amended to impose liability on the top ten shareholders of foreign (e.g., Delaware) corporations for the unpaid compensation of employees that perform services in New York. The amended law, which became effective on January 19, 2016, does not apply to members of foreign LLCs.

Although doubts have been raised as to the constitutionality of the amendment, it may take some time before it is tested in court. In the meantime, entrepreneurs and investors beware!

This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact robert.mollen@friedfrank.com or via LinkedIn here.

You will find Bob’s other weekly blogs for emerging and growth companies on US issues, international expansion and early stage financing here: http://bit.ly/2lP5uMP