Proposed New York LLC Transparency Act Is Unnecessary and Dangerous

New York's legislature passed the LLC Transparency Act (the Act) (S. 995-B / A. 3484-A), which would define beneficial ownership of limited liability companies (LLCs), require the disclosure of the identities of beneficial owners upon the formation or registration of the company, and publish personal information about beneficial owners of LLCs in a publicly searchable business entity database.

On January 9, 2023, State Senator Brad Hoylman-Sigal (W, WF) introduced S. 995 in the Senate. On February 3, 2023, Rep. Gallagher introduced A. 3484 in the Assembly.

nysenate.gov shows that on June 20, 2023, the Assembly passed the latest version of the legislation. But the history of actions shows that on June 6, 2023, the Senate passed an earlier version of the bill in a 41-21 vote.

In this post, I discuss:

• The purpose and justification of the Act
• Material differences between the Act and recent federal law, the Corporate Transparency Act (CTA)
• The June 6, 2023 opposition by the Business Council
• The July 13, 2023 opposition by the Business Law Section of the New York State Bar Association
• Why I oppose the act

Purpose & Justification of the Act

The bill strives "to end the anonymous ownership" of LLCs in New York because "[p]ermitting anonymous limited liability companies to do business in New York was a public policy mistake that deserves correction."

The justification for the bill parades the horribles that anonymous ownership of LLCs can cause:

• "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."
• "Meanwhile, the anonymous ownership of a significant portion of real estate in New York hampers policy-making and upends centuries of precedent by obscuring the answer to the question: who owns what?"

I struck out the last reason because, as the justification of the bill admits, other recent laws in New York require the disclosure of the owners and managers of LLCs that own real estate: "This bill builds on previous efforts to require the disclosure of LLC members and managers involved in real estate transactions in New York."

The justification of the bill wants to expand the federal 2021 Corporate Transparency Act because it is requires a private database, which "[u]nfortunately" is "inaccessible."

Material Differences Between the Act and the CTA

(1) Privacy:

• The CTA acknowledges that the identity of an LLC's beneficial owners should be kept private and accessible only to five categories of recipients: "(1) US federal, state, local and tribal government agencies for specified purposes, (2) foreign law enforcement agencies, judges, prosecutors, central authorities and competent authorities, (3) financial institutions to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law, (4) federal compliance with CDD requirements and (5) the US. Treasury."
• In a stark contrast, the Act disregards the need for keeping any information private and wants to make it accessible everyone: "Unfortunately, the inaccessible nature of the new federal database means that this information will serve no use for civil society or local government in New York, denying New Yorkers the many benefits that beneficial ownership transparency offers."

(2) Exemptions: Entities covered by one of 23 exemptions will have to file a report under the Act demonstrating their exemption whereas exempt entities have no filing obligations under the CTA.

(3) Penalties: The penalties for failing to comply with the Act are less severe than the penalties for failing to comply with the CTA.

Business Council Opposes the Act

On June 6, 2023, the Business Council ("the leading business organization in New York State representing the interests of large and small firms throughout the state) said it opposes the act because the Act "violates the privacy of law-abiding businesses and exposes them to significant security risks by disclosing personally identifiable and confidential information to the public."

"In a deeply troubling departure from the federal Corporate Transparency Act, this bill creates a public database where the information of businesses organized as LLCs will be available in a searchable public database," writes the Business Council. "A disgruntled employee could use the information to shame their former employer or over-eager plaintiffs’ attorneys could abuse the database to bring frivolous and unwarranted lawsuits against businesses in the database, furthering contributing to increasing insurance premiums."

The bill is "anti-businesses": "[T]housands of small businesses are organized as LLCs and they are active members of New York communities – bookstores, tradespeople, bakeries, auto repair shops, small manufacturers, and local restaurants, to name a few."

New York State Bar Association's Business Law Section Opposes the Act

On July 13, 2023, the Business Law Section of the New York State Bar Association released a memorandum opposing the proposed LLC Transparency Act. It gives the following reasons for opposing the Act:

(1) Unnecessary: The Act is "unnecessary" as "[t]here is no need for a NY database at all" because it is "redundant with the CTA."

(2) Disregards Privacy: "The CTA appropriate recognizes the need for privacy regarding beneficiary ownership information. Under the proposed CTA access rules, the private database that will be maintained by the Treasury will be accessible to legitimate state and local law enforcement agencies in NY. There is no need for a NY database at all or for any portion of this database to be public."

(3) Burdensome: The Act is "burdensome in requiring additional filings, including additional burdensome filings required to demonstrate exempt status."

(4) Unintended, Dangerous Consequences: The Act would be dangerous to owners of LLCs: "The public disclosure of legitimate NY LLC owners is likely to lead to many undesirable outcomes. The beneficial owners could become targets of various crimes, including identity theft, as well as physical and property-related crimes, such as robberies. Beneficial owners may be subject to protests from fringe groups and targeted by unwanted and harassing sales and other solicitations."

Hani Opposes the Act

Hani's Thoughts: I agree with the objections to the Act voiced by the Business Law Section of the New York State Bar Association. The Act is deaf to the need for privacy voiced by the CTA. Taking away this unjustifiable need to expose LLC owners to dangerous consequences,^[1] the Act is duplicative of the CTA and is wasteful because it unnecessarily burdens LLC owners. The Act will make doing business as an LLC in New York needlessly more expensive because it adds an unnecessary compliance requirement.