Since the adoption of the New York Business Corporation Law in 1961, New York has been one of the few states, if not the only one, to impose liability on corporate shareholders for unpaid wages due the corporation’s employees. Under Section 630 of the BCL, the ten largest shareholders, as determined by the fair value of their beneficial interest, of every corporation that is not a registered investment company or publicly traded, are jointly and severally liable for all debts, wages or salaries due and owing to any of the corporation’s laborers, servants or employees other than contractors, for services performed by them for the corporation. The term “wages or salaries” is very expansive, and means all compensation and benefits payable by an employer to or for the account of the employee for personal services rendered by such employee, including salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds; and any other moneys properly due or payable for services rendered by such employee. The shareholders are only liable if a notice seeking such payment is given with a required time frame, and only after a judgment is obtained against the corporation is return unsatisfied.
Prior to the adoption of the Limited Liability Company Law in 1994, businesspeople and attorneys seeking to avoid this potential liability would form corporations outside of New York, such as Delaware, and then qualify the corporation to do business in New York. Under the BCL and applicable case law, Section 630 is not applicable to foreign corporations. However, using a Delaware corporation resulted in ongoing annual fees for an agent in Delaware, in addition to the extra initial cost of having to form an entity in one state and qualify it in another.
With the passage of the LLCL, a new option existed to avoid Section 630 liability. Among the many benefits of doing business as an LLC, the LLCL did not include a provision similar to that of Section 630. As a result, the LLC could be formed in New York, avoiding the additional expenses of a Delaware entity, but its members would not face the same liability as their shareholder brethren.
This distinction between New York corporations and LLCs will, however, shortly come to an end. On December 29, Governor Cuomo signed a bill that amends the LLCL, effective February 27, 2015, to impose the same joint and several liability on the ten LLC members with the largest percentage ownership interest, thus closing a loophole that has existed for more than 20 years.
While the benefits of doing business as an LLC will likely continue to significantly outweigh the upside to avoiding this potential liability through the use of a Delaware corporation, businesspeople and attorneys will need to keep in mind this new exception to the “limited” liability of LLC members.