New York Will Require Disclosure of LLC Owners

In late June, the New York legislature passed a bill (AO3484) known as the “LLC Transparency Act” (the “Act”). The Act will require limited liability companies to disclose the names of their beneficial owners at the time of formation or qualification to do business in New York. Although the Act will not become law until signed by Governor Hochul, the Governor is expected to sign it into law, which will take effect one year thereafter.

The LLC Transparency Act comes after the adoption in September 2022 of a similar federal rule requiring beneficial ownership information reporting for many companies known as the “Corporate Transparency Act”. The Corporate Transparency Act goes into effect on January 1, 2024 and applies to corporations, LLCs, and other entities, unlike the LLC Transparency Act which applies only to LLCs.

Both pending laws are in response to the government cracking down on the use of anonymous entities to conduct illegal activities like money laundering and tax evasion. The New York legislature is also concerned with anonymous LLCs leasing real property, which it stated are correlated with higher numbers of legal violations, evictions, and higher rents. See NY Assembly Bill AO3484.

Currently, New York LLC owners can form their LLCs while maintaining anonymity. Articles of organization are not required to include any identifying information beyond the county where the LLC is located. In addition, the articles do not have to be signed by a member or manager. A registered agent or other authored organizer, such as an attorney, can sign the articles of organization as well as file them with the New York Department of State (“DOS”). An authorized third-party can also sign applications for authority, in the case of foreign LLCs.

After the passage of the Act, however, New York LLCs will be required to include in their articles of organization (and foreign LLCs in their application for authority to do business) “a beneficial ownership disclosure”. The beneficial ownership disclosure must include the following information for each beneficial owner: 1) full legal name; 2) date of birth; 3) current business street address; and 4) identifying number from a passport, driver’s license, or government-issued ID.

In addition, New York LLCs must amend their articles of organization after a change in beneficial owner information. Similarly, foreign LLCs that are required to report beneficial owner information under the Corporate Transparency Act must amend their application for authority after a change in beneficial ownership information.

Although existing LLCs won’t need to file a disclosure statement upon passage of the Act, New York will enforce the new requirement on many existing LLCs by requiring that LLCs file a beneficial ownership disclosure any time they amend their articles of organization. Thus, LLCs will not be able to make changes to their names or addresses for service of process, for example, without filing a disclosure statement.

For purposes of the disclosure, a “beneficial owner” means an individual who owns or controls 25% or more of the LLC. “Beneficial owner” also more broadly includes any individual who exercises substantial control over the entity, regardless of percentage ownership (for example, a founder who is phasing out ownership in preparation for retirement but still largely influences the company). Also, ownership or control can be direct or indirect, likely bringing into the disclosure requirements owners of upper-tier entities. Thus, a parent-subsidiary structure won’t suffice to circumvent the new requirements.

Notably, “beneficial owners” do not include: 1) minor children if the information of their parent or guardian is reported; 2) certain agents of individuals (such as nominees or custodians); 3) employees who act solely as employees and don’t get any economic benefits from an LLC other than employee salary and benefits; 4) individuals who only have an interest in the LLC through inheritance; and 5) creditors (unless the creditors are themselves beneficial owners).

Importantly, for New York LLCs (and foreign LLCs qualified in New York) that are also required to report beneficial owner information under the Corporate Transparency Act, the full names of LLC beneficial owners will be included in the DOS’s online, searchable public database. (Although other information reported, such as date of birth, address, and ID number will remain confidential except in the case of a court order or for purposes of law enforcement).

For an LLC with a legitimate need for preventing public disclosure of its owners, there are two potential exceptions to disclosure. The first is at the company level. There are 23 categories of companies exempt from the disclosure requirements, including certain banks, credit unions, brokers, investment advisors, venture capital fund raisers, insurance companies, accounting firms, public utilities, tax-exempt entities, large operating companies (more than 20 employees and more than $5,000,000 in gross receipts), and inactive entities. New LLCs must include in their initial articles of organization a statement indicating the provision of law under which they are exempt, and existing LLCs must file this statement with DOS by January 1, 2025.

The second exception is at the owner level. Beneficial owners with significant privacy interests may apply for a waiver to withhold their names from the DOS online database. However, New York is unlikely to grant these waivers lightly. The NY legislature has indicated that a beneficial owner must either be participating in an address confidentiality program or acting as a whistleblower using an LLC to file a false claims act lawsuit on the government’s behalf to qualify for a disclosure waiver. See NY Assembly Bill AO3484.

If an LLC fails to report required beneficial owner information, such information will be marked as “past due” in DOS records. If an LLC fails to report such information for two years or more, the LLC will be shown as “delinquent” in the DOS online database. To regain compliant status, the LLC must file its delinquent report and pay a penalty of $250.

New York LLCs and those that do business in New York should begin planning for the upcoming changes by considering whether they may be exempt from the beneficial ownership disclosure requirements.

If you have any questions regarding the LLC Transparency Act, please contact Vittoria L. Buzzelli.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2023 Harter Secrest & Emery LLP