SELF EMPLOYED SEEKING UNEMPLOYMENT INSURANCE?

Generally, under New York law, the Department of Labor will not allow business owners and independent contractors to collect unemployment benefits even though they do not earn compensation. As long as an employee is working as a business owner, even without remuneration or profit, New York law considers him employed.

MATTER OF LASKER v. Commissioner of Labor, 2017 NY Slip Op 7924 - NY: Appellate Div., 3rd Dept. 2017:

"Claimant was president and a 50% shareholder of a corporation engaged in the check cashing business. The business was sold in November 2010, payable in 72 monthly installments, and the name of the corporation was changed. Claimant filed a claim for unemployment insurance benefits effective February 21, 2011 and began receiving benefits. The Department of Labor thereafter found that claimant was ineligible to receive unemployment insurance benefits, effective from February 21, 2011 until the reason for his ineligibility no longer exists, because he was not totally unemployed during the time that he received benefits, and charged him with recoverable overpayment, reduced his right to receive future benefits by 704 days and imposed civil penalties. Following a hearing, an Administrative Law Judge found that claimant was ineligible to receive benefits from February 21, 2011 to December 11, 2012, but otherwise upheld the Department's determinations. The Unemployment Insurance Appeal Board affirmed, and claimant now appeals.

We affirm. "[W]hether a claimant is totally unemployed for purposes of receiving unemployment insurance benefits is a factual question for the Board and its determination will be upheld if supported by substantial evidence" (Matter of Robinson [Commissioner of Labor], 125 AD3d 1038, 1039 [2015], lv dismissed 26 NY3d 953 [2015]; accord Matter of Roberson [Commissioner of Labor], 142 AD3d 1259, 1260 [2016]). "[A] corporate officer who performs activities in connection with the winding up of a corporation will not be considered totally unemployed, even if his or her activities in this regard are minimal" (Matter of Bigelow [Commissioner of Labor], 13 AD3d 1022, 1022-1023 [2004]; see Matter of Bunting [Commissioner of Labor], 61 AD3d 1229, 1229-1230 [2009]; Matter of DeAngelo [Commissioner of Labor], 54 AD3d 468, 468 [2008]; Matter of Downton [Commissioner of Labor], 45 AD3d 1088, 1089 [2007]). Following the sale of the business, claimant took measures in winding up the business during the time period in question, including changing the company name with the Department of State as required by the purchase agreement, distributing the monthly installment payments received from the purchaser of the business, and writing checks from the company account for accountant and counsel fees, taxes, insurance costs, a charitable contribution, office supplies and other business expenses. Under these circumstances, the Board's determination that claimant was not totally unemployed is supported by substantial evidence and will not be disturbed (see Matter of Bunting [Commissioner of Labor], 61 AD3d at 1229-1230; Matter of Downton [Commissioner of Labor], 45 AD3d at 1089). "Contrary to claimant's assertion, actual financial gain is not a prerequisite to a finding that a claimant is not totally unemployed" (Matter of DeAngelo [Commissioner of Labor], 54 AD3d at 469 [citation omitted]; see Matter of Rance [Hudacs], 196 AD2d 930, 930 [1993]).

To the extent that claimant challenges the finding of a recoverable overpayment and the assessment of penalties, the record reflects that claimant denied working as an officer of a corporation in his application for benefits, despite signing the purchase agreement as the seller's president and being listed as the corporation's chief financial officer of the renamed corporation with the Department of State. Further, he did not report any of his activities in winding up the business when certifying for benefits. Accordingly, we decline to disturb the Board's finding that claimant made willful false statements in order to obtain benefits and was therefore subject to a recoverable overpayment and penalties (see Matter of Connell [Commissioner of Labor], 82 AD3d 1437, 1439 [2011]; Matter of Bunting [Commissioner of Labor], 61 AD3d at 1230)."

FOR THIS HEALTH CRISIS - FOR SMALL BUSINESSES

Hope for the best but prepare for the worst. In addition to all of the other concerns we have now and assuming you can still operate your business, this may be the time to examine your business succession plan - if your agreements are not be addressed right now at the very least consider adding another trusted individual as an officer or to add another signature to your business account.

DUE DILIGENCE - SELLING OR BUYING A BUSINESS

As attorneys, many times we are working with clients who had bought or sold a small business but did not consult with counsel in the transaction. And usually those who did not consult with counsel also failed to conduct their due diligence. What is due diligence? According to the dictionary, it is "reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something; a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential."

An excellent article today in Newsday:

http://www.newsday.com/business/due-diligence-is-key-before-buying-a-business-experts-say-1.11814085

FOR SMALL BUSINESSES

From a recent email from Shenwick & Associates:

"This is the outline of a lecture Jim Shenwick prepared for students and alumni of The Wharton School of the University of Pennsylvania regarding debtor and creditor issues for small business startups.

1. Observe your form of organization.

• Make sure your form of entity is properly set up and continues to remain in existence, or the principals will be personally liable
• Pay your annual filing fees so your entity remains in existence, or the principals could then become personally liable.

       2. Pay attention to details.

• If you set up a corporation as your business entity, make sure that you sign the documents with your title as an officer (i.e. as “President”, “Vice-President” etc.).  Do not sign a business document personally.
• Keep records, on site and off site, of business events such as issuance of stock, bonds, notes and capital contributions.  Ex. If a friend or family loans money to your entity, do you have an executed promissory note which states the interest rate, who is the borrower, the repayment terms, etc.?
• Have you set up an accounting system/program such as Quickbooks and do you know how to use it?
• Do you have a budget for your venture?
• Do you know your “burn rate?"
• Have you prepared and reviewed an Income Statement and Balance Sheet?

      3.  Guaranties

• There are two types of guaranties that small businesses will usually enter into: (a) a general guaranty and (b) a “good guy” guaranty
• A guaranty is a written agreement by a third party or entity to pay the debts of an individual or entity (primary obligor) who fails to pay its debts as they mature
• As an example, if the entity wants an American Express corporate credit card, the principal(s) will need to guaranty payment to American Express if the entity does not make that payment.
• “Good Guy” guaranties are generally used for office leases. It is a limited form of guaranty that provides that the principals agree to pay the debts for the Tenant, if the Tenant fails to pay base rent or additional rent, until (i) the Tenant pays its rent arrears, (ii) vacates the space in broom clean condition and (iii) gives the keys back to the Landlord.

      4. Responsible Person Taxes are sales taxes or employees’ share of employment taxes (FICA and FUTA) that are collected by an entity and not paid over to the tax authorities.

• The responsible person is generally an officer of the corporation and the taxing authorities will conduct an audit to determine who the responsible person(s) are after the business closes or fails.
• Responsible Person Taxes are also not dischargeable in personal bankruptcy
• Note the principals of a defunct entity are not liable for general corporate income tax liabilities that were not paid by the defunct entity.

       5. Fraudulent Conveyances

• NYS Debtor and Creditor Law and the Bankruptcy Code provide that if an individual or a business does not have sufficient capital to conduct its business, then they cannot transfer property for no consideration (gift) to family, friends or third parties. If they do, a creditor or the Bankruptcy Trustee can commence litigation to unwind the transaction.
• Hint: The best time to do “asset protection planning” is before one gets into trouble!

      6. Small Corporation and LLC Wages for Employees

• Section 630 of the New York Business Corporation Law renders every privately held corporation’s ten largest shareholders personally liable, jointly and severally, “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 such corporation.”  N.Y. Bus. Corp. Law § 630(a)
• Limited Liability Company Law § 609(c) provides similar treatment to laborers, servants and employees of a LLC
• Accordingly, if you are running a small business that is failing, make sure that you pay monies due your employees before the business closes or you may be personally liable for those monies.

       7. Closing a business (letting it go inactive or in windup mode) v. a Chapter 7 bankruptcy filing

• Closing a business benefits: Lower administrative costs and possible to do without the help of professionals.
• Closing a business detriments: Belief by vendors or creditors that assets or inventory were not properly sold or accounted for, lawsuits, no accounting by a bankruptcy trustee and no “automatic stay” which results from an entity filing for bankruptcy protection
• Chapter 7 bankruptcy filing benefits: Protection from creditor actions via the automatic stay, orderly payment of creditors if assets are available for distribution, and an orderly liquidation of company assets. The business closes after the Chapter 7 bankruptcy petition is filed with the bankruptcy court
• Chapter 7 bankruptcy filing detriments: Filing fee ($335), administrative cost for professionals, preparing schedules and reports for the bankruptcy trustee and meeting with the bankruptcy trustee (341 hearing) and  possible bankruptcy trustee litigation (adversary proceeding)

For information about how your small business can plan to avoid debtor and creditor issues, please contact Jim Shenwick."

Shenwick & Associates
655 Third Ave. 20th Fl,
New York, N.Y. 10017
(212)541-6224
jshenwick@gmail.com

ON CASH BUSINESSES

A topic that is of special interest in any matrimonial but also useful to know in purchase and sale...from Mark S. Gottlieb CPA, P.C.:

See http://bza.me/?51JI7Q

FRAUD IN BUSINESS

Mark S. Gottlieb, CPA, PC (MSG) is distinguished as one of New York City and the Tri-State's premier business valuation, forensic accounting, and litigation support firms and the following is from one of the firm's email/blogs:

http://www.msgcpa.com/forensicperspectives/types-of-fraud-in-business/

CASH BUSINESSES AND DIVORCE

I link to this recent blog from Mark S. Gottlieb CPA, P.C.:

http://www.msgcpa.com/forensicperspectives/cash-businesses-and-divorce/

SMALL BUSINESS OWNER AND DIVORCE

From a recent email from Cohen Greve Company CPA, P.C.:

Top Five Issues for Business Owners in Divorce

Note the following conclusion:

"From our perspective as forensic accountants, this process could be made far more cost and time effective if the parties were able to set aside their emotions and be more forthcoming, if not to each other, then to their respective legal counsel. Our message to the matrimonial attorneys and their clients is simple: if you can support your claims with documentation, do so. If you can’t, then understand that the process will generate costs and delay the divorce. Is the amount at issue worth the cost of the investigation?"

Read more: http://www.cohengreve.com/top-five-issues-for-business-owners-in-divorce/#ixzz37RMvU6iA

AN ISSUE FOR SOLE SHAREHOLDER CORPORATIONS

It is not unusual, though unwise, for a sole shareholder corporation to deduct personal expenses as  etc. business expenses. Besides the tax issues, etc. that are raised, when the owner of a sole shareholder corporation is in litigation, such practices can be harmful.

Illustrative is a case that was brought to my attention on an email list. It is a matrimonial where the court imputed income to the owner and is cited as E.D. v J D. 2013 NY Slip Op 52204(U) (Decided on December 23, 2013, Supreme Court, Westchester County). Note the following:

"Moreover, Defendant was not credible with respect to the explanations he provided as to why certain expenditures of the Corporation constitute business expenses. For example, in 2010, Defendant paid each of his three sons, then ages 10, 15, and 19, $7,000.00 from the Corporation's coffers, and, in 2011, paid two sons $3,000.00 and the third $2,500.00, contending that they performed various jobs for the Corporation including modeling clothing, helping with videos, editing copy for advertising, and testing the gear manufactured by one of the Corporation's clients. Except for the checks paid to Defendant's sons and Defendant's testimony, no other [*5]evidence was submitted to support these activities.[FN5] Westenberger v. Westenberger, 23 AD3d 571, 571-72 (2d Dept. 2005)(court may impute income where reported income on tax return is suspect); F.M.C. v. F.A.C., 12 Misc 3d 1169A, 2006 NY Misc. LEXIS 1489, ***47 (Sup. Ct., Nassau Co. 2006)(where father paid personal expenses out of business and reported income on tax returns was suspect, court would impute income to father).

The Court also found that numerous other claimed business expenses of the Corporation actually were Defendant's personal expenditures. As noted above, his legal fees in this action have been paid by the Corporation. In addition, Defendant testified that he regularly charged restaurant meals with his children as a business expense to the Corporation, as well as monthly charges for the three children's cell phones, and the expense for use of Zip Cars, despite the fact that he used the cars to pick up and drop off his children. Defendant's claim that the transport of the parties' children was incidental to his business use of the Zip Cars was not credible; indeed, it appears that Defendant's business expenses were directly tailored to benefit his personal needs.

For example, in 2007, Defendant deducted travel expenses for a trip he took to Israel purportedly to meet with representatives of an Israeli clothing company, at the same time that his son's Bar Mitzvah was scheduled to take place there, and, in 2010, Defendant deducted expenses for a three week trip to Mount Everest, including costs for training to climb that mountain, purportedly because he was working on marketing for a company that sold mountaineering gear. Defendant's claim that "it was determined that he should go," was not plausible; instead, given his control of the Corporation, the Court finds that Defendant decided to go to Mount Everest and used corporate funds to pay for it. Notably, no receipts were produced to verify these "business" expenses nor evidence verifying the "business" nature of the trips taken.[FN6]

Moreover, even if such receipts had been provided by Defendant, the evidence shows that Defendant alone controlled the Corporation's travel decisions as well as all other expenditures and any such expenses reduced the amount of funds available to increase Defendant's salary had he wanted to increase his salary.

Moreover, Defendant testified that he lives and works out of his studio [*6]apartment, and that, since 2007, he has apportioned 75% of the rent for the apartment to the Corporation as an expense.

As the Court noted in its July Decision, the very items Defendant declared as corporate business expenses - travel, rent, phones, dinners - are expenditures that a court typically is mandated to consider in calculating child support to the extent that such business expenses reduce the personal expenditures of such party. DRL § 240 (1-b)(b)(5)(vi).

In light of Defendant's lack of credibility, his clear co-mingling of business expenditures with his own personal needs and the fact that he is the sole decision maker as to how much salary he earns from the Corporation, together with the precipitous drop in Defendant's reported income after 2007,[FN7] the year he formed the Corporation, this Court will impute income to the Defendant for the years 2008 through 2012. DRL § 240 1-b(b)(5(iv); Matter of Rubley v. Longworth, 35 AD3d 1129, 1130 (2006), app. denied 8 NY3d 811 (2007)(trial court may impute income based upon past employment experience, future earning capacity, and/or payment of personal expenses from business accounts); Kelly v. Bovee, 9 AD3d at 642; Brefka v. Dobies, 271 AD2d 876, 877, app. denied 95 NY2d 759 (2000). "

SMALL BUSINESS CHECKLIST

Here is a link to a checklist entitled Small Business Fundamentals from Thomas Gallo, CPA:

From Cohen Greve & Company CPA - SMALL BUSINESS FUNDAMAENTALS 

ENFORCEMENT OF JUDGMENTS

A recent consultation revealed that in a small claims action, the client received a default judgment against a defendant. Now what? The problem is the same in any litigation: it is easy to obtain a judgment but to enforce it is another story. I have been involved in litigations in which the proceedings involved after trial in order to enforce the money judgment were as protracted as the trial itself. The New York State Unified Court System has put out a pamphlet on Small Claims & Commercial Small Claims Actions procedures and starting on page 18 is a discussion on how to enforce the judgment and this contains information that is relevant to any litigation. Here is the link:

Guide to Small Claims & Commercial Small Claims in New York City, Nassau County, Suffolk County

SMALL BUSINESSES - APPEARING PRO SE

You are a small business owner operating in corporate form. You are being sued. You can't afford an attorney. What do you do?

As a general rule, you can only appear by an attorney. CPLR 321 (a) provides:

"Attorneys. (a) Appearance in person or by attorney. A party,
other than one specified in section 1201 of this chapter, may prosecute
or defend a civil action in person or by attorney, except that a
corporation or voluntary association shall appear by attorney, except as
otherwise provided in sections 1809 and 1809-A of the New York city
civil court act, sections 1809 and 1809-A of the uniform district court
act and sections 1809 and 1809-A of the uniform city court act, and
except as otherwise provided in section 501 and section 1809 of the
uniform justice court act. If a party appears by attorney such party may
not act in person in the action except by consent of the court."

Thus, unless the action against the small business owner operating in corporate form is a defendant in a small claims or a commercial claim transaction in one of the lower courts, an attorney must be retained. If you fall within the exceptions, you may appear pro se. Sometimes, the clerks of the lower courts are not aware of these exceptions so I would advise small business corporate owners to get a copy of the above statute and a copy of the relevant exception and bring it with them when they file an answer.

SMALL BUSINESSES - LIABILITY INSURANCE

While I am on the subject of small businesses, I have recently been having discussions with small business owners and others as to whether or not they should carry liability insurance. I know it is an expense and it can be considerable. Even with attorneys in practice, there are some attorney who, for reasons of cost or whatever, do not carry malpractice insurance (although we do have the New York State Lawyers' Fund for Client Protection, still that doesn't protect all clients' from the misconduct of attorneys). But all small businesses, professional services or otherwise, should carry liability insurances and some types of businesses are required under law or contract to carry such insurance. As a lawyer, I would not advise anyone to contract with anyone for services who was uninsured and would ask that my client, in any contract for services, be named as an additional insured and received a binder. Dealing with the uninsured is not recommended by me. Moreover, although you may be incorporated, etc. and feel your personal assets are protected, usually an attorney will name the business owner or owners individually as a defendant in the action and thus you are open to potential liability, especially if the plaintiff is able to "pierce the corporate veil", viz., that, inter alia, the corporation was used not just as a business but for personal expenses, etc.

MECHANIC'S LIEN - A NOTE TO CONTRACTORS AND OTHER SMALL BUSINESS OWNERS

A recent consultation revealed that a licensed contractor had not been paid for work performed on a residential home over two years ago. Contractors and residential owners should be aware of the New York Lien Law:

"New York law permits "A contractor, subcontractor, laborer, materialman, landscape gardener, nurseryman or person or corporation selling fruit or ornamental trees, roses, shrubbery, vines and small fruits, who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof, or of his agent, contractor or subcontractor, and any trust fund to which benefits and wage supplements are due or payable for the benefit of such laborers, shall have a lien for the principal and interest, of the value, or the agreed price, of such labor, including benefits and wage supplements due or payable for the benefit of any laborer, or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien..." N.Y. Lien Law §3. "Notice of lien may be filed at anytime during the progress of the work and the furnishing of the materials, or, within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished; provided, however, that where the improvement is related to real property improved or to be improved with a single family dwelling, the notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished. N.Y. Lien Law §10. Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice upon the owner, if a natural person, (a) by delivering the same to him personally, or if the owner cannot be found, to his agent or attorney, or (b) by leaving it at his last known place of residence in the city or town in which the real property or some part thereof is situated, with a person of suitable age and discretion, or (c) by registered or certified mail addressed to his last known place of residence, or (d) if such owner has no such residence in such city or town, or cannot be found, and he has no agent or attorney, by affixing a copy thereof conspicuously on such property, between the hours of nine o'clock in the forenoon and four o'clock in the afternoon; if the owner be a corporation, said service shall be made (i) by delivering such copy to and leaving the same with the president, vice-president, secretary or clerk to the corporation, the cashier, treasurer or a director or managing agent thereof, personally, within the state, or (ii) if such officer cannot be found within the state by affixing a copy thereof conspicuously on such property between the hours of nine o'clock in the forenoon and four o'clock in the afternoon, or (iii) by registered or certified mail addressed to its last known place of business. Failure to file proof of such a service with the county clerk within thirty-five days after the notice of lien is filed shall terminate the notice as a lien." N.Y. Lien Law §10. Any lien created under New York law shall be a lien for a period longer than one year after the notice of lien has been filed, unless within that time an action is commenced to foreclose the lien, ...." or the appropriate steps are taken to request that the court grant an extension. N.Y. Lien Law §17."

Unfortunately for the contractor and fortunately for the home owner, in the matter before me, the contractor never filed a lien. The residential owner refinanced a new mortgage after the work was completed (which would not have been possible if a lien was filed and foreclosed on). Now the contractor can only sue the owner for the monies due and, if successful, will be a judgment creditor but, to enforce the judgment against the house, upon a sale, can only be paid after the mortgage holder. The construction contract also had no provision for late charges or collection of attorney fees. I point this out as a reminder to small business owners: CONSULT AN ATTORNEY ON MAJOR JOBS AND DON'T DRAFT YOUR OWN CONTRACTS!