New York’s LLC Transparency Bill Lacks the Teeth of Its US Twin

New York’s LLC Transparency Act, which is awaiting Gov. Kathy Hochul’s (D) signature or veto, in many ways mirrors existing federal provisions in the Corporate Transparency Act—except where it matters most.

The state legislation—the first of its kind in the US—aims to make it difficult for owners of limited liability companies that are created or do business in New York to protect or hide assets, or to avoid state and federal income taxes. In broad terms, the bill would require both current and any newly established LLCs 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 they both are designed to increase reporting related to the ultimate beneficial ownership of corporate entities doing business in the US or New York state. Both also affirmatively require beneficial owners to self-report details about ownership structures to specific government agencies and update the agencies whenever a change in ownership takes place. New York’s bill also would provide the same exceptions that the federal law currently provides for.

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

The most crucial difference that might be critical to the bill’s actual effectiveness (should Hochul sign the legislation) is the different potential repercussions 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 “safeguard the financial system from illicit use and combat money laundering and promote national security.”

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

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

The stark difference in these potential consequences begs a basic risk-versus-reward question for an LLC operating in New York. Specifically, would the cost of compliance be worth the possible cost of violating the law? That question is more easily answered by the owners of an LLC subject to the federal law.

Most would avoid the risk of large financial sanctions and/or jail time by simply filing a non-public disclosure with FinCEN. But the ownership of an LLC that, for example, owns a $50 million unit in an exclusive building located on Billionaire’s Row in Manhattan might determine that it’s worth a small fine and a negative comment in state records to hide detailed ownership data from the public. Such data could include business rivals, creditors, potential plaintiffs, angry former spouses, foreign governments, or even federal investigators.

All sound business decisions are based largely on basic economics. The concept of “efficient breach,”in which it’s less costly to violate an agreement than perform under the terms of the agreement, is a well-established legal reality. New York LLCs are sure to engage in a similar analysis if the bill becomes law, whereby they’ll weigh the costs of compliance (including the possible costs that might stem from public disclosure of sensitive ownership information) against the minimal costs of noncompliance.

LLCs are commonly used to mask the individual ownership of high-value assets, often multimillion dollar condominiums, yachts, or other tangible property where the true owners may not want to be easily discovered on the face of a deed, title, or other record proof of ownership. Owners sometimes use an 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 illicit activity.

To be sure, many LLCs will opt to factor in the proposed $250 penalty as simply another cost of operating in New York, as opposed to making full disclosure of 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 its owners.

Author Information

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

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