While federal legislative and regulatory authorities digest and plan their responses to the March 1, 2024 ruling in the U.S. District Court for the District of Alabama that held the federal Corporate Transparency Act (the CTA) unconstitutional, New York is moving forward with its own version of the CTA. Specifically, on December 22, 2023, New York’s Governor Kathy Hochul signed Senate Bill 995B/Assembly Bill 3484A, which enacted the New York LLC Transparency Act (the NY LLC Act). The NY LLC Act will become effective December 21, 2024. Similar to the federal CTA, the NY LLC Act aims to enhance transparency and accountability by requiring limited liability companies (LLCs) to disclose information about their beneficial owners, but the NY LLC Act limits compliance to only LLCs. Understanding the implications of this law and its potential impact is crucial for stakeholders operating LLCs in New York.
Overview of the NY LLC Act: When is Compliance by an LLC Required?
Under the NY LLC Act, any LLCs formed in New York and those formed in other jurisdictions that are authorized to do business in New York are reporting companies required to file a beneficial ownership report with the New York Department of State unless an exemption applies. LLCs, like with the federal CTA, may qualify for one of 23 possible exemptions. If an LLC qualifies for an exemption, the NY LLC Act requires the LLC to file a statement with the Department of State, signed by a member or manager of the LLC, specifying the applicable exemption.
Beneficial Ownership Disclosure Requirements for LLC Owners
The NY LLC Act’s definition for “beneficial owner” matches the federal CTA’s definition, meaning that a beneficial owner is any individual who, directly or indirectly: (1) exercises substantial control over a reporting company; or (2) owns or controls at least 25% of the ownership interests of the reporting company. The LLC must submit in its disclosure statement each beneficial owner’s full legal name, date of birth, current business street address (not residential address), and unique identifying number from a valid identification document. Note that in a divergence from the CTA, no image of the document is required, and LLCs do not need to report company applicants under the NY LLC Act. Furthermore, to simplify filing, if an LLC submits an initial report in compliance with the federal CTA, New York actually allows the LLC to simply provide a copy of that report to the Department of State so long as the report contains all information required to be disclosed under the NY LLC Act.
Timeframes for Compliance
LLCs formed after the December 21, 2024 effective date of the NY LLC Act must report their beneficial owners or file a statement of exemption at the time articles of organization are filed or, in the case of foreign LLCs, at the time their application for authority is filed. LLCs formed or authorized to do business before the effective date will have until January 1, 2025 to make filings. Updates must be filed within 90 days of any change.
Penalties for Noncompliance
If an LLC fails to disclose its beneficial owners, the report will be shown as past due or delinquent on the Department of State’s records. The Department of State can mail a notice of delinquency, giving the entity 60 days to file. If the filing is not made within that 60-day timeframe, a $250 civil penalty is possible.
Moving Forward
As with any new legislation, the NY LLC Act may face legal and practical hurdles during its implementation. Challenges could arise from issues such as enforcement, costs of compliance, data privacy, and the accuracy of disclosed information that require careful navigation and proactive solutions to ensure the NY LLC Act achieves its intended goals effectively. Despite these possible obstacles, current and upcoming challenges to the federal CTA may lead other individual states to consider adopting their own form of disclosure requirements similar to New York. In fact, California, Maryland, and Massachusetts introduced bills in 2023 into their state legislature proposing similar obligations. For more information on how the NY LLC Act may apply to your business and to discuss compliance, please contact KJK Corporate & Securities attorneys Alex Jones (AEJ@kjk.com; 216.736.7241) or Samantha Cira (SMC@kjk.com; 216.736.7232).