New York Legislature Passes the LLC Transparency Act, Aims to Curb Illicit Business Activities.
Introduction.
New York is poised to implement the nation’s first publicly available beneficial ownership registry after the New York State Assembly and Senate passed the LLC Transparency Act[1] (the “NY Act”) last month. The bill is now bound for the desk of Governor Kathy Hochul.
On June 20, 2023, the New York State Assembly ratified the NY Act, signaling a substantial move towards increased transparency in the state. The law requires the disclosure of ultimate beneficial ownership information for limited liability companies (“LLC”) at the time of establishment or when qualifying to conduct business in the Empire State. This obligation also applies to LLCs created under New York law and to foreign LLCs permitted to conduct business in the state prior to the NY Act's enactment.
The legislation, if approved by Governor Hochul, will take effect a year after its endorsement.
What the Law is Today.
The current law in New York does not require the disclosure of beneficial owners of LLCs. This means anyone can form an LLC in New York without having to disclose their identity or the identity of the other owners of the LLC. Investors have enjoyed this inherent privacy and New York has traditionally been a favored destination for both domestic and foreign investors seeking to establish a business presence in the United States. The dynamic and multi-billion dollar New York City real estate market is especially popular, attracting numerous LLCs and other entities that own a substantial portion of properties throughout the city. The forthcoming regulations will now require these companies to publicly disclose their beneficial owners. Proponents of the legislation argue this is a significant step towards transparency and not only assures a more accountable business environment, but allows all stakeholders to follow and understand the flow of investments.
The Federal Counterpart - The Corporate Transparency Act.
The introduction of the New York LLC Transparency Act aligns with a broader national movement towards increased business transparency, reflected in the federal Corporate Transparency Act (the “CTA”) passed by Congress back in 2021, as part of the Anti-Money Laundering Act of 2020. The CTA requires "reporting companies" to report their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), a department of the U.S. Treasury Department. Under the CTA, beneficial owner information is mainly reserved for law enforcement and national security purposes. The collected information is kept confidential, not publicized, and treated as sensitive information under the highest security standards. The CTA is slated to take effect on January 1, 2024.
Comparing the NY LLC Transparency Act and the Federal Corporate Transparency Act.
The NY Act, fashioned after the CTA, employs the same statutory language and provides similar disclosure exemptions for eligible companies. Its objective, akin to the CTA, is to combat business crime and corruption. More specifically, the NY Act, like the CTA, governs both domestic and foreign entities required to file with the government for conducting business, but the NY Act specifically targets LLCs operating in New York. The NY Act incorporates key definitions from the CTA, including "beneficial owner", and models its exemptions after those found in the CTA. Furthermore, entities can fulfill NY's reporting requirements by filing a copy of their FinCEN report submitted under the CTA. Thus, these similarities make compliance streamlined for those already familiar with the federal CTA rules, offering an integrated approach to regulatory clarity.
The stark difference between the two is that the NY Act makes the collected information publicly available. The NY Act requires New York's secretary of state to maintain an online registry with full legal names of beneficial owners and entity information. This contrasts the CTA, where the collected information remains confidential, with limited exceptions. The publicized approach of the NY Act is novel in the U.S., although common in the EU, UK, and other jurisdictions.
Available Exemptions & Penalties for Noncompliance.
Provisions are in place for beneficial owners with significant privacy concerns to apply for waivers under the NY Act, preserving their name and/or business address confidentiality. However, given the NY Act's overarching objective to bolster transparency, a persuasive demonstration of the need for confidentiality would be necessary to qualify for a waiver.
With respect to compliance, if a company fails to disclose beneficial owners information, it is labeled "delinquent" after two years and two months following a notice from the New York Department of State. This comes with a $250 fine and removal of the company's information from state records. Although uncertainly remains on the compliance front as the NY Act does not define the term "delinquency” and is silent on whether a delinquent company could be dissolved or lose its New York business rights.
What’s Next.
As Governor Hochul considers signing the NY Act, LLCs either operating in New York or contemplating doing so should start preparing for potential enforcement of these new disclosure mandates. This could involve exploring applicable exemptions, weighing if they have significant privacy concerns warranting a public registry waiver, or re-evaluating their preparedness to conduct business in New York altogether. Consequently, a proactive approach is crucial in navigating these impending transparency requirements, ensuring companies align their strategic decisions with both their operational necessities and the evolving legal landscape.
For more information, contact Frank Vito: , 908-964-2446
[1] Senate Bill S00995B, Assembly Bill A3484A.
