This past June, the New York State Assembly passed the LLC Transparency Act, a bill that requires most limited liability companies (LLCs) in New York to disclose their ultimate beneficial ownership (UBO) information as part of a statewide effort to curtail illicit activity. This bill was drafted against the backdrop of the Panama Papers and Pandora Papers data leaks, which put a spotlight on corporate activity in the offshore world. Intended to help curb crime and dubious business practices in New York, this new bill will require organizations to be more transparent and implement stricter disclosure standards. There are high expectations for the bill, which is planned to take effect in late 2024, though for several reasons it may fail to be the groundbreaking law that its authors envisioned. While the bill offers a window into the control of some New York companies, it will likely create loopholes that may merely shift how beneficial owners—especially rogue actors—navigate the state’s corporate disclosure laws.
The LLC Transparency Act comes on the heels of the Corporate Transparency Act (CTA), a 2021 federal law that will require most US companies to report UBO information to the US Department of Treasury beginning in January 2024. However, unlike the CTA, the LLC Transparency Act will create a public database of UBO information for most LLCs registered in New York.
The LLC Transparency Act awaits formal signoff from New York Governor Kathy Hochul, who is expected to sign off on the bill by the end of the year. Once it becomes law, the NYS Department of State will have one year to build the UBO database. Like the CTA, the bill defines ultimate beneficial ownership as individuals who own “25 percent or more of the equity interests” of a given company. Companies will be required to file the names of all such individuals with the NYS Department of State.
The LLC Transparency Act may not be the panacea that legislators hoped it would be. The bill does not include ways to enforce compliance with the new reporting requirements. Further, it only applies to LLCs and not to other types of companies in New York. Additionally, the LLC Transparency Act exempts some UBO information from disclosure, including shareholders of LLCs who are:
- Intermediaries on behalf of other individuals or organizations
- Non-senior level employees
- Owners through inheritance
Given these exemptions, companies may reorganize their ownership structures to take advantage of these loopholes and skirt required disclosure. Moreover, the LLC Transparency Act may not effectively deter illicit activities since the proposed law is limited to one type of entity, and consequences for non-compliance appear minimal. For example, the UBO information of corporations and other entity types will not be made public—though this information is disclosed to the NYS Department of State. According to the bill, if LLCs fail to disclose ultimate beneficial ownership, they will only be fined USD 250—and only after two years and 60 days of non-disclosure.
While a public UBO database could potentially help investigators track down leads and identify financial crime, we should expect to see many companies making legal efforts to avoid being eligible for disclosure. Compliance regimes should be alive to those loopholes created by the bill. The upcoming year will be pivotal for business and foreign investment in New York ahead of the implementation of the bill. As similar laws are passed in other states, companies will need to stay abreast of changes to the US regulatory landscape.