By: William L. Bricker & Maria Pigna
There are two requirements to organize a New York limited liability company: (i) pay a fee and (ii) provide the LLC’s name, the county in which it will do business, and an address. However, a March 2022 bill[1] introduced in the New York State legislature would impose broad disclosure requirements for New York LLCs and foreign LLCs doing business in New York. The stated reason for the proposed legislation was to target bad actors and bad landlords who nefariously operate behind the anonymity of an LLC, although one can speculate about the real reasons for the bill.[2] While sources predicted that it “could be voted on as soon as [May],”[3] the bill ended the legislature session “in committee.”
The NY LLC Transparency Act proposed legislation would require a New York LLC to disclose its beneficial owner’s (i) name, (ii) current residential or business street address, and (iii) an identifying number such as on a passport or driver’s license to the New York State Department of State (“DOS”) which will be stored in a searchable DOS public database. The New York Senate press release[4] states that individual information will be “protected”, although it would be subject to a New York Freedom of Information Law request.
As discussed in a previous blog,[5] the Corporate Transparency Act (“CTA”) became law on January 1, 2021. The CTA requires FinCEN[6] to promulgate regulations requiring “reporting companies” to disclose the name, date of birth, residential or business address and an identifying number of the reporting company’s “beneficial owners” to FinCEN. The CTA defines a “reporting company” as a US corporation, LLC or other similar entity of a foreign country registered to do business in the United States.
The CTA defines a “beneficial owner” as any individual who either exercises substantial control or owns or controls at least 25% of the ownership interests of the reporting company. The proposed regulations[7] (published in December 2021) provide that substantial control includes: (i) service as a senior officer, (ii) authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors of a reporting company, (iii) direction, determination or decision of, or substantial influence over, important matters affecting the reporting company, or (iv) any other form of substantial control over the reporting company. The Proposed Regulations clarify that an individual can exercise substantial control in multiple ways and lists some examples. Since the CTA depends upon final regulations, it is not yet enforced, despite its enactment some 18 months ago.
The CTA will require beneficial ownership information to be disclosed to FinCEN, the division of the Treasury responsible for enforcing anti-money laundering laws including detecting and reporting “suspicious activity”. Aside from slight variations in the definition of key terms, a notable difference between the CTA and New York’s legislation is that the CTA proposes to maintain this information in a nonpublic database, as opposed to a public database.
The NY LLC Transparency Act would define a beneficial owner as natural person who, directly or indirectly, (A) holds a membership interest in an LLC or a foreign LLC; (B) exercises substantial control over the decisions of a membership interest in an LLC or a foreign LLC; or (C) has been assigned a membership interest in an LLC or a foreign LLC.[8] Furthermore, if there is no “natural person” beneficial ownership, the disclosure will extend to a member, manager, shareholder, director, officers, partners, or any other authorized persons posing as a beneficial owner of the LLC.
This could mean that the disclosure will extend to entities such as limited partnerships, trusts, or even private charitable foundations. Therefore, if real estate in New York City is wholly owned by a New York LLC, which is wholly owned by a Delaware LLC, information about the beneficial owner of that Delaware LLC must also be disclosed.
[1] The bill is S8439B in the New York State and A9415C in the New York Assembly. [2] Interest in disclosing LLC ownership initially flourished in [2015] after the New York Times ran a five-part, front page article on LLCs used to own apartments in New York City’s AOL-Time Warner building. See generally Louise Story, et al., “Towers of Secrecy,” Parts 1-7, N.Y. Times, (Feb. 7-Dec. 14, 2015), https://www.nytimes.com/news-event/shell-company-towers-of-secrecy-real-estate. This article resulted in the U.S. Treasury Department issuing “Geographic Targeting Orders Treasury requiring the reporting of certain foreign owned purchasers (including LLCs) of U.S. real estate. [3]https://www.bloomberg.com/news/articles/2022-05-18/russian-billions-hidden-in-us-spur-backlash-to-financial-secrecy [4]https://www.nysenate.gov/newsroom/press-releases/brad-hoylman/shine-light-secretive-llcs-senator-hoylman-assembly-member [5]https://www.wbrickerlaw.com/post/corporate-transparency-act-will-require-beneficial-ownership-disclosures-by-corporations-and-llcs [6] The CTA is administered by the Financial Crimes Enforcement Network (“FinCEN”) which is part of the U.S. Department of Treasury. FinCEN is responsible for the enforcement of anti-money laundering laws. [7]https://www.govinfo.gov/content/pkg/FR-2021-12-08/pdf/2021-26548.pdf [8]https://legislation.nysenate.gov/pdf/bills/2021/s8439