Understanding the Limited Liability Transparency Act
By Bonnie Berkow and Joshua Glatter
On June 20, 2023, the New York State Assembly passed amendments to the LLC Transparency Act amending sections of New York’s Limited Liability Company Law to require the disclosure of information relating to the beneficial owners of a limited liability company registered or qualified to do business in New York. The amendments take effect one year after the bill is signed by the Governor and would establish a public searchable data base of the names of an LLC’s beneficial owners as well as the name and business address of the company. Though largely rooted in concerns about abuses of the LLC corporate form, particularly with respect to combatting money laundering and other forms of illicit finance, as is so often the case, changes to a legal regime can carry in their wake the additional “law of unintended consequences.” In this era of broad dissemination of information and misinformation on social media, the new law subjects’ individuals with a legitimate need for privacy to abuse and possible harassment by others who can ascertain their identity. Because the public data base also contains the address of the business, and the business address may also be the residential address of the beneficial owners, persons who wish them harm could learn where they live. On the other hand, the new law does nothing to further the objective of crime prevention. If the primary purpose is to facilitate prosecution of those who perpetrate crimes under cover of an LLC, then there is no need to have this information on a public data base and should be limited to access by the relevant governmental authorities.
Under the statute as amended, the term “beneficial owner” means an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) owns or controls at least 25% of the ownership interests of the entity or (ii) exercises substantial control over the entity. “Substantial control” has been defined as the ability to make important business decisions on behalf of the entity. Ownership or control of a company or its ownership interests may include the following: joint ownership with one or more other persons; through another individual acting as a nominee, intermediary, custodian, or agent; as trustee, grantor/settlor, or beneficiary of a trust; or through ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting entity.
The following are not considered beneficial owners:
- A minor child (as defined in the state where the company was formed) if the information of the parent or guardian is reported;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- A non-owner employee of the company;
- An individual whose only interest in the company is through a right of inheritance;
- A creditor of the company.
Once the statute goes into effect, New York’s public data base would include the full legal name of the beneficial owners and the business street address. The disclosure requirements also require disclosure of the date of birth of the beneficial owners and a unique identifying number, such as a driver’s license, passport number, State identification card number or military identification number. These additional disclosures are not included on the public data base and are deemed confidential except for law enforcement purposes or as may be required to be disclosed by Court order. The beneficial owner may apply for a waiver by citing significant privacy interests such as participation in an address confidentiality program or in a whistleblower (“qui tam”) action to recover money obtained by fraud on behalf of the government.
The disclosure of beneficial ownership is required for any LLC registering articles of organization or amendments thereto. For any existing LLC, the beneficial owner disclosure must be filed by January 1, 2025. If the entity fails to file the information for a period exceeding thirty days from the date when due, it will be shown as past due on the records of the Department of State. If the entity fails to file the beneficial ownership disclosure for a period of two years, it will be shown as delinquent on the records of the Department of State after a notice of delinquency is mailed and the information is not filed within sixty days of mailing. The delinquency will be removed after filing of beneficial ownership disclosure and payment of a civil penalty of $250. Although the Department of State is not likely to administratively dissolve the LLC, the members of the LLC may lose their limited liability protections. If the LLC is declared delinquent, it would be unable to obtain a Certificate of Good Standing. Therefore, a delinquent status may result in an inability to obtain financing, to transfer or sell the business, or even to obtain access to the courts.
While similar beneficial owner disclosures are required by the federal Corporate Transparency Act’s (CTA) beneficial ownership information reporting provisions, a significant difference is that under the CTA the data collected by Financial Crimes Enforcement Network (FinCEN) is confidential with authorization to disclose only in limited circumstances to certain government authorities and financial institutions. In contrast, the New York LLC Transparency Act requires the Department of State to maintain a publicly accessible open-source online data base that includes the full legal name of the beneficial owner(s) of LLC’s organized in New York and foreign LLC’s qualified to do business in New York. The public data base also includes detailed information about the entity including its full name and business address.
Although the impetus behind the amendment may be admirable, the practical implications and potential threat to legitimate privacy interests are of material concern. LLC members often have legitimate interests to maintain confidentiality of their identities, especially to the general public at large. For example, an LLC member may be a foreign national living in a high-risk jurisdiction where disclosure of their identity as one receiving distributions from the entity exposes them to harm. Celebrities may often purchase real property through an LLC in order to protect their anonymity. In other cases, an individual may form or become a member of an LLC to maintain a competitive business edge, particularly if they would otherwise be known in a given industry. In other cases, there may be complex interpersonal family disputes or a need to shield assets. Or a philanthropic donor wishes to make their donation through an LLC on an anonymous basis. That isn’t to say that money laundering is not an area of legitimate concern, but if that is the driving force, one must question why this data must be accessible to the entire public rather than those agencies or departments that have a genuinely acute need for it.
In addition to privacy concerns, LLCs are typically formed to limit liability for business debts and claims against the business. While it may be appropriate – as is the case in the federal law – to allow government authorities who are seeking to battle money laundering or terrorism financing with the ability to access the names of individuals who are acting under the auspices of a corporation or LLC, making it available to the entire world on a public data base absent of requiring any show of genuine need presents the risk that the disclosure will be used indiscriminately to sue individuals personally who are otherwise insulated from liability as a matter of law. Even worse, as noted above, it may also be used by persons looking to harass or harm individual LLC members, whether by taking unfair business advantage, disclosing the whereabouts of a controversial or famous individual, or even cyberbullying. New York State has, of course, genuine interests in combatting illicit finance, but it is hard to understand why the State would implement a program far broader and intrusive than federal authorities, who typically are on the front lines of money laundering and terrorism finance threats, given their frequently transnational nature.
Certainly, there may be instances where disclosure of members outside of a law enforcement setting is appropriate, but an open source, universally accessible database is not necessary to achieve that. For example, when a case is brought in federal court based on “diversity jurisdiction,” meaning that the parties are from different states, unlike corporations whose citizenship is determined by their state of incorporation or their principal place of business, an LLC’s citizenship is based on the citizenship of each LLC member. That member may often be another LLC, rendering it difficult for a litigant to determine whether they have a sound basis to assert diversity jurisdiction. But there are many ways to tackle that problem without the need for a public database. New York LLC law could be amended, for example, to make clear that any LLC incorporated in New York is a citizen of New York regardless of the members’ individual citizenship. Or pleading rules can be amended to relax requirements of alleging LLC members citizenship at the pleading stage, with any information in that regard to be disclosed only after the case has been filed, the litigant has demonstrated their good faith efforts to independently determine that information, and the information is provided on a strictly confidential, court-supervised basis. Instead, it seems New York has made the classic error of “using a shotgun rather than a scalpel” to address the issues, and the statute also seems to reflect a failure to acknowledge and give serious consideration to legitimate privacy interests that will be unfairly impacted.
That is all before the concerns from the compliance costs that the new statute entails, especially on small businesses and property owners, who now must satisfy both federal and state standards. It seems especially unfairly burdensome to require an LLC to disclose the names of beneficial owners where the members of that LLC may themselves be an LLC and the company’s structure may continue in this form for several levels. The identity of the individual owners of each member entity, some of whom may be domiciled in other States or even other countries, may not be easily ascertained and, if disclosed on a public data base could adversely impact their private, personal, and financial interests for the reasons detailed above. As noted above, the statute does permit LLC members to apply for a waiver, but apart from bureaucratic delays, the rather limited bases to receive such waiver, and the impossibility of knowing whether the agency will grant the waiver, there is also the reality that an LLC member’s circumstances change over time. A person whose business is at a nascent phase may have different privacy concerns than they may have when the business grows and expands. But once the “horse has left the barn” and any member of the public can learn the member’s identity and address, the privacy interests are already compromised, threatening to render a later waiver of limited utility. Stated differently, to limit waivers to the unique situation of serving as a confidential informant, whistleblower or similar is unfairly dismissive of LLC members’ legitimate privacy concerns that do not involve such extreme circumstances.
In sum, New York’s admirable effort to mitigate criminal activity unfortunately reflects a “failure of imagination” when it comes to balancing law enforcement interests with privacy interests, as is the case with the federal Corporate Transparency Act. The statute also seems to reflect a mistaken view that privacy is, per se, undesirable, perhaps because many incorrectly believe LLCs are simply tools for the wealthy to engage in tax strategies. The State Legislature would be wise to reconsider its approach, and limit access of often highly sensitive identifying information, and tailor the statute so that it serves as an effective means of fighting illicit finance, rather than a vast library that can be easily used for mischief, or worse. Importantly, while LLC members may often be wealthy, be they natural persons or juridical entities, and may bear the largest risks when their identities and addresses are disclosed, small, modest, businesses, and persons of more modest means also may have need to create or join an LLC. Privacy concerns are germane to all New Yorkers, and the State Legislature would be wise to take a hard look at their new statute, consider the ramifications of broad public disclosure on an open-source data base, and consider amending it to restrict access to those with a genuine need for the information.