THOMSON REUTERS
Westlaw Today
Enter to open, tab to navigate, enter to select
New York LLC Transparency Act: what you need to know
2023 PRINDBRF 0549
• Practitioner Insights Commentaries
• October 26, 2023
(October 26, 2023) - Matthew Moisan and Idris Motiwala of Crowell & Moring LLP discuss New York's recently passed LLC Transparency Act, which requires limited liability companies in the state to publicly disclose the identities of their beneficial owners.
Key takeaways
(1) The New York LLC Transparency Act1 ("LLC Transparency Act") aims to end anonymous ownership of limited liability companies in New York to address concerns of illegal activities and promote transparency.
(2) The LLC Transparency Act applies to LLC formed in New York and foreign LLCs qualified to do business in New York and will take effect one year after being signed into law by the governor.
(3) The LLC Transparency Act defines a beneficial owner as an entity or individual who directly or indirectly exercises substantial control over the LLC or owns or controls 25 percent or more of the LLC's ownership interests ("Beneficial Owner").
(4) The LLC Transparency Act requires LLCs to file with the State of New York ("NY") the identities of their Beneficial Owners, including their full legal name, date of birth, current address and unique identification number.
(5) The LLC Transparency Act requires public disclosure of the name of the LLC Beneficial Owners, unless exempted or waived, on a publicly searchable database.
(6) The LLC Transparency Act adopts the exemptions which exist in the federal Corporate Transparency Act ("CTA"). There are numerous exemptions under the CTA, including, entities such as banks and public accounting firms (see below for more details).
(7) The LLC Transparency Act permits an LLC to file a waiver to withhold certain information from public disclosure if such disclosure poses significant privacy concerns (as will be provided in the guidance by the New York Secretary of State) to certain LLC Beneficial Owners.
(8) Noncompliance with the LLC Transparency Act for a period exceeding two years will be shown as delinquent on the New York Department of State's records. The Secretary of State makes a proclamation dissolving delinquent corporations once a quarter. There is a $250 fee to remove the delinquency status before such a proclamation is made. If the LLC is dissolved, it must follow the New York State reinstatement procedures.
(9) Comparatively, the LLC Transparency Act is on par with California in that it promotes greater transparency of LLCs by disclosing their ownership information.
Background and purpose of the LLC Transparency Act
The drafters of the LLC Transparency Act expressed in the justification section of the bill that this law starts from the theory that allowing limited liability companies to do business in New York anonymously was a mistake. It notes that anonymous corporate ownership has caused numerous problems, such as shell companies being used to bypass sanctions, avoid taxes, fund criminal activities and launder money.
In support of this position, the drafters point out that anonymous LLCs in the real estate leasing business have a higher correlation with code violations, higher rents and more evictions compared to non-LLC real estate participants. They go on to express concerns that the anonymity of LLCs may allow bid-rigging and campaign finance violations to continue.
In furtherance of these goals, the purpose of the LLC Transparency Act is simple: "to end the practice of anonymous ownership of limited liability companies in New York" by requiring the LLCs to file with NY and publish their ownership information.
Legislative history of the LLC Transparency Act
In June 2023, the New York State Senate and Assembly passed the LLC Transparency Act. The LLC Transparency Act requires limited liability companies ("LLCs") in New York to publicly disclose the identities of their Beneficial Owners.
The initial version of the LLC Transparency Act passed the New York State Senate ("Senate") on June 6, 2023, and passed the NY Assembly on June 20, 2023. It is now back with the Senate before being sent to the Governor of New York for signature, as it is with all legislation, once the LLC Transparency Act is sent to the governor, the governor has ten days to veto the LLC Transparency Act before it becomes law.
The LLC Transparency Act is a significant change from past practice, where owners of corporations and LLCs had some privacy or limited public disclosure. This LLC Transparency Act applies to both LLCs formed under New York law and foreign LLCs, regardless of whether they were formed before or after the passing of the LLC Transparency Act. Under its current text, the LLC Transparency Act will take effect one year after it is signed into law by the governor.
Similarities and differences from the federal Corporate Transparency Act
The LLC Transparency Act uses CTA as a template. The LLC Transparency Act and the CTA are similar in that it requires LLCs to report their ownership information to the relevant government agency, in the case of the LLC Transparency Act to the State of New York, and for the CTA to the federal government.
However, the LLC Transparency Act and CTA are different in (1) the scope of entities covered and (2) who can access the reported information. The LLC Transparency Act is focused on LLCs whereas the CTA regulates various types of entities including LLCs, corporations and partnerships. Second, the LLC Transparency Act requires the State of New York to publicly disclose the reported information while the CTA limits access of information to government entities.
Whose and what information are collected and what is disclosed to the public
As discussed above, the LLC Transparency Act defines a Beneficial Owner as an entity or individual who directly or indirectly exercises substantial control over the LLC or owns or controls 25 percent or more of the LLC's ownership interests. For example, officers and directors will be considered Beneficial Owners because, even if they do not hold a 25 percent ownership interest, they can exercise substantial control over the LLC.
This definition is noteworthy in that it is not merely a 25% ownership test, rather, it is also a management test. This likely means that a "manager" as often designated in an operating agreement, the governing document in New York LLCs, will likely need to be disclosed.
As previously described, similar to the CTA, the LLC Transparency Act requires Beneficial Owners to file the following information with the NY state: (1) full legal name; (2) date of birth; (3) current business street address and (4) a unique identifying number from an acceptable identification document defined in the CTA.
The list of items that should be filed with NY under the LLC Transparency Act is the same as the information required under the CTA. The LLC Transparency Act allows an LLC to file a copy of the report filed with the Treasury Department for CTA compliance.
However, the LLC Transparency Act only requires the Secretary of State to disclose to the public only the full legal name of each Beneficial Owner of the LLCs. Certain exceptions to public disclosure of a Beneficial Owner's name may apply, such as when a child or a creditor is a Beneficial Owner or when an individual's interest in the LLC is through inheritance.
When the information should be filed
If the LLC Transparency Act becomes law, newly registering LLCs will be required to report their Beneficial Owners upon formation on or after the effective date of the LLC Transparency Act. LLCs formed on or before the effective date of the LLC Transparency Act should file with the department of state by January 1, 2025. Also, if LLCs formed on or before the effective date of the LLC Transparency Act make changes to their articles of organization, they are required to report their Beneficial Owners.
Exempted entities
The LLC Transparency Act permits certain LLCs to be exempt from filing beneficial ownership information. The exemptions are the same as those provided by the federal Treasury Department under the CTA and incorporate them by reference. LLCs claiming exemption should file a statement signed by a member or manager indicating the CTA provision on which their claims rely by January 1, 2025.
Exempted entities include more than twenty different types of entities, including: securities issuers under Section 12 of the Securities Exchange of 1934, banks as defined in Section 3 of the Federal Deposit Insurance Act, investment companies as defined in Section 3 of the Investment Company Act of 1940 and insurance companies as defined in Section 2 of the Investment Company Act of 1940.
If an LLC is not required to report Beneficial Owner information under the CTA, it is not subject to disclosure under the LLC Transparency Act. Conversely, if an LLC is required to report such information under the CTA, it is subject to disclosure under the LLC Transparency Act.2
Waiver to withhold information from public disclosure
The LLC Transparency Act requires NY to waive the public disclosure of the name and/or business address associated with a Beneficial Owner of a reporting LLC in case they cite significant privacy interests. The State of New York may waive the disclosure obligation of an LLC in cases where (1) the name and/or business address of a Beneficial Owner discloses personal or identifying information of such Beneficial Owner, (2) no amendment to such information mitigates such disclosure and (3) such disclosure serves no public interest.
Significant privacy interests under the LLC Transparency Act include, but not limited to, instances where a Beneficial Owner is a natural person participating in an address confidentiality program, or is a member of an LLC as a relator in a False Claims Act lawsuit.
Penalties for noncompliance
When a company fails to comply with the LLC Transparency Act for a period exceeding two years, the records of the New York State Department of State will show that the company is delinquent. The department will then send a notice of delinquency to the company, giving it sixty days to file in compliance with the LLC Transparency Act.
The delinquency will be removed from the records of the department of state upon the filing of the proper ownership disclosure required by the LLC Transparency Act and the payment of $250. When in delinquent status, the LLC will not be able to file any other documents with the Department of State of New York and will no longer have the liability protections that an LLC offers.
California legislative action
Under current California law, member-managed LLCs are required to file the names and addresses of any managers or officers with the Secretary of State. The current law does not require the disclosure of beneficial owners of manager-managed LLCs. However, Senator Durazo of California introduced a bill on February 17, 2023, that would, if enacted, require all corporations and LLCs to disclose beneficial owner information.
The California bill is currently in a senate committee awaiting hearing. If the senate committee passes the bill, the bill will be voted on by the full California senate. An initial committee hearing was scheduled for April 2023 but has been indefinitely postponed. The California bill is more similar to the CTA than the LLC Transparency Act in that it does not require the state to publicly disclose the information collected.
Additionally, the California definition of a beneficial owner is different. Finally, unlike the LLC Transparency Act the California bill applies to both corporations and LLCs. It remains to be seen what action other states will take in this area of law.
Crowell's perspective
The LLC Transparency Act is a significant departure from current corporate law across the United States, which does not require LLCs to publish information regarding their management or ownership. This change is a response to the international movement to regulate anonymous shell companies and is in-line with the Treasury Departments CTA.
However. New York took disclosure a step further, New York is not only requiring submission, but it is also publicly disclosing that information. On the one hand, today's society's view of privacy has shifted — anyone who partakes in social media is allowing a trove of information to be collected and, sometimes, disseminated to various third parties. On the other, it is reasonable to expect a semblance of privacy should you choose to maintain it.
The LLC Transparency Act achieves its objective, it removes anonymity, thereby allowing monitoring and reducing the ability to hide behind the shield of corporate form. The LLC Transparency Act seems to be administratively cost effective and leverages an efficient process, LLCs can simply submit a copy of their filing under the CTA to the NY state.
Further, it seems that the regulators were thoughtful the LLC Transparency Act does not broadly encompass all LLCs, as exemptions are provided to business entities that are already well regulated, such as certain securities issuers, banks and public accounting firms. In addition to the long list of exempted organizations, the LLC Transparency Act also provides a permission-based exemption for LLCs with significant privacy interests.
This, of course, is where the rubber will meet the road — the scope, size and authority of this exemption will likely be a fighting ground and will also likely determine whether the stated goal is achieved or not. Of note, it is inconsistent that this is limited to LLCs; why not have similar regulations for corporations and limited partnerships? While we cannot opine the reason, we can guess that other forms of corporate entity will now be weighed with this in mind.
Conversely, there are numerous reasons why business owners are protected by anonymity, or, in the least, protected from the inability to find on a publicly searchable forum. Certain small business groups argue that the disclosure of ownership information of small businesses poses significant security risks by disclosing personality identifiable and confidential information to the public.
Other advocacy groups suggest alternatives to the LLC Transparency Act. For example, a small landlord advocacy group suggests a specific process for people to apply to see who the members are of an LLC, where a valid reason for accessing the information is required in the request process.
Notes
1 LLC transparency act, 2023 Bill Text NY S.B. 995.
2 For more information regarding beneficial ownership as defined in the CTA and the various exemptions to beneficial ownership under the CTA please see https://bit.ly/3FwdptT.
Matthew Moisan is co-lead of Crowell & Moring LLP's emerging companies and venture capital practice in the firm's New York office. He represents clients in structuring, formation, growth and exits while providing practical, effective, business-minded counsel based on a keen awareness of the entrepreneurial life cycle. He can be reached at [email protected]. Idris Motiwala is an associate in the firm's emerging companies and venture capital practice in Washington, D.C. He handles a range of transactional and regulatory matters for both startups and mature companies, including government contractors, health care providers and developers of emerging technology. He can be reached at [email protected]. The authors would like to thank senior law clerk Heonjun Park for his contribution to this article.
)
Matthew Moisan)
Idris Motiwala| End of Document | © 2024 Thomson Reuters. No claim to original U.S. Government Works. |