New York LLC Transparency Act Presents Privacy Concerns
Transparency in classical music refers to the clarity and purity of musical texture. When a piece is transparent, each instrumental or vocal part will be discernable and sound distinctly, even though the composition might be complex. Transparency allows listeners to appreciate the intricate interplay of a composition's melodies, harmonies, and rhythms.
Some compositions are inherently more transparent than others. Johann Sebastian Bach’s meticulous attention to intricate counterpoint in his Brandenburg Concertos allows the listener to hear every line or thread separately within a complex tapestry. In contrast, listeners rarely find Richard Wagner's music transparent. Yet, Wagner's music also weaves an intricate musical tapestry using motives or leitmotifs.
Performers and conductors play critical roles in realizing the transparency in a musical composition, as their interpretation and execution can enhance or diminish transparency. Individual performers use articulation, dynamics, and other techniques to ensure each note performs the role intended by the composer as a musical whole. Conductors must focus on balancing individual parts, voices, and instruments so that each theme and line can be heard clearly.
In modern performances and recordings, the expert operating the sound board or mixer performs a similar function. Like performers and conductors, their decisions and adjustments can enhance or diminish clarity and transparency.
During the past few years, there has been increased focus on transparency in corporate law. Concerned that corporations and limited liability companies (LLCs) were used to conceal unlawful activities, in 2020, Congress passed the Corporate Transparency Act (CTA) requiring reporting of beneficial ownership of many legal entities. The CTA, implemented by the Department of Treasury's Financial Crimes Enforcement Network (FinCEN), took effect on January 1, 2024.
Not to be left out, in December 2023, the New York legislature passed the LLC Transparency Act (LLCTA), which will require reporting similar to that required by the CTA. This article discusses the LLCTA and how it compares to the CTA and concerns about privacy of LLCTA reports.
Reporting Companies Under the CTA and LLCTA
The CTA applies to companies without significant operations. The CTA defines "reporting company" as any corporation, limited liability company (LLC), or "similar entity" that is created by a filing with a federal, state, or triable government or authorized to do business in the United States except for entities that:
Large companies with more than 20 full-time employees in the United States that report more than $5 million in gross receipts or sales to the Internal Revenue Service and an operating presence or physical location in the US
entities, such as banks and broker-dealers, that are already subject to close federal regulation, and
certain non-profit and political organizations
entities considered "dormant."
The definition and exemptions are complex, and companies should consult an attorney to determine whether it applies to them. However, most small businesses and real estate special purpose entities (SPEs) must file reports under the CTA, regardless of whether they are corporations, LLCs, or other types of legal entities.
Although the LLCTA defines “reporting company” by reference to the CTA, since the LLCTA is a New York law, it only applies to entities formed or qualified to do business in New York. Further, as its name implies, the LLCTA only requires LLCs to report beneficial owners. So, only LLCs formed or qualified to do business in New York must file reports under both the CTA and LLCTA.
When Must Information Be Disclosed Under the CTA and LLCTA?
The CTA rules currently require newly formed reporting companies to file a report within 90 days of formation (or a later date when the reporting company learns a state secretary of state has accepted its filing or makes the reporting company’s formation public). Reporting companies formed before January 1, 2024 must file their reports by January 1, 2025.
The LLCTA will take effect 365 days after it took effect, or December 21, 2024. LLCs formed or qualified on or after that date must file their report along with their formation or qualification documents. Like the CTA, existing LLCs have until January 1, 2025 to file their reports.
Unlike the CTA, the LLCTA requires exempt LLCs to file a report explaining their exemption. So, every LLC formed or qualified in New York must make a filing – either claiming an exemption or reporting beneficial owners.
What Information Must Be Disclosed Under the CTA and LLCTA?
Under the CTA, reporting companies must report the following information about the company:
Company Name – the reporting company’s full legal name and any trade names or DBAs
Address – the street address for the reporting company’s principal place of business in the United States
Formation Jurisdiction – the state, tribal, or foreign jurisdiction where the reporting company was formed. Foreign companies must also report where they are registered in the United States.
Tax Identification Number – all US reporting companies must provide their tax identification number (TIN), usually an Employer Identification Number (EIN). Foreign reporting companies without a TIN may use a foreign tax identification number and the jurisdiction's name.
Reporting companies also must report the following information about their beneficial owners:
Name – the full legal name of the beneficial owner. For a minor child, all information should be that of a parent or legal guardian.
Date of Birth – the date of birth of beneficial owners who are individuals
Address – a business that forms a reporting company may use its business address, and an individual must report their residential address.
Unique Identifying Number – a unique identification number (i.e., driver’s license number, passport number, or state identification number) and the jurisdiction that issued the number, along with an image of the document showing that identification number
The CTA requires that companies report similar information about their "company applicants," individuals involved in forming the entity. Instead of providing their personal information to the company, beneficial owners and company applicants may instead provide this information directly to FinCEN, and FinCEN will issue them a number for use in CTA reports.
The LLCTA does not require company applicant information. The law requires only that LLCs report information about their beneficial owners. Also, while the CTA requires that the company provide a copy of a document containing the beneficial owners’ unique identification number, the LLCTA does not.
The LLCTA requires that newly qualified LLCs provide a copy of their CTA filing. Newly formed domestic LLCs may provide their CTA report but aren't required to do so.
Privacy and Other Concerns About the LLCTA
A major concern about the LLCTA is beneficial owner privacy. Under the CTA, only law enforcement can obtain beneficial ownership information. That information isn’t available to the general public under the CTA.
However, beneficial owners reported under the LLCTA will be publicly available (except for their unique identifying number and birth date). The Secretary of State is to develop a procedure where individuals can apply that their information remain private.
However, individuals who obtain a personal identifier from FinCEN may find that their personal information must be disclosed under the LLCTA. So, if a beneficial owner chooses to use a FinCEN identifying number so they need not provide their personal information to a reporting company, they still likely will have to provide that information for LLCTA compliance. The result is that the LLCTA dilutes the individual privacy afforded under the CTA.
The LLCTA requirement that the ownership be reported with the qualification or formation documents creates a "chicken and egg" problem for new LLCs. Technically, an LLC doesn't have owners until individuals become members, typically by signing an operating agreement. But the operating agreement technically can’t be signed until after formation.
Further, people often form LLCs before the ownership structure has been fully developed, particularly in real estate transactions. So, those LLCs will need to amend their beneficial owner reports. Presumably, LLCs will report the expected ownership upon filing and update that information as it becomes known.
What Companies Should Do to Plan for the LLCTA
Reporting companies already should be collecting information for their CTA reports, so compliance with the LLCTA shouldn’t require significant additional preparation for them. However, companies claiming an exemption must remain abreast of developments under the LLCTA so they can timely file their claims of exemption.
Individuals planning to form new companies might choose a structure that avoids the need to comply with the LLCTA. If the company doesn’t plan to operate or own property in New York, it could simply avoid forming or becoming qualified in New York.
Companies that must operate in New York but want to retain privacy for their beneficial owners could restructure their company so it is not an LLC. Although LLCs are the entity of choice for many businesses due to their flexibility, some companies could convert to a corporation. Due to tax reasons, conversion won't be feasible for some LLCs taxed as partnerships, but it could be an option for LLCs who qualify for a Subchapter S election.
New York real estate owners who want to avoid public disclosure of their beneficial owners could revert to a structure often used before LLCs became popular – provided mortgage lenders will allow it. The real estate could be owned by a limited partnership, with a corporation serving as the partnership's general partner.
Meanwhile, LLCs formed or qualified in New York and their advisors should be on the lookout for New York Department of State regulations implementing the LLCTA. Those regulations must include a process where individuals can apply to keep their personal information private. Ideally, in the implementing regulations, the Department of State will either accept FinCEN identifying numbers in LLCTA filings or develop a New York issued state identifier process similar to that offered by FinCEN.
© 2024 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless all parties sign a written contract.