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New York LLC Owners Beware - Your Wealth May be at Risk for Unpaid Wages

By Sandra B. Feldman, Publications Attorney for CT Corporation. 

If you own a New York LLC and have employees, your personal assets may be at risk for unpaid wages owed to employees. This is because a recent New York law change exposes the personal wealth of LLC owners to liability for certain unpaid wages and compensation.
 
CT TipNew York’s corporation law has contained a section imposing this kind of liability for many years.  This had led some New York small business owners to form an LLC  instead of a corporation.  But since the LLC Law was amended effective February 27, 2015 to provide for possible liability for members, this particular advantage of the New York LLC over the New York corporation no longer exists.
 

LLC Owners Have Limited Liability - So How Could They be at Risk? 

 
One of the main reasons people form a corporation or LLC rather than doing business in their own names is to avoid personal liability for the business’ debts and obligations.  Corporate shareholders and LLC members have limited liability.  Their corporations and LLCs are liable for their own debts.
 
Exceptions to general rule: However the rule of limited liability does have its exceptions.  One is if there is a statute that imposes personal liability on shareholders or members.  Such is the case in New York, where the state’s Business Corporation Law and Limited Liability Company Law say that certain large owners can be held liable for wages owed to the company’s employees in certain situations.
 

What Situations Could Expose an Owner’s Personal Wealth?

Here are some things to keep in mind:

  • The corporation law provision applies to the ten largest shareholders of a New York privately held corporation, as determined by the fair value of their interest.
  • The LLC law provision applies to the ten members of a New York LLC with the largest percentage ownership interest.
  • Liability is for unpaid wages, salaries and other compensation and benefits payable by an employer for services performed for the corporation or LLC, including overtime, vacation, holiday and severance pay, employer contributions to insurance or welfare benefits, pension or annuity funds.  
  • The employee has to try to recover the unpaid amount from the corporation or LLC first.  Only if a judgment against the corporation or LLC remains unsatisfied can the employee try to recover from the shareholder or member.
  • The employee must first give notice to the shareholder or member that he or she intends to hold the shareholder or member personally liable under the corporation or LLC law.  That notice must be provided within 180 days after the termination of the services performed for the corporation or LLC.  
  • Liability is joint and several.  That means, for example, the employee can go after one shareholder or member for the whole amount rather than all of the top ten.  And if the employee is successful, that one shareholder or member can seek contribution from the rest of the shareholders or members. 
 
In sum, the new law reduces a previously significant difference between a New York LLC and a New York corporation. Keep in mind, though, that there are still many other differences between an LLC vs. Corporation. But, similar to owners of corporations with employees, the owners of LLCs with employees should be aware of how the new law could impact them.

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