As covered in our Transparency-is-in-Your-Future series, Congress enacted the Corporate Transparency Act (“CTA”), requiring certain entities that are not otherwise exempt to file information about their beneficial ownership with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). On December 22, 2023, New York Governor Kathy Hochul signed into law a similar act, the LLC Transparency Act (the “NY Act”), requiring the disclosure of beneficial ownership information to the New York Department of State (“NY DOS”) by limited liability companies formed under the laws of the state of New York and foreign limited liability companies authorized to do business in the state of New York. Below is a brief summary of the NY Act.
What entities are affected by the NY Act?
Under the NY Act, a “reporting company” is defined as a limited liability company covered under the CTA (31 U.S.C. § 5336(A)(11)(A)), as amended, and any regulations promulgated thereunder. This definition includes limited liability companies formed under the laws of the state of New York and foreign limited liability companies that have filed an application for authority with NY DOS. Curiously enough, the NY Act does not affect corporations or limited partnerships, which are also formed by filings with the NY DOS.
The NY Act defines “exempt company” to have the same meaning as under the CTA ((31 U.S.C. § 5336(A)(11)(B). The CTA exempts most financial services institutions, including investment and accounting firms, securities trading firms, banks, and credit unions that report to and are regulated by government agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, or the FDIC, as well as non-profit organizations and certain inactive entities. Additionally, an entity that (i) employs more than 20 full-time employees; (ii) filed in the previous year Federal income tax returns demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (iii) has an operating presence at a physical office within the United States is exempt from reporting. As with the CTA, exemption under the NY Act is not automatic – in order to become exempt, a member or manager of the limited liability company will have to sign a statement of exemption and file such statement with NY DOS.
Who constitutes a “beneficial owner” under the NY Act?
The NY Act defines “beneficial owner” to have the same meaning as under the CTA ((31 U.S.C. § 5336(A)(3)), which is defined as “an individual who, directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The term “indirectly” means that a reporting company will need to trace its ownership back through any entities in the ownership chain to identify the individual or individuals who own, ultimately own, or control the company.
The term “beneficial owner” does not include (i) a minor, if the minor’s parent or guardian provides the required information; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an employee of the company and whose control over or economic benefits are derived solely from his or her employment; (iv) an individual whose only interest is through a right of inheritance; or (v) a creditor (only in their capacity as such).
What constitutes “beneficial ownership disclosure” under the NY Act?
The NY Act requires each reporting company file an initial report or beneficial ownership disclosure to identify each beneficial owner by (i) full legal name; (ii) date of birth; (iii) current business street address, and (iv) a unique identifying number from an acceptable identification document defined in the CTA (31 U.S.C. § 5336 (A)(1)). Acceptable identification documents include a non-expired passport issued by the United States or a foreign government, and a non-expired identification document issued by a State, local government or Indian Tribe.
When must the information be filed with NY DOS under the NY Act?
Domestic limited liability companies in existence on December 22, 2024 and foreign limited liability companies authorized to do business in New York on such date will have to file their beneficial ownership disclosure information or a signed statement of exemption by January 1, 2025.
Domestic limited liability companies formed after December 22, 2024 and foreign limited liability companies first qualifying for authority to do business in New York on or after such date will be required to file their beneficial ownership disclosure information or a signed statement of exemption at the time of formation or application for authority, as applicable, in New York. While the NY Act is not exactly a model of clarity (as it seems to state that the beneficial ownership information is to be included in the articles of organization or application for authority, which would make such information publicly available), we believe that a more reasonable interpretation of the NY Act would be that the articles of organization or application for authority would need to either confirm that the entity is an exempt company or that it has filed the required beneficial ownership information.
The NY Act permits reporting companies to file a copy of the report they filed with FinCEN pursuant to the CTA to satisfy the New York reporting requirements.
Are Reporting Companies required to update their beneficial ownership information?
Yes. While the NY Act is not particularly well written on this issue (as it seems to state that the articles of organization or application for authority must be amended to reflect updated beneficial ownership information every time a change occurs in such information, which not only would make such information publicly available but could result in significant legal and filing fees for Companies that have frequent changes in such information), the NY Act does require that this information be current. As Section 211 of the NY Limited Liability Company Law gives LLCs 90 days to amend their articles of organization to reflect the events enumerated in such Section, and the NY Act amends Section 211 to include changes in beneficial ownership, presumably LLCs will have 90 days to report such changes. Given the somewhat lengthy time period, questions will inevitably arise regarding what needs to be reported. For example, if an individual ceases to be a beneficial owner within 90 days after first becoming a beneficial owner, would the Company need to report that such person was a beneficial owner even though by the time the report was filed they ceased to be such?
What are the penalties for failing to comply with the NY Act?
The NY Act establishes civil penalties for noncompliance. A reporting company which has failed to file the beneficial ownership disclosure as required for more than 30 days shall be shown as “past due” on the NY DOS records until an update report is filed. If the failure continues for more than two years, the company shall be shown as “delinquent” on the records of NY DOS after a notice of delinquency has been mailed to the last known business address of such reporting company, and such company has failed to file such information within 60 days of the mailing of such notice. Such delinquency will be removed from the records of the NY DOS upon the delinquent reporting company filing an up-to-date beneficial ownership disclosure and paying a $250 civil penalty.The penalties are much less serious than those imposed under the CTA, which provides for criminal and civil penalties for willful noncompliance, provides that persons who knowingly provide false or fraudulent information or willfully fail to report complete or updated information may be fined $10,000 and/or imprisoned for up to two years, and imposes a civil penalty of $500 for each day that the violation continues.
An interesting question is how, exactly, the NY DOS will know when a report is past due when the NY DOS only knows of changes when they are reported to it. The most obvious example is a change of the business street address of a beneficial owner. Presumably the NY DOS is not assigning a team of employees to check business street addresses of beneficial owners on a 24/7/365 basis, even assuming there was some way that the NY DOS could ascertain such information. Likewise, we assume that the NY DOS is not scouring court records throughout the world (as beneficial owners could live anywhere) to check name change applications against their database of beneficial owner names. The NY DOS will know of changes in beneficial ownership information when they are informed of the change, at which point the entity will have cured the failure (including by paying the $250 fine, if applicable). Unless the NY DOS is acquiring information via telepathy or is omniscient, we don’t see how companies will ever be listed as past due, other than by a third party or disgruntled employee reporting a company as being in breach (which, given the de minimis consequences, doesn’t seem likely). The simple fix for this would be to require companies when filing bi-annual statements to confirm that there has been no change to their most recently reported beneficial ownership information, with the penalties set forth above for filing to provide either such confirmation or the updated information.
What should LLCs do to comply with the NY Act?
Prior to January 1, 2025, companies should check to see if NY DOS has issued regulations for compliance with the NY Act. Once the rules have been issued, entities should review the regulations to confirm whether they must file an initial report or are eligible to file for an exemption. Additionally, companies should keep updated records of the required information for each owner and enhance their compliance processes to ensure that the required information is being collected and reported to NY DOS in accordance with the NY Act (and FinCEN in accordance with the CTA).
Companies should also include language in their operating agreement or similar document that requires owners of the company to regularly provide any information required to comply with the NY Act. Additionally, companies may want to consider indemnification provisions if an owner fails to timely provide the required information or provides false or incomplete information. If such operating agreement contains a confidentiality provision, it should include an exception to permit the company to report the required information to NY DOS and FinCEN.
Hopefully the legislature will amend the NY Act to provide clarifications with respect to the issues identified above or the NY DOS will promulgate rules and forms to provide such clarification.