In New York, every new Limited Liability Company must announce its formation by placing notices in two publications for six weeks, at a cost of up to two thousand dollars. Despite the information being readily available on the website of the New York Department of State, the Legislature has long affirmed the mandatory publication of an LLC’s name, basic contact information, and notice of formation. Lawyers, investors, and others who understand how difficult it is to attract new start-ups to New York have long been outraged by the publication requirement, but the Legislature has consistently reaffirmed the requirement, most recently in 2006. Various arguments have been advanced regarding the purpose of this tax on new businesses in New York. But ultimately, the real effect is to foster confusion and drive new businesses away from New York. Now, there is a new movement to abolish the requirement, which is picking up steam.
The Publication Requirement and its Most Recent Changes
Prior to June 1, 2006, the publication requirement (Limited Liability Company Law § 206) required businesses formed as LLCs to announce their existence in two newspapers, one daily and one weekly, for a period of six consecutive weeks. Depending on the county in which the LLC is located, and the periodicals specified by the County Clerk, the total cost hovers around two thousand dollars. The publication cannot take the form of an advertisement. It must adhere to strict formatting guidelines spelled out by the statute.
Seeing no immediate utility in publishing an expensive announcement that no one reads, many LLCs have simply ignored the requirement and have allocated this money to more pressing areas of their business. Prior to the 2006 amendment, the only penalty enforced by the state was that the LLC would lose standing to bring a lawsuit in New York. Consequently, a noncompliant LLC wishing to sue would simply publish, wait six weeks, file and sue, or publish simultaneously with their lawsuit and come into compliance prior to opposing counsel’s motion to dismiss for lack of standing. With no penalties for delaying the publication of the notice, it was a better business decision to publish when actually necessary, instead of within one hundred twenty days as the law requires.
Many attorneys presumed that the Legislature would eventually amend the statute to do away with the publication requirement, especially given that only two other states have similar publication requirements for LLCs.
However, instead of removing the publishing barrier, in 2006, the Legislature amended the penalty to suspend a noncompliant LLC’s right “to carry on, conduct or transact any business” in New York. Initially it was difficult to discern what this actually meant, because the new law explicitly does not impair the LLC’s right to contract, or the right of other parties to sue the LLC. Furthermore, the statute states that suspension will not “result in any member, manager, or agent of such limited liability company becoming liable for the contractual obligations or other liabilities of the limited liability company.” The practical effect of the new penalty was essentially nothing more than an intimidating rewording of the preexisting penalty. In addition, the Secretary of State has indicated it will not keep a record of LLCs that are not in compliance, further reducing any real liability for failing to publish. Still, faced with the possibility of sudden enforcement, risk-averse attorneys are likely to advise new ventures to form elsewhere.
What if New York is the Only Place you can Do Business?
According to the New York County Lawyer’s Association’s Executive Committee’s 2006 letter to then Governor Pataki, the original legislative intent of this “antiquated requirement…[was] one of consumer protection, as the publication of the notice of formation ostensibly serves to put the public on notice that an entity has been formed to do business… within a corporate structure that shields its owners from personal liability for the debts, obligations and liabilities of the business entity.” But if this is the true purpose of the requirement, then it is surely a holdover from a prior age, given the easy ability to obtain the same information from the secretary of state’s own website for free. However, the analysis above begs a more important question. What is a well-meaning early stage entrepreneur supposed to do, given the complicated state of affairs discussed above?
The statute appears unlikely to achieve its alleged goal of causing more LLCs to publish their existence. Instead, it seems clear that well-advised new businesses will use a different business form in New York, or will form their LLC in a different state, as long as they can avoid filing an Application for Authority to do Business in New York. In short, well-informed LLCs will avoid forming in New York if possible.
So Why Have the Publication Requirement at All?
Given the clear discrepancy between the stated purpose and actual consequences of the publication requirement, there must be some valid reason why the New York Legislature continually preserves this requirement. We believe the most probable answer is the financial benefit afforded to the short list of newspapers in which LLCs must publish.
The statute dictates explicit requirements for the publishing and formatting of the notice ads. Also, the County Clerk maintains a short list of newspapers that fit the statute’s strict circulation and publication frequency requirements. This short list of approved newspapers can charge a premium for publishing the notices of formation. Consequently, the publication requirement forces an LLC choosing to do business in New York to pay what amounts to a state mandated formation tax to a private print publication, the amount of which is arbitrarily set by that publication. Like a Mario Puzo novel, the LLC wishing to do business in New York is given “an offer it can’t refuse.” The only other option is to willfully ignore the law. Some have even argued that the statute’s formatting requirements are “quasijudicial” and will create a controlled market that is likely to further increase this premium.
An examination of the 2006 legislative history adds credence to this theory. The original Chapter 767 amendment scaled the duration of publication back to four weeks, but at the eleventh hour the duration was pushed back up to six weeks. Two more weeks does not meaningfully increase the public’s chance of becoming aware of a LLC. The public already enjoys unfettered, twenty-four hour access to a database containing information about every New York business. The only beneficiaries are the periodicals that New York LLCs must pay to publish a fourteen-line ad. The publications get two more weeks of revenue.
New York’s publication requirement will cause new LLCs to avoid forming in New York in order to avoid the unnecessary fees, or if they must form in New York, to ignore the requirement or choose a different form. Since this statute also applies to any foreign LLC with sufficient contacts in New York to warrant filing for authority to do business within the state, it will also cause these LLCs to avoid doing business in New York, if possible. The numbers bear out the truth of these statements. As the charts below show, the ratio of new LLC formations to new corporation formations in New York is half that of both DE and NJ. All figures are derived from IACA annual jurisdictional reports, 2008.
Total NY LLCs vs. Total NY Corps: The slower growth of NY LLCs compared to DE LLCs suggests that businesses are choosing to form corporations instead of LLCs, or simply choosing to form in a different state.
The Legislature should not continue to overlook the negative effect the publication requirement has on LLCs that want to do business in New York. Almost any business starting in New York would wish to spend its money more strategically and avoid the risk that the LLC will be declared invalid, exposing the owners to personal liability. Businesses with a choice will form LLCs elsewhere, while those with no choice will choose a different form. We urge the Legislature to abolish the publication requirement.
How Attorneys Should Counsel Their Clients?
As long as the publication requirement for LLCs exists in New York, responsible attorneys should counsel their clients to either form a corporation, or when forming an LLC, to comply with the publication requirement in order to remain in good standing within New York. However, since the penalty does not revoke the right to contract, clients may be made aware that the only direct penalty for not complying with the law is the loss of the right to bring lawsuits within the state. As a result, if a noncompliant LLC should ever need to file a suit in New York, it must take into account the time required to bring itself into compliance with the publication requirement before filing its claim.
Mr. Masur is the managing director of MasurLaw, a technology, entertainment and venture law firm internationally recognized for its work with new businesses. Mr. Masur would like to thank Andrew Bain, Peter Elkins-Williams & Stephen Barrett, without whose help this article would not have been written.