New York’s Beneficial Ownership Disclosure Targets LLC Investors

The New York LLC Transparency Act—requiring ultimate beneficial owners, or UBOs, to disclose identifying information that will appear on a state-run public database—is poised to become law.

Investors now 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 the federal beneficial ownership disclosure regime.

Comparison to US Law

The New York LLC Transparency Act is modeled on the US Corporate Transparency Act, enacted in 2021, incorporating its definitions of statutory terms and providing disclosure relief for exempt companies. Like the CTA, it aims to expose and prevent crime and corruption by disclosing identities of owners of limited liability companies and other business entities.

But in a marked departure from the CTA, New York intends to accomplish the enforcement objective by making UBO information available in a searchable database. This public database contrasts with UBO reporting to Financial Crimes Enforcement Network, a bureau of the Treasury Department.

Under the CTA, beneficial owner information primarily is for use in law enforcement and national security efforts, generally isn’t publicized, and is “kept confidential and treated as sensitive information, protected under the highest information security standards.”

The New York database would be available to all, not just to law enforcement, unless a waiver is granted and disclosure doesn’t serve public interest. Such a publicly available business entity database, which is common in the EU, UK, and other jurisdictions, is unprecedented for the US.

Under the state bill, UBOs may apply for a waiver citing privacy interests, but the examples of grounds for granting waivers in the proposed statute suggests relatively few reporting companies would qualify for exemption from disclosure. As a result, investors may no longer view New York 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.

Onerous Requirements

The New York bill requires an LLC’s member or a manager to include a statement in its articles of organization that the LLC is exempt from disclosure. That may prompt 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.

The bill 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 isn’t required to be disclosed publicly. Therefore, LLC investors will have some flexibility in complying with this organizational requirement under the legislation absent future stringent state regulations.

The legislation is even more onerous for LLCs formed in a foreign jurisdiction—generally, another US state or Washington, D.C.—that apply for authority to conduct business in New York. An existing LLC would have to file beneficial owner disclosure with an amended application. Alternatively, the LLC could file an initial report with FinCEN. These beneficial owner disclosure requirements apply only to reporting companies.

Unlike new ventures, existing LLCs already would have considered the CTA reporting obligations and would have less of a burden in complying with the New York legislation upon application for authority or amendment of application.

Failure to disclose UBO data would result in a “delinquency” after two years and another two months after the New York Department of State issues a notice to the company. The delinquency would carry a $250 fine and removal of company information from Department of State records. The legislation doesn’t define the term delinquency, although state regulations may elaborate on the definition. The bill refrains from stating that a delinquent business entity would be dissolved or lack authority to conduct business in New York.

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 bill in their know-your-customer and anti-money-laundering procedures. Business owners would be forced to comply with the legislation in order to close deals.

Next Steps

The bill would take effect a year after being signed into law, but the Department of State is authorized to issue final regulations before the effective date.

At FinCEN level, the CTA reporting requirements generally take effect on Jan. 1, 2024. But akin to the New York bill, the CTA provides a one-year reporting extension for existing LLCs. Business owners may need to wait for final state regulations to determine whether existing LLCs that become exempt from CTA requirements after Jan. 1, 2024, would still have to comply with the New York bill by Jan. 1, 2025.

If Gov. Kathy Hochul signs the legislation, foreign persons seeking to conduct business in New York should consult with tax counsel on compliance with the new law, as well as the interaction of beneficial ownership reporting rules under both FinCEN and New York State disclosure regimes.

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

Author Information

Marina Vishnepolskaya is an attorney and principal of Marina Vishnepolskaya, Esq., P.C. specializing in domestic and cross–border tax, ERISA, executive compensation, employee benefits, and exempt organization matters.