Saturday, January 8, 2011

Personal Liability of New York Shareholders

In this blog post I would like to highlight one important but not widely known fact about New York privately held corporations: top ten shareholders of such corporation may be held personally liable for any unpaid compensation to the corporation’s employees.

This law may come as a surprise to those who incorporated their business in order to limit their personal liability. Well, incorporation does not offer absolute protection to the business owners. There are exceptions, and one of them is that ten largest shareholders may be personally liable for unpaid compensation.

This law is found in Section 630(a) of the New York Business Corporation Law. Several things to note here:
  • The law applies only to privately held corporations (not to LLCs or investment companies).
  • It covers not just wages, but other types of monetary compensation as well, including overtime, vacation, severance pay, contributions to insurance or welfare benefits, pension or annuity funds.
  • It excludes contractors.
  • The shareholders are liable jointly and severally. This means that the employees can choose to go after one wealthiest shareholder for the whole amount instead of all ten. The law allows that shareholder to seek pro rata contributions from the other largest shareholders.
  • The employee needs to first try to recover the unpaid amounts from the corporation. Only if the judgment remains unsatisfied, can the shareholder pursue the claim against the shareholders.
  • The law establishes a procedure that employees have to follow. It consists of a written notice to be given within a specified period of time to the target shareholders that the employee intends to hold such shareholders personally liable under section 630(a).
One additional note: the law extends only to New York corporations and does not include corporations formed in other states that do business in New York. This question was tested as recently as October 2010 in New York courts. See Stuto v Kerber, 2010 NY Slip Op. 7646 (NY Appellate Div, 3rd Dept. 2010). So, all a business owner needs to do to escape from the reach of this law is to incorporate elsewhere and then register in New York as a foreign corporation. For example, Delaware does not have a similar provision.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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