Restaurant Law Blog

Monday, June 24, 2013

Corporation vs. Limited Liability Company: Which provides better liability protection for Restaurant Owners.

Business owners form legal entities such as corporations and limited liability companies in order to protect themselves from personal liability. Before you choose which type of business entity is best for you and your company, consider the different types of protections offered by each of the business forms.

Corporations

New York does not allow corporate shareholders to be completely shielded from liability for their corporate debts. New York is the only state in the country that holds a corporation’s top ten shareholders personally liable for the unpaid wages of the corporation. Section 630(a) of the New York Business Corporation Law states, in relevant part:

“The ten largest shareholders …shall jointly and severally be personally liable for all debts, wages, or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation.”

Note that if your corporation was formed in a state other than New York, but is authorized to do business in New York, the top ten shareholders will not be liable for unpaid wages.

Limited Liability Companies

The New York Limited Liability Company Law, effective as of October 24, 1994, contains many of the same provisions found in the Business Corporation Law. However, Section 609 of the LLCL states that members, managers, and/or agents of an LLC are not liable for “any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent[.]”  Thus, members of an LLC will not be liable for an employee’s unpaid wages.

Corporations and Limited Liability Companies

Corporate Officers and LLC Members are personally liable for their “employee’s share” or “trust fund” portion of employment taxes – i.e., unpaid Social Security, Medicare and federal income tax withholdings that are “withheld” from employees.  Likewise, both Corporate Officers and LLC Members are liable for unpaid sales tax debt of the company, as that money is merely collected by the company but otherwise always owned by the State of New York. 

Corporate Officers and LLC Members are not personally liable for the employer’s share of Social Security taxes, Medicare taxes, or federal unemployment taxes.

Protection against liability is only one aspect of what a business owner should consider before choosing between a corporation and LLC.  Among other considerations are taxation, stock interests, and allocation of business losses.


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