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Proposed Legislation in New York State Would Require Disclosure of the Beneficial Owners of Limited Liability Companies

New York, N.Y. (August 14, 2023) – In an unprecedented move, both the New York Senate and Assembly have approved Senate Bill 995, also referred to as the “LLC Transparency Act,” which would require the disclosure of the beneficial owners of limited liability companies (LLCs) in the State of New York. The LLC Transparency Act defines a “Beneficial Owner” to include any individual who, directly or indirectly: (a) exercises substantial control over the LLC; or (b) owns or controls not less than 25% percent of the ownership interests of the LLC. The LLC Transparency Act is currently awaiting Governor Kathy Hochul's signature to become law.

Legislative History And Background

The proposed legislation is intended to address various issues arising from the use of anonymous LLCs in New York since the 1990s to evade sanctions and taxes, and to finance illegal activities such as terrorism, organized crime, and money laundering. In particular, the sponsors of the LLC Transparency Act focused on targeting and correcting the use of anonymous LLCs in connection with purchasing and leasing real estate. Real estate leasing by anonymous LLCs has been linked to an increase in code violations, higher rents, and increased evictions, as compared to non-corporate property owners. Further, the prevalence of anonymous ownership in New York's real estate sector has hampered policy-making and has muddled the essential question of property ownership. To rectify these problems, the proposed legislation seeks to introduce measures that enhance transparency and accountability for anonymous LLCs operating in the state.

The LLC Transparency Act draws inspiration from the federal Corporate Transparency Act (CTA), which was passed in 2021. The LLC Transparency Act adopts the same definitions of statutory terms as its federal counterpart and offers disclosure relief for exempt companies. The LLC Transparency Act and the CTA were both created to combat criminal activities and corruption by requiring the disclosure of ownership information for LLCs. However, unlike the CTA, which protects the confidentiality of beneficial owner information, the LLC Transparency Act would make beneficial owner information publicly searchable through an online database. The database would include information such as the entity’s name, its business address, and the full names of each beneficial owner. Under the LLC Transparency Act, the Secretary of State would be obligated to establish regulations that enable beneficial owners with "significant privacy interests" to seek waivers which, if granted, would maintain their confidentiality in the public database that discloses beneficial ownership information.

Summary Of Statutory Mandates

If passed into law, the LLC Transparency Act would take effect one year after its enactment and would require, among other things, the following:

  • Beneficial owners of LLCs that are formed in New York State, or qualified to conduct business within the State of New York, would be required to be disclosed. Domestic and foreign LLCs existing in New York before the LLC Transparency Act’s enactment would also be required to disclose their beneficial owners. At this point in time, the LLC Transparency Act is only applicable to LLCs.
  • The LLC’s beneficial owner information would be searchable through an online database, which would include information such as the entity’s name, its business address, and the full name of each beneficial owner.
  • The New York Secretary of State would be obligated to establish regulations that enable beneficial owners with "significant privacy interests" to seek waivers. These waivers would allow them to maintain confidentiality in the public database that discloses beneficial ownership information.
  • Domestic LLCs formed after the effective date of the LLC Transparency Act will be required to file its beneficial owner information with its articles of organization. Foreign LLCs qualified to do business in New York after the LLC Transparency Act’s effective date will also have to file its beneficial owner information with its application for authority to do business in New York.
  • Domestic and foreign LLCs formed on or before the effective date of the LLC Transparency Act must file an updated beneficial disclosure document by January 1, 2025.
  • If a change in beneficial owner information occurs after such initial reporting, the LLC must file an amendment to its articles of organization within 90 days of such change. However, foreign qualified LLCs must amend their applications for authority upon any change to its beneficial owner information.
  • LLCs that fail to disclose beneficial ownership information within the time limits prescribed by the Secretary of State will be marked as past due in the Secretary of State’s records until the LLC provides an up-to-date beneficial ownership disclosure.
  • Failure to disclose beneficial ownership for a period exceeding two years and 60 days would result in the LLC being labeled as delinquent in the Secretary of State’s records. In order to rectify this delinquency, the LLC would have to pay a civil penalty of $250 and submit the necessary beneficial ownership disclosure.
  • A delinquent LLC status could potentially prevent an LLC from obtaining a Certificate of Status from the Department of State that may be required in connection with qualifying to do business in another state, opening business bank accounts, obtaining commercial loans, or in connection with real estate, M&A or other business transaction.

Consideration And Conclusion

While there is no certainty regarding Governor Hochul’s endorsement of the LLC Transparency Act, LLCs already operating in, or intending to do business in New York should be prepared for this potential reporting requirement. In particular, entities should carefully assess potential exemptions, evaluate if they possess significant privacy interests that could warrant a waiver from inclusion in New York's public database, and consider the option of forming a different type of entity in New York that is not currently subject to disclosure requirements. By engaging in proactive planning, LLC owners can be better prepared for compliance and the potential chilling impact resulting from the enactment of the LLC Transparency Act.

For more information on this topic, contact the authors of this alert. Visit our Business, Finance & Transactions and Real Estate & Land Use Practice pages for additional alerts in this area.

Authors:

Frank J. Cerza, Partner & Co-Chair of Real Estate & Land Use

Katherine Franck, Attorney

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