October 24, 2023

NY Legislature Enacts Law Mandating Disclosure of Beneficial Owners of Limited Liability Companies via Public Database

Authors:

New York may soon require limited liability companies (LLCs) organized under New York law, or doing business within the state, to disclose their beneficial owners—including certain personal identifying information (PII)—to the state and others through the creation of a new, publicly searchable database. While these requirements are broadly patterned after the federal Corporate Transparency Act (CTA), which will begin implementation on January 1, 2024, New York’s law diverges in several significant ways likely to raise concerns among the business community and the broader public, and increase compliance burdens.¹

These additional disclosure requirements would be implemented through the New York LLC Transparency Act (NYLTA)², which passed both houses of the New York State Legislature in June 2023, and which currently awaits Governor Kathy Hochul’s review and signature. If adopted in its current form, the NYLTA would take effect in 365 days after the Governor's signature. In this Legal Update, we discuss the NYLTA’s key provisions and offer our early thoughts on how it fits into the burgeoning compliance and regulatory landscape for 2024. We also note some potential areas for further assessment as the business and legal communities prepare for compliance.

Summary of the NYLTA Requirements

Similar to the CTA, the NYLTA aims to prevent the use of anonymous LLCs for illicit activities, including money laundering, fraud, tax evasion, and violations of real estate leasing, campaign finance, and government contracting laws.³ The bill would require all existing and newly formed LLCs in New York—as well as foreign LLCs that register to do business in New York—to file a list of their beneficial owners with the New York Department of State (DOS) and update it whenever a change occurs.

The NYLTA adopts the same definition of beneficial ownership as the CTA and its implementing regulations. However, the NYLTA differs from the CTA in some key aspects, including the following:

	CTA	NYLTA
Applicability	All US entities and non-US entities that are registered with a secretary of state, including LLCs, with exemptions for large operating companies and certain highly regulated industries, as defined in the CTA.	All LLCs formed or authorized (qualified) to do business in the state of New York, with exemptions for exempt companies under the CTA.
Filing Requirement	With the Financial Crimes Enforcement Network (FinCEN).	With the DOS.
Service Provider Disclosures	Requires certain ministerial employees and service providers in connection with the formation of the entity (including individual law firm personnel) to provide PII to FinCEN.	No.
Updating Requirement	Within 30 days of any change in beneficial ownership.	Within 90 days of any change in beneficial ownership for NY LLCs, and within an unspecified time for other LLCs doing business in New York. Also requires updating at the time of any change to the LLC’s organizational certificate (called the articles of organization in New York, which are similar to a certificate of formation for foreign LLCs).
Public Access	No; limited to certain federal, state, local, and tribal officials, as well as certain foreign officials acting through a federal agency, and, and certain financial institutions, with customer consent.	Yes; filings with the name and business street address of each beneficial owner to be available to the public via searchable database, though the date of birth and other PII would remain confidential, accessible only by certain state agencies, including law enforcement.
Penalties for Non-Compliance	Civil and criminal monetary penalties of $500 to $10,000 per violation and jail time of up to two years.	Recording as delinquent in the records of DOS, subject to cure upon the filing of up-to-date beneficial ownership disclosure, and the payment of a civil penalty of $250.
Compliance Date	Effective January 1, 2024 for entities formed on or after that date. An entity formed or registered before the effective date of the final regulations is required to file its initial report no later than January 1, 2025.	If signed by the governor, January 1, 2025.

These changes potentially create greater exposure to public scrutiny and legal risks, because the LLCs and their owners would be required to disclose their PII not only to FinCEN, but to the state, as well as anyone who accesses the public database. For example, LLCs may be concerned that recruiters will use the public database to identify and poach senior executives, and economic beneficial owners may fear the database being used by marketers and con artists to target them as higher net worth individuals.

In addition to concerns created by the exposure of PII or business information by NYLTA’s public database, some of the more significant practical issues presented by the NYLTA are as follows:

1. Uneven Alignment with the CTA. Although the NYLTA as currently drafted clearly intends to facilitate compliance for CTA filers and exempt companies, the option for an LLC to simply submit a copy of its CTA filing to DOS would be ineffectual for many LLCs, including:

CTA Filers Who Use FinCEN Identifiers. Unless DOS clarifies otherwise, NYLTA would not permit covered LLCs to submit FinCEN identifiers in lieu of providing PII on beneficial owners. This could require LLCs to seek, secure, and transmit sensitive PII with every filing made with DOS.
CTA Filers Who Do Not Use the Same Residential and Business Addresses. NYLTA requires LLCs to submit the business street address for beneficial owners. This is in contrast to the CTA, which requires entities to submit the residential street address for beneficial owners. This divergence may negate the option provided in the NYLTA for LLCs to submit a copy of their CTA filing, because the CTA filing may have the wrong street address for the purposes of NYLTA.⁴
CTA-Exempt Entities. NYLTA requires LLCs which qualify for an exemption under the CTA to certify to DOS the specific exemption that they are relying upon. The CTA does not require an entity to file for an exemption, nor does it require the written certification of an owner or manager to adopt an exemption. In this way, the NYLTA will put greater pressure on LLCs to “get it right” with respect to exemptions under the CTA.

2. Routine Updates Following Amendments to LLC Certificates. Beneficial ownership updates may also be triggered under NYLTA by events as minor as an LLC engaging a new registered agent. This is because—unlike the CTA—NYLTA requires a filing not only when the LLC files articles of organization (or the equivalent, such as a certificate of formation or organization for foreign LLCs in connection with an application for authority to conduct business in New York), but also when the LLC amends its articles of organization (or in the case of a foreign LLC, an amendment to its certificate of formation filed in another jurisdiction).⁵

3. New Obligations to Report Changes of Control related to M&A Transactions and Dissolutions. The business community and their advisors should be prepared to consider the need to file under CTA and NYLTA as a routine matter in connection with investment transactions. Consideration of beneficial ownership updates under NYLTA may also be triggered by important events, such as a change of control upon the closing of an M&A transaction involving the LLC (or the LLC’s beneficial owners), or a dissolution of the LLC for any life events, including upon the LLC’s dissolution and substitution of a new member. This may include a succession by operation of law (e.g., due to death or bankruptcy).

Though a change in the sole member of an LLC would clearly trigger a filing, the NYLTA does not specify all circumstances when a change in the manager or the board of managers of an LLC (in the case of manager-managed or board-managed LLC) would trigger a filing. Absent further guidance from DOS, we expect that a filing might be appropriate in certain similar circumstances, and additional analysis will be required based on the specific facts.⁶

4. Evolving Effect on Representations, Warranties and Covenants in Deal Documents. Given the potential risk and implications of delinquent filing status in NY, transaction parties should generally consider their CTA and NYLTA status (and those of their affiliates) in connection with reps and warranties involving formation, valid existence, good standing, etc., as well as covenants to maintain compliance or update.

5. Other Issues in connection with Legal Opinions. In light of the CTA and NYLTA changes, issuers of legal opinions should be prepared to generally evaluate whether additional legal diligence is appropriate, including additional representations as to beneficial ownership in back-up certificates, and bring-down good standing reviews as they go “up the chain” for “building block” opinions.

Concluding Thoughts

Given the growing momentum and public pressure for more transparency and accountability of LLCs, it is fairly likely that the NYLTA will become law in New York. Even if further negotiations ensue between Governor Hochul and the New York State Legislature, including as to the publicly searchable database, the new filing requirements could potentially create significant new challenges.

Many in the business community and within the private sector may be concerned about the potential consequences of the disclosures and the publicly searchable database contemplated by the NYLTA, whether that be the exposure of their PII or business information, the potential for identity theft or fraud, or the impact on competitive advantages. Although the disclosure requirements under the NYLTA are limited in number, they may raise greater concerns for individual LLC owners, even those already publicly associated with a company. Other potential challenges and costs include:

Greater exposure to legal risks, including in connection with routine transactions and successions as a matter of law.
Increased compliance costs, as well as administrative burdens in light of the requirements to report the beneficial ownership information to the State of New York, in addition to FinCEN under the CTA, and also in respect of updates to such information.
New complexity and uncertainty in navigating the different and potentially diverging definitions, requirements, and exemptions under the NYLTA and the CTA (and any future state laws), as well as possible preemption or coordination issues among state and federal authorities.
Enhanced risk of economic inefficiencies, stemming from incentives for LLC owners to convert to other legal entity forms not subject to the NYLTA.

Some of these concerns may well be addressed as FinCEN and DOS issue further guidance, and a shared course of compliance develops for the CTA and NYLTA within the business and legal communities. At this time, we recommend that all covered entities, including LLCs, continue timely preparations for compliance with the CTA, which becomes effective on January 1, 2024. We further recommend that covered entities continue to monitor state-level developments such as NYLTA and prepare for additional potential changes. The NYLTA is not the only state-level initiative to address the issue of anonymous LLCs. California is considering similar legislation, the California Transparency in Corporate Structures Act (CTCSA), and the California Corporate Transparency Act, which are both pending in the California Senate as of this writing.⁷

Owners of covered entities and businesses considering an expansion into new states should also familiarize themselves with the proposed changes, to understand the information that could be made publicly available and the options for maintaining and facilitating compliance.

Our Mayer Brown Team will continue to monitor and provide updates. Please do not hesitate to contact the authors or your regular Mayer Brown attorney with any questions.

¹ For more information on the CTA, please refer to our Mayer Brown Perspectives Memo.

² See LLC Transparency Act, Assemb. A03484, 2023 Sess. (N.Y. 2023-2024), https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A03484&term=&Actions=Y&Text=Y; LLC Transparency Act, Sen, S00995, 2023 Sess. (N.Y. 2023-2024), https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=S00995&term=&Text=Y (June 20, 2023).

³ See Memorandum in Support of Legislation, Assemb. A03484, 2023-2024 Sess. (N.Y. 2023-2024), https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A03484&term=2023&Memo=Y.

⁴ Another minor divergence from the CTA is that the NYLTA does not require an LLC to submit a copy of the identifying document (e.g., passport or driver's license) for a beneficial owner; the obligation may be satisfied by completing the separate New York requirements. Depending on the circumstances and its authorizations to disclose PII, an LLC may accordingly conclude that it may not share a copy of its CTA filing with New York because doing so would require the disclosure of copies of PII documents that are not specifically mandated by NY law.

⁵ In those scenarios, the reporting LLC would be required to file the amended articles with DOS plus beneficial ownership updates under NYLTA. While the information typically included in articles of organization (and similar certificates of formation in other jurisdictions) is typically limited to the LLC’s name, its business address (in NY, including the county in which it operates), plus registered agent information, sometimes including an e-mail for service of process, those routine changes will now also require consideration of beneficial information updates.

⁶ We also note that that large holding company structures that do not meet the CTA exemption requirements may trigger a chain of filings if, for example, there is an “upstairs” member substitution. We expect the “good housekeeping” importance of maintaining updated organizational structure charts would only increase under the CTA and NYLTA requirements.

⁷ See, e.g., An Act to Amend Sections 1502, 2117, 17702.09, 18200, 18205, and 18210 of the Corporations Code, Relating to Corporations, Sen SB-594 Beneficial Owners, 2023 Sess. (CA 2023-2024), https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=202320240SB594; Corporate Transparency Act: Foreign Corporations: Certificate of Qualification, Sen SB-738, 2023 Sess. (CA 2023-2024), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB738 In its current form, the CTCSA would require corporations and LLCs in California, as well as foreign entities that register to do business in California, to file a list of their beneficial owners with the Secretary of State and update it biennially.