Why NY May Want to Reconsider Its LLC Transparency Law

The purpose of the federal CTA is to compel disclosure by limited liability companies, limited partnerships, corporations, certain trusts, and other similar entities formed or qualified to do business in the U.S., or its territories or Tribal areas, subject to statutory exemptions, of their individual beneficial owners to a nonpublic database established the Financial Crimes Enforcement Network (FinCEN), an arm of the U.S. Department of the Treasury.

The stated purpose of this exercise is to comply with international standards for anti-money laundering and other law enforcement purposes. The federal database opened for business on Jan. 1, 2024, but became tangled during that year, and remains entangled, in considerable controversy, resulting in nationwide litigation, congressional challenges and—now—presidential disdain.

As of the date of this article, FinCEN and the Treasury have announced that they are rethinking their approach and that, for the moment, pending their review process, the federal CTA is not being enforced. During the Trump administration, it seems unlikely that the federal CTA will be implemented substantially as first articulated and without a material reduction in scope and effect. In fact, calls continue for its outright repeal or a determination that it is fundamentally unconstitutional.

During the salad days of the federal CTA, before the opposition coalesced, several state legislatures jumped into the fray and considered their own CTA-like legislation, notably California, Maryland and Massachusetts. But only New York succeeded in adopting a "baby CTA" statute, named the LLC Transparency Act.^[2]

While the New York law is not a clone of the federal CTA, it rhymes with it—in Mark Twain's usage—and piggybacks on its terminology and concepts. Its basic framework is the federal CTA.

The terms, virtues and flaws of the federal CTA have been debated in an extensive and passionate literature. A discussion is beyond the scope of this article.

The New York law, as currently enacted, only applies to LLCs formed or qualified to do business in New York state, so is narrower in scope than the federal CTA. It is not scheduled to take effect until Jan. 1, 2026, and it contemplates that the New York secretary of state will, prior to that time, create a database to accept the filings and a regulatory framework for their use.

Reporting companies formed or qualified in New York on or after Jan. 1, 2026, have 30 days after formation or qualification to file their beneficial ownership information report or establish their exemption with the secretary of state. By Jan. 1, 2027, reporting companies formed or qualified prior to Jan. 1, 2026, must file or establish an exemption.

Filing requires identification to the New York secretary of state of the names of the company's individual beneficial owners and certain company applicants who participated in the filings with the secretary of state. Each individual's full name; date of birth; current home or business address; and a unique ID from a passport, driver's license or other identification card must be disclosed. This is somewhat less onerous than the information required under the federal CTA.

The penalties under the New York law are strict and severe, and differ substantially from the federal CTA:

• Fines of up to $500 per diem can be assessed.
• The New York secretary of state may suspend a reporting company that fails to comply with the filing obligation, in which event it is prohibited from conducting business in the state.
• After two years, the New York attorney general can act to dissolve or cancel a delinquent LLC.
• It is a crime to knowingly provide false or fraudulent beneficial ownership information. This risk is exacerbated by the fact that the definitions under the federal CTA, incorporated by reference into the New York law, are widely considered to be complex, confusing and self-referential. However, no penalty for commission of this crime is expressly prescribed.

The New York law differs in other material respects from the federal CTA. For instance, unlike the federal CTA, exempt reporting companies must apply for an exemption and justify this request with a certification given under penalty of perjury. Annually thereafter, under the New York law, this information must be updated even if nothing has changed. The federal CTA does not require an update unless material information has changed, and then mandates a revised report within 30 days.

Furthermore, the federal CTA, in a commonsense concession, does not require information about company applicants from reporting companies in existence as of Jan. 1, 2024—the date on which the federal database became operational—reflecting the difficulty of tracking down or even identifying these individuals. This is not followed in the New York law, which required identification of legacy "company applicants" and continuing disclosure of changes in their personal information.

Moreover, all personal information must be run through the reporting company under the New York law. The federal CTA allows individuals to file individually and obtain a FinCEN ID that they can provide to the reporting company, which some individuals prefer. The New York law does not allow this courtesy.

Last, the text of the New York law, as initially adopted by the New York Legislature, provided that the identities of individual beneficial owners and company applicants, and their personal information, would be publicly available. Anecdotally, it was rumored that this stricture was pushed by the Legislature so that individuals who participated in certain disfavored activities, such as gentrification, could be publicly identified.

However, in order to be endorsed by Gov. Kathy Hochul and finally enacted into law, the New York law provided greater protection to information regarding beneficial owners—but not protection to company applicants. This information is no longer publicly available, but can be obtained by court orders or for valid law enforcement or governmental purposes.

In contrast, the federal CTA contained rigorous protections of all submitted information, although on appropriate showings it could be shared with other governmental agencies for law enforcement purposes and, with the reporting company's consent, to its lenders. The federal CTA imposes express and serious penalties on misbehaving governmental actors, while the New York law does not.

Whereto the New York law?

There has always been (to some) a question as to why the New York law was necessary or even useful, so long as the federal CTA remained in effect. Initially, an attraction may have been the public availability of the filed information, but that is no longer a feature of the New York law. The necessity of its adoption was also questionable because the federal CTA has provisions that would allow New York state governmental authorities to access the federal database, upon an appropriate showing, and the information would be nationwide and from a broader range of entities.

There has also been a question as to why the other deviations of the New York law from the federal CTA were necessary or appropriate. The existence of the New York law could by itself be a deterrent to doing business in New York. Making compliance even more onerous by not coordinating its provisions with the federal statute just ratchets up this concern.

How does this analysis change due to the travails enveloping the federal CTA? Arguably, it makes the New York law more important, since the secure backstop of the federal CTA may not exist or may be seriously vitiated.

Some, but perhaps not all, of the objections raised to the federal CTA are federal constitutional arguments that may not automatically apply to New York legislation. An analysis as to whether the New York law is vitiated if the federal CTA is unconstitutional, or whether the New York law comports with the New York State Constitution, is beyond the scope of this article. However, this analysis would be of real use in evaluating the New York law.

However, there are possible objections to the necessity of the New York law, in addition to any federal or New York constitutional arguments.

First, there are serious objections to the federal CTA, as enunciated in litigation papers, before Congress and in public discussion. Many of these were not fully understood or evident when the New York law was adopted. These include arguments that:

• The CTA and regulations promulgated by the federal government under the CTA resulted in a regime that unreasonably intrudes into zones of privacy to which U.S. persons are entitled, and that the New York law in many ways incorporates these regulations into the statute and enforcement, in particular by using the same definitions as prescribed in the federal regulations.
• The regulations violate concepts of unreasonable search and seizure, and violations of freedom of speech or of association, that are fundamental to the country and the expectations of its citizens.
• The regulations are unreasonably vague and subject individuals to criminal sanctions that are not necessarily avoidable by good faith diligence.
• The cost of compliance, as estimated by the federal government, for the CTA, has proven to be inaccurate, and that the actual compliance costs are multiples of the estimate—the same most likely would be true for the New York law.
• Due to the categories of exemptions, the strictures of the CTA are disproportionately imposed on small businesses, which are unprepared to understand or assume these obligations, particularly given the fines and penalties levied for noncompliance.

Second, the failure of other states to adopt their own beneficial ownership interest disclosure legislation makes New York even more of an outlier and less competitive with other jurisdictions as a location for business activities.

Third, the adoption of the New York law may have been premature. Even if it is appropriate for there to be such a proprietary New York statute, it might have been preferable to wait for a consensus as to best practices to be developed before adopting a New York-centric statute. Given recent events, it also might be prudent to wait to see if the federal CTA and/or regulations thereunder are revised or repealed.

Fourth, the New York database has not yet been established, and regulations have not been proposed or adopted. So, the New York law is not ready to be implemented, and the energy and cost to do so can be more beneficially applied to other needs. Other concerns could arise when the details of the database and the text of any regulations are announced.

As a result, it would perhaps be prudent for New York to reconsider its adoption of the New York law. If the federal CTA survives the current challenges, the New York law is of limited benefit and should in all events be more closely conformed to its federal counterpart.

But if the federal CTA does not survive the current challenges or is materially modified, that could serve as a warning to New York against continuing to follow the abandoned track of the original statute, particularly if that makes the Empire State an outlier among its peer states.

^{[1] 31 U.S.C. § 5336.}

^{[2] Chapter 102 of the Laws of 2024.}