Introduction. On January 9, 2023, New York State (“State”) Senate introduced the New York LLC Transparency Act, S. 995-B (the “Act”) requiring ultimate beneficial owners (“UBOs”; in singular, a “UBO”) to disclose identifying information, which will be available on a State-run public database. On June 20, 2023, the State Assembly passed a mirror version of the Senate bill. Investors must weigh key disclosure rules that affect choice of jurisdiction for doing business, location of real property investments, organizational formalities, regulatory compliance and interaction with Federal beneficial ownership (“BO”) disclosure regime.
Contrast with CTA. Mandated public disclosure of UBO data by business entities is similar to long-standing publication of business entity information in jurisdictions, such as the E.U. and the U.K. But the Act’s public database contrasts with UBO reporting to Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury (“Treasury”) under the U.S. Corporate Transparency Act (“CTA”), enacted in 2021. The CTA adds section 5336 to the Bank Secrecy Act, 21 U.S.C. sections 5311 et seq., originally enacted in 1970 (“BSA”). Under the CTA, BO information primarily is for use in law enforcement and national security efforts, and generally is not publicized and “will be kept confidential and treated as sensitive information, protected under the highest information security standards.”
New York LLCs under the Act. The Act is modeled on the CTA, and incorporates definitions of statutory terms under the CTA. Akin to the CTA, the Act provides disclosure relief for “exempt companies”. However, the Act goes further by imposing requirements for LLC formation. Thus, a requirement to include in articles of organization a statement by a member or a manager that the LLC is exempt prompts business owners to evaluate organizational and management structure of the LLC in light of UBO disclosure in early business planning stages. Accordingly, business owners may wish to avoid the UBO reporting burden by doing business in another jurisdiction.
However, the Act is silent on liability protection of LLC members if the statement in the articles later is determined to be incorrect. Also, the articles are an internal document that is not required to be disclosed publicly. Thus, LLC investors will have some flexibility in complying with this organizational requirement under the LLC Act, absent future stringent DOS regulations.
Foreign LLCs Under the Act. Compared to domestic LLCs (formed under the LLC Act), new LLC Act section 810 is more onerous for LLCs formed in a foreign jurisdiction (generally, another U.S. state or the District of Columbia), which apply for authority to conduct business in the State. Pursuant to LLC Act section 804(c), an existing LLC would have to file BO disclosure with an amended application. Alternatively, the LLC could file an initial report with FinCEN. These BO disclosure requirements apply only to reporting companies. Thus, unlike new ventures, existing LLCs already would have considered the CTA reporting obligations and would have less of a burden in complying with the Act upon application for authority or amendment of application.
Purpose of the Act. Similarly to the CTA, an objective of the Act is to expose and prevent crime and corruption by disclosing identities of owners of LLCs and other business entities. However, in a marked departure from the CTA, State legislature intends to accomplish the enforcement objective by making UBO information available in a searchable database, not just to law enforcement, unless a waiver is granted, and disclosure does not serve public interest. The Act creates a publicly available business entity database, which is common in the EU, U.K. and other jurisdictions but is unprecedented for the U.S. Under the Act, UBOs may apply for a waiver citing privacy interests, but the examples of grounds for granting waivers statute suggests relatively few reporting companies would qualify for exemption from disclosure. Thus, investors will no longer view the State as a haven for anonymous transactions. In particular, buyers of New York real property who legitimately prioritize privacy may reduce their transactional activity in the State.
What is a delinquency? On the other hand, the penalties are relatively minor under the Act. Failure to disclose UBO data would result in a “delinquency” after two years and another two months following issuance of a DOS notice to the company, in a $250 fine and in removal of company information from DOS records. The Act does not define the term “delinquency”, although DOS regulations may elaborate on the definition. The Act refrains from stating that a delinquent business entity would be dissolved or lack authority to conduct business in the State. However, counterparties in business transactions likely would include representations and covenants in purchase agreements to protect themselves against delinquency status. In addition, financial institutions likely would incorporate compliance with the Act in their KYC and AML procedures. Thus, business owners would be forced to comply with the Act in order to close deals.
Effective Date of the Act and Interaction with the CTA. The Act would become effective a year after being signed into law, but DOS is authorized to issue final regulations before the effective date. At FinCEN level, the CTA reporting requirements generally become effective January 1, 2024, but akin to the Act, CTA provides a one-year reporting extension for existing LLCs. Thus, business owners may need to wait for final DOS regulations to determine whether existing LLCs that become exempt from CTA requirements after January 1, 2024 would still have to comply with the Act by January 1, 2025.
Action Items for LLC Investors. If the Act is signed into law by the Governor, foreign persons seeking to conduct business in New York would find advisable to consult with tax counsel not only on compliance with the Act, but also on the interaction of beneficial ownership reporting rules under both FinCEN and New York State disclosure regimes.