New York’s LLC Law Might Be Bad for Everyone, Not Just Criminals and Slumlords

The legislation, passed in late June by the New York State Legislature and as of July 7 awaiting a signature from Gov. Kathy Hochul, gathers the same information that will be tracked at the federal level and can even be filed using a copy of the same form. But the beneficial owners of limited liability companies in New York state from all backgrounds will have their names made public in a database, including those LLC owners using the vehicle to hide their identities in a property purchase.

LLCs can apply for an exemption, but the qualifications have yet to be decided by the New York Department of State (DOS). On the other hand, the consequences of failing to comply with the law make it no more onerous than a speeding ticket, according to attorneys. If corporations scoff at the law for more than two years, they’ll be forced to pay a civil penalty of only $250.

“That’s the cost of lunch,” Jeffrey Margolis of The Margolis Law Firm told Commercial Observer.

And if those dodging regulations aren’t willing to pay the fine either, they can simply register their business as a different kind of entity such as an incorporation, which fell out of fashion due to the ease and confidentiality of creating an LLC, according to Margolis.

“This may be signaling the return of other forms of corporate identity if the LLC represents something you might not want to get involved with because of the new disclosure,” Margolis said.

The bill’s sponsor, Assemblymember Emily Gallagher of Brooklyn, told CO that the exemptions are largely out of legislators’ hands but the bill is not meant to create a database to stalk the rich and the famous, and an exemption for domestic abuse survivors as well as others with credible fears for their safety should be baked into rules established by the DOS.

Discussions with the state agency have not yet taken place, Gallagher said July 7, and the DOS declined to comment on the basis that the law has not yet been signed.

For vulnerable individuals, an anonymous number accessible only by the government would be assigned in the database.

“We’ve developed a pretty ridiculous system with LLCs in a pretty short period of time — it’s only really been, like, 30 years that they’ve been around, and I think it’s destroyed a lot of the human connection between business owners and their employees, their patrons,” Gallagher said. “A lot of people are looking at this fearfully from the business angle, but it’s really gonna help good business people do business more cleanly.”

Gallagher doesn’t deny that the regulation around LLCs is terra incognita, with New York being first in the nation to pass a law of this kind. But how the “experiment” of the law progresses will likely inform how the penalties could eventually evolve, perhaps becoming more severe, she said.

To Margolis’s point, Gallagher said the act targets LLCs specifically because of the commonality of those types of entities, due to how easy and inexpensive they are to create. 

“Those elements have made it really ripe for abuse,” Gallagher said in an interview. “We’re going to be dynamic in this and see what we need to do in the future after the bill is signed.”

The bill’s language is directly aimed at those who bypass sanctions, avoid taxes, fund terrorist organizations and support organized crime. Landlords who use LLCs are more likely to have code violations, higher rents and more evictions attached to their properties compared to “non-corporate” owners, according to the legislation.

“Should we be naming the average person on the street? I think it should be narrowly tailored to where it’s aimed toward those that you want the law to reach,” real estate attorney Adam Leitman Bailey told CO. “People from out of the country with a certain amount of money who do not live in these residences full time, who are using it for the purpose of money laundering. That’s not what this bill achieves; it’s a very dangerous law and is probably going to cause a lot of problems.”

A hypothetical improved version of the law would target only foreign investors and widen the exemptions for people who need to protect their privacy, such as some of Bailey’s more high-profile clients who, due to their fame, are able to live without interference from fans and stalkers because of their current ability to register their New York City apartments under an LLC.

Cash transactions in particular should be flagged as requiring the disclosure of beneficial owners, according to Bailey, as famous people and legit corporations usually don’t buy property that way.

“There are privacy rules that are supposed to be set up, but, based on the acts of the New York State Legislature, I do not expect their regulations to protect the privacy of my wealthy and famous clientele as well as the ability to prevent crimes that will happen in the future,” Bailey added in an email.

As it stands, the bill has exemptions only for people enrolled in an address confidentiality program or companies acting as a “relator” in what’s called a qui tam action, an LLC bringing charges against individuals or entities on behalf of a government.

The New York bill has a federal counterpart — the Corporate Transparency Act — championed by Carolyn Maloney, who until the start of 2023 was a U.S. representative from Manhattan.

The federal law applies to all corporate entities while the state law applies only to LLCs, but those disclosing beneficial owners with the New York Department of State will need to present only the federal forms, making it more convenient, according to Margolis.

Another distinction between the two laws is that the federal bill does not make the disclosures available to the public.

“Unfortunately, the inaccessible nature of the new federal database means that this information will serve no use for civil society or local government in New York, denying New Yorkers the many benefits that beneficial ownership transparency offers,” the text of the LLC Transparency Act notes.

With a public database, fears are circulating about not only different forms of harassment taking place, but also identity theft and spam if fraudsters are able to access homeowners’ personal information.

But mostly small businesses will be negatively impacted, said Ashley Ranslow, New York state director of the National Federation of Independent Business (NFIB). The federal law already does enough to hold LLCs accountable considering that law enforcement and other government agencies can access the data. But, if everyone can access the information, Ranslow told CO, the database becomes less of a crime deterrent and more of a vehicle for activists and others.

“Unfortunately, we live in this world where there’s social media backlash and cancel culture,” Ranslow said. “But [New York’s Department of State] probably doesn’t have the mechanisms in place, so it comes down to whether or not they’re really going to be able to enforce this.”

Having a public database could aid plaintiffs in taking aim when filing lawsuits, though. That’s something Ranslow sees as a negative thing, but the New York City District Council of Carpenters sees as a very good thing.

A database that’s open to the public will put the power back in the hands of labor leaders looking to take “unscrupulous” contractors to court and use that information to their benefit in collective bargaining negotiations, said Kevin Elkins, political director of the District Council of Carpenters. 

“It’s like a burglar complaining about police having flashlights — come on,” Elkins said in an interview. “We’ve seen this in the migrant crisis right now with people who are ripe for exploitation because they may not know the rules or they may not speak English as well and they may not even know they have certain rights. If we cannot go after the people who are exploiting them, then they will continue to be at risk.”

As for the measly $250 fine for noncompliance, Elkins agrees it should be higher.

“That’s very sweet of [those opposed to the bill] for being concerned about the fine being so small, and they should go talk to the governor’s office and strongly encourage her to amend it to a stronger enforcement level,” Elkins added.

Corporate property owners will be least affected by the bill, according to Margolis, with the majority of them having to be transparent about holdings due to their publicly traded nature, while other larger companies will be easy to track through addresses already tied to LLCs in New York City property records.

GFP Real Estate’s Jeff Gural and his partners in ownership of the Flatiron Building — Newmark (NMRK), Sorgente Group and ABS Partners Real Estate — have a pending lawsuit against Jacob Garlick, alleging that he used an LLC to shield himself from liability in his botched bid for the Manhattan landmark in a March partition auction.

The lawsuit claims Garlick pushed the bid for the building to $190 million with the full knowledge that he didn’t have the scratch to cover the $19 million deposit that was due two days after bidding closed. The LLC was supposedly used to protect himself from damages. The lawsuit also alleges that Garlick may have acted on behalf of his cousin, Nathan Silverstein, a partner in the Flatiron Building’s ownership whom the other four partners were trying to remove from the joint venture.

For all the trouble Garlick put Gural and his partners through, they’re asking that he cough up the $19 million anyway. The partnership eventually secured the building for $161.5 million in a second auction in May.

“This messes things up for everyone, especially business to business,” Gallagher said, referencing the LLC’s role in the Flatiron Building fiasco. “So, I think people are used to thinking in a very defensive way about protecting profit, but I think this bill, once singed, will actually really help people do business better, and it will help the people who are good actors achieve the success that they deserve, because it’s going to clear out a lot of the nonsense from the field.”

Mark Hallum can be reached at mhallum@commercialobserver.com.