Thursday, May 6, 2010

LLC Publication Requirement - present and future

Since 1994 New York has required LLCs (as well as LPs) to publish a notice of formation in two newspapers. New York is one of several states which imposes this extra step upon small companies who are already sensitive to startup costs (the publication costs can range widely from county to county from around $300 to over $1,600 in Manhattan). LLCs cannot avoid this requirement by forming their LLC in a foreign state; as soon as the LLC does business in New York, the publication requirement will be triggered. All publication filing fees go to the newspapers.

How does a company satisfy this requirement? The LLC must contact the county clerk of the county where the LLC has its principal office. The county clerk will give the LLC the names of two newspapers in which the LLC must publish their notification within 120 days of formation.

What happens if the LLC fails to publish within 120 days? The company will lose its authority to do business in New York State, which means that the LLC cannot sue anyone in New York courts and the Department of State will not issue a “good standing certificate” for the entity. Another serious consequence is the potential loss of limited liability protection. However, the LLC can still defend itself in the New York courts and its contracts are enforceable. There is no penalty for failing to publish or publishing late. Even if delayed, the publication will allow LLC to regain good standing.

What is the purpose of this requirement? Theoretically, the publication aims to notify members of the general public who they are doing business with. However, in practice, it is hard to imagine that members of the general public regularly go through all the newspaper ads (especially in this Internet age when information about all companies registered in New York is freely available on the Department of Corporations website). Also, if forming an LLC in New York County, the New York Law Journal will likely be designated as one of the papers. The readers of the NYLJ are mainly lawyers, which displays the “irrationality” of the publication requirement being necessary to inform the general public who they are doing business with. Interestingly, the law does not require publications about a change in ownership or dissolution, even if such events happen shortly after the publication.

What is the future of this publication requirement? The constitutionality of the law was unsuccessfully challenged in 2003 (See Barklee Realty v. Pataki, 309 A.D.2d 310 (2003), holding that (1) the statute did not violate plaintiffs' limited right of access to New York courts, and that (2) the statute was rationally related to legitimate state interest in ensuring that limited liability companies actually made required disclosure, and thus, did not violate plaintiffs' equal protection rights). The court noted that it was not their job to consider the wisdom or efficacy of that law or whether it is superior to other alternatives; rather, it is for the legislature alone to determine whether the statute was necessary.

Recently, an interesting development has occurred in the legislature: Senator Lanza has introduced Bill S1101 eliminating publication requirements for LLC and LPs. On January 6, 2010, the Bill has been referred to the Committee on Corporations, Authorities and Commissions. It is unclear if and when the NY legislature will act on the proposal. Perhaps now is the good time for all the future LLC owners and members of the general public to let the legislators know their opinion about the publication requirement.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

No comments:

Post a Comment

Post a Comment