New York’s LLC transparency bill lacks the power of its American twin

New York’s LLC transparency bill lacks the power of its American twin

New York’s LLC Transparency Act, which awaits Gov. Kathy Hochul’s (D) signature or veto, in many ways mirrors existing federal provisions in the Corporate Transparency Act — except in the most critical cases.

The state legislation — the first of its kind in the United States — aims to make it harder for owners of LLCs that are created or do business in New York to protect or hide assets, or avoid state and federal income taxes. In general, the bill would require existing LLCs and any newly incorporated corporations to disclose a list of all beneficial owners with the Department of State.

The New York bill is similar to the federal law in that both are designed to increase reporting of the ultimate beneficial ownership of corporate entities doing business in the United States or New York State. Both also require beneficial owners to provide details about ownership structures to specific government agencies and update the agencies whenever there is a change in ownership. The New York bill would also provide the same exceptions currently provided by federal law.

This is where the similarities end. New York’s bill would make ownership information largely available to the general public, unlike the Corporate Transparency Act, which limits public access to records that reflect beneficial ownership.

The most important difference, and one that could be crucial to the bill’s actual effectiveness (should Hochul sign the legislation) are the different potential ramifications for violations of each law.

The Corporate Transparency Act is administered and enforced by the Federal Financial Crimes Enforcement Network. FinCEN’s primary mission is to “protect the financial system from illicit use, combat money laundering, and enhance national security.”

New York’s LLC Transparency Act would be administered and enforced by a state agency whose primary goal is to help launch new businesses and “help revitalize the state’s economy and make its communities more livable.”

These vastly different priorities are reflected in the potential penalties for LLCs violating each of their disclosure rules. Entities that violate federal law face fines ranging from $500 to $10,000 per violation and up to two years in federal prison. Meanwhile, LLCs that violate New York’s measure would face only a general listing as noncompliant in the state’s database and a civil fine of just $250.

The stark difference in these potential consequences raises a fundamental question about risk versus reward for an LLC operating in New York. Specifically, will the cost of compliance be equal to the potential cost of violating the law? This question is most easily answered by owners of LLCs subject to federal law.

Most will avoid the risk of significant financial penalties and/or imprisonment simply by making a non-public disclosure to FinCEN. But the ownership of an LLC that owns, say, a $50 million unit in an exclusive building located on Billionaire’s Row in Manhattan, may determine that it is worth a small fine and an adverse hold in state records for hiding detailed ownership data from the public. This data could include business competitors, creditors, potential plaintiffs, angry ex-spouses, foreign governments, or even federal investigators.

All sound business decisions depend largely on basic economics. The concept of “effective breach,” whereby violating an agreement is less costly than performing under the terms of the agreement, is a well-established legal fact. New York LLCs will almost certainly engage in a similar analysis if the bill becomes law, weighing the costs of compliance (including potential costs that might result from public disclosure of sensitive proprietary information) against the minimal costs of noncompliance.

LLCs are typically used to hide individual ownership of high-value assets, often condominiums, yachts, or other multi-million dollar tangible property, as the true owners may not want them easily discovered on the face of a title deed or other evidence of ownership. Owners sometimes use the limited liability company (LLC) structure simply (and legally) for asset protection reasons, but in other cases, an LLC can be a tool to hide income or launder money gained from illegal activity.

It is certain that many LLCs will choose to consider the proposed $250 penalty as just another cost of operating in New York, rather than fully disclosing the LLC’s ownership structure.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their respective owners.

Author information

Brian Ketcham is a defense attorney and tax controversy expert in New York City.

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