New York Legislature Passes LLC Transparency Act

The LLC Transparency Act is in many respects similar to the federal Corporate Transparency Act (CTA), which was enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. As discussed in our prior client alerts, the CTA requires certain entities (“reporting companies”) to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) that identifies the entities’ ultimate individual beneficial owners who have substantial ownership interests or can or do exercise substantial control, and to provide similar identifying information about up to two individuals who acted to form the entity. The CTA’s reporting requirements are effective January 1, 2024, for new entities and January 1, 2025, for entities existing as of January 1, 2024.

Similarities between the LLC Transparency Act and CTA include:

• Both apply to both domestic and foreign entities, but only those entities that have to make a filing with the government in order to conduct business. In its current form, the LLC Transparency Act applies only to LLCs.
• The key defined terms in the LLC Transparency Act, including “beneficial owner,” incorporate by reference many definitions of those terms in the CTA.
• Exemptions that companies may claim under the LLC Transparency Act are modeled on those found in the CTA.
• The LLC Transparency Act permits reporting companies to file a copy of the report they filed with FinCEN to satisfy the New York reporting requirements.
• Updates to some previously filed information, including in personal information filed about individuals, must be made in filings with the New York secretary of state. 

LLC Transparency Act Would Create a Public Database of Beneficial Owners
The key difference between the LLC Transparency Act and the CTA is that the LLC Transparency Act would require New York’s secretary of state to maintain a publicly-available online database that includes the full legal name of the beneficial owner(s) of LLCs organized in New York and foreign LLCs qualified to do business in New York. The public database will also include detailed information concerning the entity such as its full name and business address. In contrast, the information FinCEN collects under the CTA will be confidential, except in limited circumstances where FinCEN is authorized to disclose the information to certain government authorities and to financial institutions.

Certain information that LLCs would be required to file with the New York secretary of state concerning beneficial owners would not be included in the public database. Like the CTA, the LLC Transparency Act would require LLCs to file a beneficial ownership disclosure that includes beneficial owners’ full legal name, date of birth, current business street address, and a unique identification number from an acceptable identification document as defined in the CTA, such as a passport or other government issued identification document. New York’s public database would include the full legal name of beneficial owners and the LLC’s business street address, but not the other information filed in the beneficial ownership disclosure. The other personal identifying information of beneficial owners would be deemed confidential, with exceptions for law enforcement purposes or if the information is otherwise required to be disclosed by court order. 

The New York secretary of state would be required to promulgate regulations to allow beneficial owners with “significant privacy interests” to apply for waivers to keep their name and/or business street address confidential. The LLC Transparency Act states that those with significant privacy interests include whistleblowers using LLCs to file false claims act lawsuits and individuals participating in an address confidentiality program. Beneficial owners, even those described in the preceding sentence, would still be required to demonstrate that a significant privacy interest exists. Because the stated purpose of the LLC Transparency Act is to make beneficial ownership information broadly accessible to the public, it appears likely that beneficial owners will need to make a strong showing of need for confidentiality to qualify for a waiver. 

The LLC Transparency Act would be more limited than the CTA in one key respect. The CTA applies to a variety of business entities, including corporations, LLCs and potentially many other entities such as limited partnerships, LLPs, business trusts or statutory trusts, but not general partnerships, proprietorships and trusts that need not file to exist. The LLC Transparency Act only requires LLCs to report beneficial ownership information, and therefore only the beneficial ownership information about LLCs would be included in New York’s public database. 

Penalties for Failure to File Beneficial Ownership Disclosure Under the LLC Transparency Act
The new statutory text of the LLC Transparency Act would carry less severe penalties for noncompliance than the CTA. LLCs that fail to file beneficial ownership disclosures required by the LLC Transparency Act for a period exceeding 30 days would be reflected as past due in the secretary of state’s records until the LLC files an up-to-date beneficial ownership disclosure. If an LLC fails to file a required beneficial ownership disclosure for a period exceeding two years, it would receive a notice from the secretary of state and have 60 days to file a beneficial ownership disclosure. If an LLC fails to file within that 60-day period, it would be recorded as delinquent in the secretary of state’s records. Such LLCs would be required to pay a civil penalty of $250 and file the beneficial ownership disclosure to remove the delinquency. In contrast, the CTA provides for more significant civil and potentially criminal penalties.

California Legislature Has Also Introduced Beneficial Ownership Legislation
California legislators have also introduced bills that would require various levels of reporting of beneficial ownership information. One California bill (SB-738) would require foreign corporations and foreign LLCs to report certain beneficial ownership information to the California secretary of state. Another bill (SB-594) would require certain LLCs to report beneficial ownership information. However, as of the date of this article, neither bill has advanced out of committee and the prospects that California will enact legislation on this issue is currently unclear.

Next Steps
While there is no guarantee that Gov. Hochul will sign the LLC Transparency Act, LLCs that do business in New York should begin planning for this potential reporting requirement to go into effect. In particular, entities may wish to consider whether any exemption would be applicable, whether they have a significant privacy interest that would warrant a waiver from being included in New York’s public database, or whether their willingness to do business in New York is affected by this legislation.