What’s in a Name? New York Legislature Passes LLC Transparency Act – LLCs and Their Individual Beneficial Owners Must Prepare for Disclosure (and Corporate/Tax Lawyers Prepare for More Work to Avoid It)
By Helen D. (Heidi) Reavis and Michael D. Utevsky
Headline
The New York Legislature passed the LLC Transparency Act (the “Act”) (S.B. S995B) in June and if Governor Kathy Hochul signs the bill into law, domestic or foreign LLCs that are operating in New York will be required to disclose their beneficial ownership information – meaning, their owners’ individual full names, date of birth, and current business street address. This disclosure requirement will extend to each natural person who owns an interest in the LLC, whether directly or indirectly through another entity. The goal of the new Act is to lift the cloak covering the personal identities of the beneficial owners of companies doing business in New York and thereby counteract fraud, money laundering, domestic terrorism, and other types of illegal practices in or through the state.
Once signed into law, the Act would become effective one year later and amend the New York Limited Liability Company Law (NY LLCL §§ 101 et seq.) and the New York Executive Law (N.Y. Exec. Law §§ 1 et seq.). While the LLC Transparency Act has not yet been signed into law, New York LLCs would be well advised to familiarize themselves with the Act’s disclosure requirements and anticipate compliance by the end of 2024. This also goes for foreign LLCs doing business in New York (to the extent they choose to continue doing so). Similarly, those anticipating new LLC formation and registration in New York (or foreign LLCs planning on doing business in New York) should expect the identities of their natural beneficial owners would have to be disclosed.
There are, however, some exceptions and side doors out of these prospective requirements, as summarized below. And surely as the legislation sits on Governor Hochul’s desk, many corporate and tax lawyers are already planning end-arounds.
The LLC Backstory
New York was one of the last states to enact a Limited Liability Company law, in 1994, after 40 other states had already done so. One of its principal benefits has been to shield company and real estate investors from disclosure of their personal identities. The New York LLC law also provides LLC owners with limited liability against business losses, as well as the opportunity to pass through profits and losses to its investors without paying a double tax. These were all considered legitimate business purposes by the states that adopted LLC laws, which at the time outweighed the possibility that LLCs might also be used for illegitimate purposes such as money laundering, tax evasion, or funding domestic terrorism.
Prior to 1994, Subchapter S corporations, limited partnerships, and trusts were commonly used as investment vehicles. If the New York LLC Transparency Act becomes law in its present form, it seems likely that we will see a revival of the use of these older entities, and perhaps the creation of new ones, that are exempt from State-mandated public disclosures. And this, predictably, will keep corporate and tax attorneys in the field even more occupied with companies and investors seeking to shield the identities of their beneficial owners. Further, since 1994 with the explosion of digital media and the erosion of privacy, privacy laws which have since evolved will provide individuals with grounds for exemption from public disclosure of their personal information, and the Act anticipates those types of efforts.
Specific Disclosures Required
New York’s LLC Transparency Act in large part follows the definitions and reporting requirements of the federal Corporate Transparency Act (the “CTA”) (31 U.S.C. § 5336), enacted to assist federal law enforcement with its pursuit of companies and individuals engaged in illegal practices through shell companies, ranging from corporate fraud and money laundering to tax evasion and the funding of terrorism. However, as discussed below, the New York Act in some respects goes farther than the CTA, and provides for the public disclosure of some of the individual beneficial owners’ personal information that is collected, unlike the federal law.
Under the New York Act, LLCs would have to disclose every single beneficial owner’s (as defined in the CTA), full legal name, date of birth, and current business street address, as well as a unique identifying number from an acceptable identification document (also as defined in the CTA). New York LLCs and foreign LLCs doing business in New York may comply with the Act’s requirements by filing a copy of their submission under the CTA. LLCs claiming an exemption from the Act must identify sufficient grounds (also defined in the CTA). However, unlike the CTA, the New York LLC Transparency Act does not require disclosure of the individual LLC applicants themselves.
Limited Scope – New York LLCs and Foreign LLCs Only Need Comply
If the Act becomes law, New York LLCs formed on or before the effective date would be required to file the identities of their beneficial owners by January 1, 2025. LLCs formed after the effective date would have 30 days from formation to file their individual beneficial owner reports setting forth the required information. Any changes to such information would have to be filed with the state within 90 days; and foreign qualified LLCs would also be required to report such changes.
New York companies should note that one major difference between the Act and the CTA concerns entity form and application. While the CTA covers LLCs, limited liability partnerships, corporations, business trusts, and other types of company forms and investment vehicles, the New York Act in its present iteration applies only to New York LLCs and foreign LLCs registered to do business in New York. And therein lies the opportunity (for lawyers).
Implications of the New York Act – Public Disclosure, and a Boon for Corporate and Tax Lawyers Seeking to Avoid It
While under the CTA, the federal government maintains information reported by registrants in a non-public federal database accessible only to authorized entities in certain circumstances, under the New York Act, some of the individual beneficial owners’ reported information would be made publicly available on-line. Accordingly, New York LLCs and foreign LLCs conducting business in the state should anticipate their beneficial owners’ full legal names and current business street addresses, as well as the year of their birth (but not month and day), would be included in a public database. That database would be maintained by the New York Secretary of State and be publicly accessible through its website.
That said, beneficial owners would be able to apply for a waiver of such publicly accessible information on grounds of significant privacy interests, and seek to have their information withheld from the database under procedures that would be established by the Secretary of State.
Conclusions
Given the New York LLC Transparency Act would become effective one year after Governor Hochul signs it into law, LLCs and foreign LLCs doing business in New York should consider their business structure and anticipate the disclosure requirements set forth above, as well as the possibility of the Act being amended over time to apply to additional company forms and investment vehicles as included in the more far-reaching federal CTA. Foreign LLCs may choose not to do business in New York, opting instead for more liberal states without such natural persons disclosure requirements. Either way, lawyers skilled in corporate structure, taxation, and privacy will be dining at the company and investor table and getting into the Act.
This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Helen D. (Heidi) Reavis who counsels clients in areas of corporate operations and management, employment matters and dispute resolution, and media and intellectual property law.
This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Counsel Michael D. Utevsky who counsels clients in areas of corporate operations and management, real estate and infrastructure, reorganization and bankruptcy, and trust and estates.