Long Island attorney, Mona Conway answers questions clients frequently ask about business law and intellectual property matters.
If you are going into business by yourself, there is no need to have a corporate agreement. However, if you are establishing a business with one or more partners, a shareholder’s agreement (if you form a corporation) or an operating agreement (if you form an LLC) is likely a necessity.
Frequently, closely held corporations and LLCs have one or more business partners who act as the financiers and others who run the day-to-day operations of the business. Sometimes the partners of a business share in the operations of the business equally or certain partners are taken on to perform very specific duties. A delineation of job responsibilities and establishing who takes what percentage of the business proceeds need to be in “a writing” where all parties agree. Another important issue to establish in a written document is how money for the business will be spent and another prepares for events such as partner incapacity or death.
Operating and shareholders’ agreements do not take much time to draft and execute. In addition to providing the partners with a degree of legal security, a written agreement gives the partners a clear sense of who gets what and who has what responsibilities before beginning operations. You may have discussed all of the issues associated with running the business, but without a written agreement, the partners leave themselves vulnerable to misunderstandings and disputes.
The first place to look for your remedy is in your shareholders’ or operating agreement. Remedial measures can be outlined with great specificity in such an agreement.
If, however, you don’t have a written agreement or your written agreement cannot adequately address the particular issue, you have two remedies: negotiation and litigation.
Negotiation should always be your first action in resolving a partnership dispute. Try to work out your issues to the best of your ability, keeping in mind that litigation is expensive, time consuming and, sometimes, destructive to a business. (See below: “What does the litigation process entail and, more importantly, what’s it going to cost?”).
If partner/officer meetings held to correct problems do not get results, retaining a mediator may be a smart option. Our experience has shown that one major reaction to avoid is anger. Business decisions made in anger are bad business decisions. Smart business owners keep their cool and carefully consider only the business options that directly relate to the productivity and profit of the business.
The factual details regarding how your partner “is not performing as agreed” are needed for a proper evaluation. The degree to which your partner is deviating from his/her performance obligations is key in determining the remedy to seek. For instance, if your business partner is merely not working as many hours as you are, or is a less-than-effective salesperson, or makes a few dumb, but not-too-costly decisions, litigation would seem too drastic a remedy. If, however, your partner is skimming money from the corporate account without partner authorization, that breach of trust calls for a strong response.
Where a written agreement cannot remedy your situation, New York’s Business Corporation Law, Limited Liability Law or common law provides your rights and remedies. You may want to dissolve a corporation, remove an officer, buy-out a shareholder or sue your partner directly for money taken improperly.
Closely held corporate entity partnerships are like marriages; in fact, you will probably spend more time each day with your business partner than with your own spouse. Like marriages, partnerships require trust and cooperation. Choose your partner wisely, make efforts to cooperate, and if things go sour, consider getting out as soon as possible.
As stated above, your rights are outlined in your contract, provided it has been carefully drafted to protect your interests. If you’re not sure what your rights are, based on your own plain reading of your agreement, an attorney will be of great assistance to you. You may, for instance, have a right to enforce a non-compete clause in your agreement if one of your partners is doing business with another company, which jeopardizes your corporation. You may have a right to inspect the books and records of the business on a frequent basis or upon short notice. You may have a right to control marketing and advertising, to have the corporate bank account’s online password, domain access, emails, etc. Sometimes the plain meaning of terms are not so plain and you need an attorney to decipher meanings; other times, the law automatically provides for rights which are not outlined in your contract. One example is a duty of fair dealing.
You can. In fact, for details of a particular business’s operations, client input is essential. However, when it comes to remedies, notifications and various other legal contingencies, you are wise to seek counsel in drafting a solid contract. A good attorney is not only familiar with various issues relating to business law; he/she also has the kind of experience that can help you greatly in avoiding the pitfalls common in non-attorney drafted contracts. These days, contract forms are easily accessible online. However, most are not drafted with New York law in mind and most will not cover the unique needs of your business. Keep in mind the old adage that “a little bit of knowledge is a dangerous thing.”
It depends. The rules for suing an out-of-state corporation are governed by the “personal jurisdiction” of New York courts. The corporate defendant has to have what are known as certain “minimum contacts” with New York. As a basic principal, if the corporation has no contacts with New York in that it does no business here, has no employees here and makes no money here, there will not be personal jurisdiction over that defendant and you cannot sue them here. This is a fact-specific analysis, which will require consultation with an experienced New York attorney.
Not really. Many savvy individuals handle their own incorporation, a simple process done through the Department of State. The advantage of having an attorney prepare the incorporations is gives you an advantage because your attorney can help you understand certain ramifications of choosing a particular business entity, assist with obtaining an Employer Identification Number, and drafting a shareholders’ or operating agreement.
Yes. You probably do need an attorney. Again, some savvy businesspeople can manage federal registration through the U.S. Patent and Trademark Office. However, the process can be quite complicated and getting it wrong can cost you time, money and an improper registration. It’s best to let an experienced attorney handle it for you.
The key difference between these two forms of intellectual property is that one is merely a brand of the source of goods or services (trademark) and the other is an authored work of art or literature (copyright). Read more about how our firm can help with intellectual property matters.
Yes. You probably do need an attorney. Some inventors are very adept at patenting their own inventions, having gained experienced through trial and error over many attempts to patent a product. If you are a first-time inventor, however, you may be wise to seek legal counsel for assistance. Patent attorneys have a scientific background, must sit for a separate Patent Bar and usually specialize in this form of legal service.
Yes. A corporation must appear in Supreme Court, represented by an attorney, whether the corporation is appearing as a plaintiff or defendant. A corporation may, however, appear as a defendant by one of its officers in New York City (civil court) and Long Island Small Claims Courts (district court).
The greatest reason to incorporate your business is to protect the partners from personal liability, referred to as “the corporate shield.” Incorporation shields the owners from personal liability. While the “shield” is not impenetrable, it provides a great deal of protection for business owners who might be sued for negligent acts. Incorporating is so easy and relatively inexpensive, that not doing so makes no sense from a practical business standpoint.
Incorporation takes a few days, but for an additional, nominal fee, you can have incorporation in a number of hours. The cost to file a Certificate of Incorporation is $125. Forming an LLC is more complicated and requires more up-front costs: $200 to file Articles of Organization and there is a “publishing requirement.” A notice of the entity’s formation must be published in two newspapers for six consecutive weeks. Business owners choose an LLC because of annual tax treatment benefits, as opposed to the corporation.
Oftentimes, you may have a legal right which is not necessarily worthy of pursuit. Collection is a tricky business that often ends in compromise. If the amount one person or entity owes exceeds $15,000, you can sue in Supreme Court. However, retaining an attorney to represent you may cost just as much or more if your case does not settle or otherwise resolve quickly. Unless you have an agreement that says otherwise, attorney’s fees are not recoupable from the other party. If some owes you a substantial amount of money, it may be worth initiating a suit with the knowledge that some of that money will go to pay your attorney. Amounts lower than $15,000 can be pursued in District Court on Long Island or Small Claims Court. Collections attorneys can be retained to bundle groups of small claims on a contingency, which is a percentage of the recovery (usually 20%).
If you have a written agreement, note or other conclusive proof of money owed, your case may be resolved swiftly, saving costs for attorney’s fees. The commercial parts of many courts in New York also have arbitration available to save time (and money) in litigation.
Deciding whether to sue for monies owed, is really a “do the math” kind of situation and typically causes much frustration among small business owners. Accepting unpaid accounts receivable may be the cost of doing business.
Litigation, by its nature, is typically expensive. And, unlike personal injury cases for example, commercial litigation is rarely taken on contingency. Therefore, clients must fund their own litigation, paying their attorneys by the hour. The range of overall cost will vary widely, depending on the nature and complexity of the action and how long the case proceeds before settlement, judgment or verdict. Attorneys can speculate as to the time it might take to resolve a given matter, but there is no crystal ball to provide an accurate estimate. The simpler contract cases in State court which do not involve much or any discovery (explained below) usually cost between $3,000 and $5,000. However, more often, litigation runs over $10,000. Matters that are more complex can cost between $75,000 and $150,000.
Litigation usually begins with the drafting, filing and service of a summons and complaint. Sometimes, the plaintiff requires immediate relief and can bring an emergency action (by Order to Show Cause) and seek an injunction. Filing a Supreme Court action costs $210. A process server usually charges about $75. Most up-front costs for litigation are in the attorney fees. Your lawyer must thoroughly consult with you on the matter, review all relevant documentation, assess your claims, develop strategies for pursuing litigation, do research and then draft the paperwork.
Once a claim has been initiated, the defendant will respond with an answer, counterclaims or a motion. Motion practice can be quite expensive with respect to attorney’ fees because it tends to be labor-intensive. Depending on the issues brought in the motion before the court, extensive research may be needed and counsel is required to prepare a well-composed written response.
Court appearances by counsel for conferences and correspondence between the attorneys are a matter of course in litigation. One trip to Riverhead (Suffolk Supreme), Mineola (Nassau Supreme) or Manhattan (New York Supreme) for a mandatory court conference usually costs the litigant between $300 and $600.
Discovery is also a time-consuming and costly part of litigation. Discovery is a matter of right for the parties; each party may demand from the other documents, answers to questions on paper and oral testimony. Disclosed or discovered information is collected during the discovery period in preparation for trial. Your attorney must not only take time to determine what discoverable information he/she wants the other party to produce, but must also answer the demands of the other party. Depending on the complexity of the matter, documents produced can range from a single, three-page contract to a closet full of boxes with information. Deposition testimony can last a few hours or a few days and cost between $500 and several thousand dollars. Most simple contract cases do not require the taking depositions. Experts are also expensive. If an expert is needed in your case to either help prove liability or help to establish damages, the cost can range from $3,500 to tens of thousands of dollars.
Trial preparation and the trial itself are the final stages of litigation. Trial preparation may include the bringing of motions, which, as stated, can be quite costly, particularly if they are designed to obtain a judgment in lieu of trial (such as a motion for summary judgment). When thinking about the cost of trial, factor in how many witnesses will be called to testify, how many documents will be presented as evidence and how many experts will be used. For example, a case involving three witness (including the parties), two experts and twenty documents will probably take about a week to try, costing approximately $8,000-$10,000 in attorney’s fees alone.
In short, bringing an action is often a good and necessary measure, but settling your case before trial should always be your goal.
The judge won’t actually hear your story, at least not the way you are probably envisioning it. Your “story” is told through your attorney and through the procedural methods of the court system. Generally, there are two ways the judge will hear your case: on motion or at trial. After or while navigating through various procedural hurdles, you may have an opportunity to ask the court for the ultimate relief you seek before trial, which is done through a motion to the court. The motion simply asks the court to give you some form of favorable judgment, such as dismissing the case against you, a judgment in your favor on some or all of your claims or for injunctive relief and is the time that your attorney can put into written form the legal story of your case.
Otherwise, the judge is not authorized to hear your story before trial – the point at which all sides tell their whole story. The judge is not a person who you relate your points to in narrative form. During trial, you will only speak when giving your testimony and being cross-examined by opposing counsel.
Many litigants desire to have a judge “hear their story,” but it simply doesn’t work that way. Your case is heard in due time and only through your attorney’s representation.
A Final Note about Litigation and Lawyering
For those of you considering retaining counsel to assist you in a legal matter, please keep in mind that real legal practice is not like what you see on TV. First of all, courtroom drama in civil litigation is rare by its nature and by the fact that approximately 98% of all cases are settled before trial. While some lawyers employ certain “tricks” to obtain favorable relief for their clients, these are merely “tricks of the trade,” not “tricks up our sleeves.” There is no magic. There is the law, thorough preparation, timely responses and common sense. A good lawyer will give you plenty of bad news regarding your case, not just tell you how they’re going to win it for you. Litigation is unpredictable, nasty and sometimes just unfair. Proceed with an attorney you trust with the knowledge that the legal system is less than perfect and won’t wrap-up like a one-hour episode of your favorite lawyer show.
Finding a lawyer you trust and who knows what they’re doing can give you a great advantage in litigation and in transactional processes. However, there can be no guarantees as to an outcome. You should demand much from your attorney; you’ve put much in their care. But also be cooperative, for an attorney with an uncooperative client is handicapped. You should expect courtesy from your attorney and reciprocate it.
Despite much public opinion about lawyers, many of us do not exemplify the “lawyer joke.” * Many of us love what we do, care about our clients and are not rich, but just making a living to support our families, just as you are.
*Why are attorneys buried 12 feet down instead of 6 feet? Because deep down, they’re good people.