By: Steve Masur, Amanda Chiarello and Luca Turchini
Every new limited liability company (LLC) organized under the laws of the State of New York must announce its formation by publishing a notice in two newspapers for a period of six weeks, which could cost the LLC up to $2,000 depending on where in New York it principally conducts its business. Despite the continuous and loud outrage of lawyers, investors, and others that the cost of publication hinders new startups to do business in New York, and the fact that for some reason the same requirement does not apply to corporations, the New York State Legislature has consistently reaffirmed the requirement. Until lawmakers discontinue the publication requirement, it’s up to law firms to work with new ventures to dispel confusion and help our clients’ businesses succeed in New York.
The LLC Publication Requirement
Section 206 of the New York Limited Liability Company Law requires every limited liability company to give public notice its formation in two newspapers in the county in which the LLC is located, one newspaper of daily circulation and the other of weekly circulation, for a period of six consecutive weeks. Despite the information being readily available on the New York Department of State’s corporation and business entity database, the LLC must generally include in the notice its name, formation date, address of its principal place of business, registered agent’s name and address (if any), the date or event that would trigger its dissolution (if not perpetually existent), and business purpose. The county clerk of the LLC’s home county typically designates the two newspapers in which the new LLC must publish. Once completed, the newspapers will provide the LLC with affidavits of publication, which the LLC files with the Secretary of State along with a Certificate of Publication.
The most significant problem with the publication requirement is the cost of running the notices in the two newspapers, and since the county clerk typically assigns the newspapers from a (sometimes secret) master list instead of allowing the LLC to choose the two newspapers that charge the least, costs can vary wildly, especially in New York City counties. Depending on the county in which the LLC is located, and the periodicals specified by the county clerk, the total cost hovers between $1,500 and $2,000.
Many LLCs see no immediate utility in publishing an expensive announcement that no one reads and simply ignore the requirement, allocating this money to more pressing areas of their new businesses. However, an LLC that does not comply with the publication requirement within 120 days of filing its articles of organization with the State forfeits its right “to carry on, conduct or transact any business” in New York. Practically, this means that the LLC loses standing to bring a lawsuit in New York, for example, to enforce a contract against a non-paying customer or supplier, and that the LLC would not be able to obtain a perfect Certificate of Status (also referred to as a Certificate of Good Standing or Certificate of Existence), which could be required to register in other states and even obtain a loan. However, noncompliance does not prevent an LLC from entering into valid contracts or forfeit the liability shield of its members, managers, or agents to the extent such liability may be limited by law. An LLC may reinstate its authority to carry on, conduct, or transact business in good status by completing the publication requirement as if it were just organized in New York. Thus, a noncompliant LLC wishing to sue, for example, would simply publish, file its Certificate of Publication with the State, and then file its complaint in court, or publish simultaneously with initiating its lawsuit and come into compliance prior to opposing counsel’s motion to dismiss for lack of standing.
The practical effect of the penalty language is seemingly nothing more than intimidation since there have been no visible enforcement actions against LLCs that lack the legal authority to do business in New York. Based on the Department of State’s inaction, it seems unlikely (but not impossible) that the Secretary of State maintains a record of noncompliant LLCs, further reducing any real liability for failing to publish. Today, LLCs still face the possibility of sudden enforcement of this requirement, and therefore, risk-averse attorneys would advise new ventures intent on an LLC structure to either comply with the publication requirement or simply organize elsewhere.
Intent versus Impact
In a 2006 letter to Governor George Pataki and legislative leadership, the New York County Lawyers Association cited consumer protectionism as the original legislative intent of the “antiquated” publication requirement, observing, “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’s surely a holdover from a prior age, given the public’s easy ability to obtain the same information from Department of State’s corporation and business entity database for free. Furthermore, the commitment to print media and averseness to a more accessible and less expensive electronic format gives further pause. It is unlikely the statute achieved its stated goal of causing more LLCs to publish their existence. Instead, it seems clear that well-advised new businesses will use a different entity structure in New York, or will organize in a different state, as long as it can avoid filing an Application For Authority required for a foreign LLC to properly do business in New York.
So Why Have the LLC 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 the New York State Legislature continues to preserve this requirement. It’s long been suspected and alleged that the powerful newspaper and print industries, which benefit from being on the short list of newspapers kept by county clerks across the State, have a vested interest in requiring the thousands of LLCs that form each year in New York to publish their notices.
Section 206 has strict requirements for publishing the notice in print, and not electronically. In addition, the county clerks maintain a short list of newspapers that fit the statute’s strict circulation and publication frequency requirements, and these approved newspapers can charge a premium for publishing the notices of formation. In Kings County (Brooklyn), the county clerk will not even release the full list to the public, further adding to the mystery of the cabal. 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 publication, of an amount arbitrarily set by that publication. Like a Mario Puzo novel, an LLC wanting to do business in New York is given “an offer it can’t refuse” since its only other option is to willfully ignore the law. Some have even argued that the statute’s formatting requirements are “quasi-judicial” 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 publication period back to four weeks, but at the eleventh hour, the period was increased back up to six weeks. Two more weeks does not meaningfully increase the public’s chance of becoming aware of an LLC. The public already enjoys unfettered, 24-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, which get two more weeks of revenue.
New York or Bust
Many new LLCs avoid organizing in New York to bypass the publication requirement, or make the judgment to either not comply or chose another form. Section 206 additionally applies to foreign LLCs with sufficient contacts in New York to warrant filing for authority to do business within the State. Yet New York is the crossroads of the world, a global hub for business, technology, innovation, media, and culture. It’s unlikely that LLCs can avoid doing business in New York, so what are they to do?
Almost any business starting in New York would wish to spend its money more strategically and avoid the risk of having the LLC be declared invalid. As long as the New York State Senate and Assembly continue to overlook the negative effect that the publication requirement has on new ventures and the larger industries integral to business innovation and growth, businesses with a choice will form LLCs elsewhere, while those with no choice will choose a different form or buckle to the extortion.
Attorneys Counseling Their Clients
Responsible attorneys should counsel their clients to either form a corporation, or when forming an LLC, to comply with the publication requirement 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 suit in New York, it must account for the time required to comply with the publication requirement before initiating its claim.