In June, both the New York State Assembly and Senate approved passage of the Limited Liability Company Transparency Act [see https://bit.ly/3JMhqNu] (the “LLC Transparency Act” or “New York’s Act”). The bill is awaiting signature by Gov. Kathy Hochul and would go into effect 365 days after it is signed. The legislature’s stated purpose of the bill is “to end the practice of anonymous ownership of limited liability companies in New York by defining beneficial ownership, requiring the disclosure of the identities of beneficial owners upon company formation or registration, and publishing beneficial owners of limited liability companies in New York’s publicly searchable business entity database.” One of the key features of a limited liability company, which is to protect the identity of owners from being disclosed publicly, has been simply removed.
Potential real estate investors, who primarily set up limited liability companies when purchasing and investing in real estate, will undoubtedly think twice before they do so in New York. This will certainly have a chilling effect on future real estate investment in New York State. The passage of the LLC Transparency Act comes only a few years after the passage of LLC disclosure legislation in 2019, which required the disclosure of members’ names and the names of authorized persons and managers of the owner LLC in connection with the sale of 1-to-4 family residential real property. New York’s Act also follows closely the enactment, on the federal level, of the Corporate Transparency Act [see https://bit.ly/3JMXs59] which is set to go into effect on Jan. 1, 2024. The new LLC Transparency Act goes well beyond the scope of the 2019 Legislation and the CTA, and exposes private information in a public database for all to see.
The 2019 Law Requiring Disclosure on 1-to-4 Family Transactions
In September 2019, New York State and New York City passed legislation (collectively, the “2019 legislation”) which requires LLCs selling 1-to-4 family residential real property to file, along with the NYC or NYS transfer tax return, “a document which identifies the names and business addresses of all members, managers, and any other authorized persons, if any, of such limited liability company and the names and business addresses or, if none, the business addresses of all shareholders, directors, officers, members, managers and partners of any limited liability company or other business entity that are to be the members, managers or authorized persons, if any, of such limited liability company.” [See https://bit.ly/3PPwhdy (Section 1409 of the NYS Tax Law) and https://bit.ly/3XMdVMH (Section 11-2105 of the NYC Transfer Tax Law)].
The disclosure required under the 2019 legislation includes the indefinite and continuous disclosure of every individual (i.e., natural person) member of the principal LLC owning the real property and any authorized persons or managers of that principal LLC. If the principal LLC is owned by one or more underlying entities or LLCs, then the names of all members, shareholders, and authorized persons or managers of those entities must be disclosed (regardless of the number of underlying layers or entities that own an interest or manage the principal LLC), along with each of their business addresses.
The 2019 legislation was primarily enacted so that municipalities and agencies could be provided with the names of members or authorized persons so that these individuals may be held accountable for fines and violations (e.g., Environmental Control Board violations, etc.). Since the individuals’ information accompanies the NYS or NYC transfer tax return and is filed with the appropriate tax departments, and is not recorded in the County Clerk’s office with the deed to the property, the information is not made publicly available and is only disclosed for a limited purpose to address a specific problem relating to violations and the imposition of fines. This is a major difference between the 2019 legislation and the new LLC Transparency Act.
Justifications Behind the CTA and the LLC Transparency Act
Both the LLC Transparency Act and the CTA were principally enacted for purposes of curbing illicit activities. The Final Rule [see https://bit.ly/3pFufCn] issued by the Financial Crimes Enforcement Network explains that “illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.” FinCEN further points out that these “shell” or “front” companies often “shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while creating an uneven playing field for small U.S. businesses engaged in legitimate activity.” The CTA requires the disclosure of owners’ information so that the appropriate governmental agencies can have access to the personal information of individuals who may want to engage in criminal activity.
Similarly, the justifications cited by legislators in passing the LLC Transparency Act include the following: “Anonymous shell companies are used to bypass sanctions, avoid taxes, fund terrorist organizations and organized crime and launder money. Anonymous LLCs leasing real property are correlated with more numerous code violations, higher rents, and more evictions compared to non-corporate owners. Drug and human traffickers use anonymous shell companies like LLCs to launder the proceeds of their criminal activities and evade detection. Deed theft, campaign finance violations, and bid rigging can be facilitated by anonymous LLCs. Anonymous LLCs hamper routine code enforcement, burdening local governments.” While many of the aforementioned reasons offered above by the New York State Legislature are important, there are some that may not be supported by evidence.
Both the CTA and LLC Transparency Act focus on fighting and curbing illegal activity. In fact, New York’s Act is patterned after the CTA, and also cites and specifically includes certain provisions and definitions from the CTA. Additionally, New York’s Act adopts the same standards as contained in the CTA with regard to the information disclosure requirements.
Key Differences Between the CTA & the LLC Transparency Act
While the justifications behind the federal and state legislation are similar, there are key differences between CTA and the LLC Transparency Act. New York’s Act applies only to limited liability companies. However, similar to the 2019 legislation, if there are additional layers of entities that own the main entity, the disclosure of the individuals who own those underlying entities would be required to be disclosed. Additionally, New York’s Act applies to LLCs formed in New York and foreign (i.e., out-of-state) LLCs that are registered or required to register to conduct business in New York. The CTA, on the other hand, applies to all types of entities, including corporations.
Penalties and Fines Under the CTA and New York’s Act
Another difference between the two laws relates to the penalties for non-compliance. Under the LLC Transparency Act, if an LLC fails to file a beneficial ownership disclosure “for a period exceeding two years shall be shown to be delinquent on the records of the Department of State after a notice of delinquency has been mailed to the last known address of such reporting company, and such company has failed to file such information within 60 days of the mailing of such notice.” If the company fails to file the information, the Department of State will assess a civil penalty of $250.00 against the company. While it is not clear from the legislation, this delinquency notation may come up in a title search and may be required to be remedied before a seller will be permitted to close on a real estate transaction.
The CTA, in contrast, provides for much more severe penalties for non-compliance. If a company or owner willfully or intentionally violates the CTA’s reporting requirements, the company could be subject to civil penalties of up to $500 per day for continuing violations. Owners could also face criminal penalties of up to $10,000 and imprisonment for up to two years.
Privacy Concerns: New York’s LLC Transparency Act Goes Too Far
Another critical difference between the LLC Transparency Act and the CTA is the disclosure of personal information to the public. Under the CTA, FinCEN is required to maintain disclosed information of beneficial owners in a confidential, secure and non-public database. The CTA also provides significant protections against unauthorized disclosure. An individual disclosing such information could face a criminal penalty of up to $250,000 or five years in prison. It is clear that the CTA was carefully tailored and limited to achieve a specific goal.
The LLC Transparency Act, in stark contrast, creates a publicly available database on the Secretary of State’s website which will contain, among other things, the name of the LLC, the business address of the LLC and the full name of each beneficial owner of the LLC. New York’s Act goes too far in disclosing this information in a public database for all to view and access. Using the language cited in New York’s Act itself, disclosure of this information to the public serves “no public interest.” If there are illicit or criminal activities, it is sufficient that the governmental agencies have this information and utilize it only when needed for a legitimate purpose in order to curtail or stop such activities, and making private information available to the public is not necessary to achieve those objectives.
The LLC Transparency Act does provide that beneficial owners may apply for a waiver to withhold their personal information. The bill requires that the Department of State “establish, though regulations, procedures to allow beneficial owners…who site significant privacy interests to apply for a waiver to withhold the name and/or address of a beneficial owner.” However, the burden of proof would be on the beneficial owner to “demonstrate that a significant privacy interest exists,”, which standard will be difficult to meet as is evident from the language of New York’s Act.
Be Ready for Compliance, It’s Right Around the Corner
The CTA goes into effect on Jan. 1, 2024 and New York’s LLC Transparency Act will go into effect 365 days after the bill is signed by the governor. While there is still some time, it is important that business owners review their entities and adequately prepare for compliance. It is important to review the structure of existing companies and prepare in advance to file the necessary disclosures. While many smaller entities are owned by one or two members, there are many that are owned through various layers of other entities, and include dozens and hundreds of members, and/or are operated or managed by numerous individuals. It is important to contact accounting and legal professionals in order to determine what will need to be filed and to discuss potential alternative entities. Again, it is important to note that the CTA covers all entities and New York’s Act only applies to LLCs, and since real estate investment in New York is primarily done through LLCs, this will certainly affect investment going forward.
