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On June 20, 2023, the New York State Assembly enacted the LLC Transparency Act, a bill that would require the disclosure of the beneficial owners (i.e. those who own an interest of 25% or more in the entity) of limited liability companies (LLCs) formed under the laws of the State of New York or qualified do business in New York. The disclosure requirements of the bill would apply to LLCs formed prior to and after the effective date of the bill, in addition to foreign LLCs qualified to do business in New York prior to and after the effective date of the bill. In addition to the disclosure requirement, the bill would also create a searchable public database, maintained by the Department of State, containing the names of the beneficial owners of LLCs. If executed by Governor Hochul, the bill is set to take effect one year thereafter.

LLCs are among the most-popular business entity structure due to the ease of formation, ownership flexibility and tax benefits. In the wrong hands, however, this ownership structure can be misused in order to shield the beneficial owners’ true identities, making LLCs attractive to those individuals seeking to conceal their involvement in unscrupulous business practices and financial activities. The bill’s sponsors designed the bill to take aim at the potential misuse of LLCs for illegal activities, such as money laundering, tax evasion, and code violations that go unaddressed by untraceable property owners. The bill’s intention is to limit the amount of shady activities that are shielded via the use of LLCs by requiring companies to provide the state with basic information pertaining to all individuals with ownership interests in LLCs, including their names and business address.

The sponsors of the bill tout the potential benefits of the bill including curbing financial crimes by revealing the true owners behind LLCs, enhancing the effectiveness of law enforcement by allowing agencies to seamlessly tie LLCs to the bad actors behind such entities, and establishing safeguards for businesses and consumers by allowing such persons to verify the identities of the individuals behind the companies they deal with.

According to some of the bill’s supporters, corrupt activities carried out by LLCs are especially prevalent in the real estate and construction industries. The bill recently gained the support of the New York City District Council of carpenters, which praised it for ensuring “that unscrupulous contractors are no longer able to hide behind anonymous LLCs.” Some believe that the bill’s disclosure requirements and corresponding database will provide construction unions and others in the construction industry with a clearer picture of a contractor’s history of worksite injuries and code violations. As for the real estate industry, the sponsors of the bill believe that it will help identify bad actors in real estate without casting a negative net over the industry as a whole. The sponsors appear confident that bill will better equip lawmakers to enact legislation that will help small property owners refute allegations that they own hundreds of apartment units.

Critics of the bill argue that the supposed benefits of the bill are greatly outweighed by its potential negative impacts. Some critics of the bill argue that the bill’s disclosure requirements and corresponding database pose potential privacy concerns for the legitimate business owners operating under LLC ownership structure. Additionally, some critics are concerned that the bill could potentially drive investment away from the state and make business and property owners increasingly more vulnerable to identity theft.

The bill addresses some of the privacy concerns by requiring the New York secretary state to form regulations to allow beneficial owners with significant privacy interests to apply for waivers to keep the name and/or business street address confidential. It should be noted that beneficial owners will likely need to demonstrate a strong showing of need for confidentiality to obtain a waiver.

LLCs that fail to comply with the bill for a period exceeding 30 days would be reflected as past due in the secretary of state’s records until the LLC files an updated beneficial ownership disclosure. If an LLC fails to file the required disclosure for a period exceeding two years, the entity would receive a notice from the secretary of state and will have 60 days to file the disclosure. If the LLC fails to file within that 60 day period, the entity would be noted as delinquent in the secretary of state’s records, required to pay a civil penalty of $250, and must file the required disclosure to remove the delinquency. As currently drafted, the bill does not contain any criminal penalties for non-compliance.

Of course, there is no guarantee that Governor Hochul will sign the LLC Transparency Act into law, however, individuals that do business under a LLC ownership structure in New York should prepare themselves for the potential reporting requirement. For example, individuals may want to consider applying for the privacy waiver, or perhaps changing their entity choice if privacy concerns exist.

By Michael A. Mulia