New York’s Burdensome LLC Publication Requirement: Relief May be on the Horizon

Commentators widely agree that New York’s LLC publication requirement hurts both small businesses and the state itself. It hurts small businesses by increasing the startup costs for businesses that can benefit from the flexible management structure that an LLC can provide. It hurts the state because the existence of the onerous publication requirement has led to fewer LLCs being formed per capita in New York than in comparable states (such as Delaware, New Jersey, Nevada and Connecticut). As a result, New York State has lost out on the filing fees that accompany new business formation.

Thankfully, relief may be on the horizon.

In February 2009, a bill repealing the publication requirement was introduced in the New York legislature (S1667/A4496). In the memo accompanying the bill, the sponsors explain:

The intent of the Legislature when enacting the LLCL in 1994 was to allow businesses to enjoy the advantages of incorporation, without requiring them to adopt the organizational constraints of the business corporation law. This is particularly useful for small businesses. §206 of the LLCL requires that after the articles of organization have been filed, the LLC must publish a copy of the articles or a notice of their substance, once a week, for six consecutive weeks, in two newspapers from the county where the LLC is located. The LLC is then required to file affidavits of publication within 120 days and pay an additional fee of $50.00. These requirements are both unnecessary and very expensive sometimes prohibitively so. Also, there are no similar requirements in the Business Corporation Law. The transparency that publishing this information allows can be better achieved today through the internet. Indeed, the Department of State already maintains an excellent publicly-accessible online database. It is extraordinarily difficult to find this published information when or after it appears in print in a daily or weekly local print publication . . .

To improve access to LLC information, the bill also requires that department of state promulgate rules and regulations for the on-line filing of articles and certificates, and establishes a fee of $50.00 for the on-line filing of documents with the department of state. This filing fee is much more reasonable than the cost of publication in the least costly county. Moreover, the fee will be the same regardless of where the LLC is located. The fee will help fill the state’s coffers, not those of private media interests such as the huge Incisive Media (publisher of the New York Law Journal, which is one of the papers designated for publication in New York County).

Currently, the bill is stuck in the legislature’s corporations, authorities and commissions committee. With more pressing matters to deal with—New York’s budget is currently more than three months overdue—it’s unclear when S1667/A4496 will make it back to the Senate and Assembly floors. To help encourage the legislature to act on S1667/A4496, we encourage you to sign the “Why 2K?” petition, which you can find here.

What Happens if You Ignore New York’s LLC Publication Requirement?

Our last post about New York’s LLC publication requirement drew some heated comments from small business owners who are frustrated by this anachronistic requirement. Although we advise our clients to comply with the requirement, we know that many do not do so.  We decided to investigate whether non-compliance has any practical consequences.

A Brief Refresher

In New York, §206 of the Limited Liability Company Law requires an LLC to publish, within 120 days of its formation, a notice in two general-circulation newspapers (one daily, one weekly) in the county where the LLC was formed. The notice must run once a week for six weeks and include a number of facts concerning the company and its formation. If an LLC doesn’t fulfill the publication requirements, the company’s authority to do business in New York can be suspended. The costs of publication vary widely from county to county, ranging from around $300 in some upstate counties to over $1,600 in New York County (Manhattan).

The LLCs That Have Been “Caught” Haven’t Suffered Any Negative Consequences

In re Equities Capital Corp., is recent bankruptcy case involving the publication requirement. In that case, a foreign LLC (which is subject to publication requirements that are nearly identical to those applicable to New York LLCs) sought to retain a contract deposit after the debtor (Equities Capital) failed to close on a transaction involving an option contract. The debtor argued that the foreign LLC—which did not fulfill the publication requirement within 120 days of qualifying to do business in New York—couldn’t recover for breach of the option contract because: (1) it didn’t have the authority to enter into the option contract in the first place; and (2) therefore couldn’t sue to keep the deposit. The court rejected the debtor’s argument on two grounds.

First, the court noted that §802 of the Limited Liability Company Law (which is substantially identical to §206) explicitly says that the failure to comply with the publication requirement “shall not limit or impair the validity of any contract or act of such . . . limited liability company, or any right or remedy or any other party under or by virtue of any contract, act or omission of such . . . limited liability company.”

Second, the court pointed out that, under the same statute, when an LLC files documentation of its substantial compliance with the publication requirement, the previous suspension of its authority to do business in New York is annulled. Since the debtor complied with the publication requirement after the litigation over the deposit commenced, the suspension was revoked, retroactive to the date the LLC started doing business in New York; in other words, it was as if the suspension had never happened.

A handful of New York state courts have been faced with similar arguments in cases involving New York LLCs, and all have reached the same conclusion. Thus, an LLC that wishes to enforce a contract doesn’t even have to wait until publication is complete to sue for breach of contract: it can cure its failure to publish even after it files a lawsuit.

So, while we can’t advise you to ignore the law, we can tell you that our legal research hasn’t revealed a single case in which an LLC suffered any negative consequences because it failed to comply with the New York LLC publication requirement.

LLCs formed for Web Productions, Short Films, Not Exempt from New York’s Absurd Publication Requirement

In New York, a Limited Liability Company must publish, within 120 days of its formation, a notice in two general-circulation newspapers (one daily, one weekly) in the county where the LLC was formed. The notice has to run once a week for six weeks and include a number of facts concerning the company and its formation. If an LLC doesn’t fulfill the publication requirements, the company’s authority to do business in New York can be suspended. (See, http://www.eminutesonline.com/new-york%e2%80%99s-irrational-llc-publication-requirements-hurt-business-owners-and-benefit-special-interests/#more-44). 

Fortunately, there is a narrow exemption for “theatrical productions” (see, http://www.eminutesonline.com/theatrical-production-llcs-and-the-new-york-publication-requirement/#more-295)

Despite the growing number of small web productions, the exemption does not apply to LLCs formed for short films, web series, or webisodes.  The law (see,http://codes.lp.findlaw.com/nycode/ACA/F/23/23.03) provides that a LLC that is a “theatrical production company” is exempt from the requirement for publishing its articles of organization, application for authority or notice containing the substance thereof … so long as the words “limited liability company” appear in its name”.  The term “theatrical production company” is defined narrowly by the statute to refer only to entities formed for “live-staged dramatic productions, dramatic-musical productions and concerts”.

Because of the costs imposed by the publication requirement, business owners should think twice before forming an LLC in New York, particularly in the downstate counties.  In many cases, the solution is to form a corporation, which is not subject to the publication requirement, rather than a LLC.

How to Form a Corporation that will Act as a SAG Signatory

When a production company wishes to employ Screen Actors Guild (SAG) performers, the company must agree to follow various SAG rules related to the employment to SAG performers. By doing so, the corporation becomes a SAG “signatory”. This article outlines the corporate actions that must be taken by a production company that wishes to become a SAG signatory.

Step One.  First, a corporation must agree to abide by the terms of the Producers-Screen Actors Guild 2002 Codified Industrial and Educational Contract and the 2008-2009 Extension to the 2005 Memorandum of Agreement (collectively, the “SAG Agreement”).  In California, this can be accomplished by (1) the corporation entering into the Agreement, and (2) the shareholders and directors authorizing the corporation to do so.  SAG requires “incumbency” provisions in its resolutions (i.e., a specific corporate resolution that identifies the person who is authorized to sign the SAG Agreement on behalf of the corporation).  A copy of the SAG Agreement is contained in the following packet of materials, Full Ind Sig Forms (e-mail).  For a form of Joint Written Consent of the Shareholders and Board of Directors, see jtwrittenconsent. 

Step Two.  For corporations, the production company should complete the SAG Company Information Sheet.  Doing so will require a copy of the company’s Articles of Incorporation, as well as the names and addresses of the officers of the corporation (i.e., President, Secretary, Treasurer, and Vice Presidents, if any).  A California corporation must have a President, Secretary and Treasurer. For more information, watch this video “What Officers Are Required?” http://www.eminutesonline.com/what-officers-are-required-watch-video/

When a performer joins SAG, she is required to comply with Global Rule One, which states that “No member shall work as a performer or make an agreement to work as a performer for any producer who has not executed a basic minimum agreement with the Guild which is in full force and effect.” By becoming a SAG “signatory”, a production company is permitted to hire SAG members for its projects, and, in exchange, obligates itself to comply with SAG policies (e.g., nondiscrimination), pay certain taxes and make various contributions on behalf of SAG members participating in the company’s projects (e.g., Social Security, tax withholdings, unemployment insurance and disability insurance payments, and payments to the Screen Actors Guild-Producer Pension and Health Plans).

Similar authorization and documentation is required for limited liability companies (LLCs) and limited partnerships (LPs) that wish to become SAG Signatories.   For more information about the basic differences between LLCs and corporation, watch this video “Should I form a LLC?” http://www.eminutesonline.com/should-i-form-an-llc/

Can Your California LLC Avoid the Annual $800 Franchise Tax?

When a newly formed LLC elects to dissolve, on the other hand, the process is far simpler and the LLC does not need to pay the $800 annual Franchise Tax if certain requirements are met. A newly formed LLC can file a Certificate of Cancellation Short Form (LLC-4/8) and the $800 Franchise Tax will be waived if the following requirements are met:

1. The Certificate of Cancellation is being filed within 12 months from the date the Articles of Organization were filed with the Secretary of State;
2. The LLC has no debts or liabilities (other than tax liabilities);
3. The assets of the LLC have been distributed to the person entitled thereto, or no assets have been acquired; 
4. The final tax return or a final annual tax return has been or will be filed with the Franchise Tax Board; 
5. The domestic LLC has not conducted any business from the time of filing the Articles of Organization (including opening of a bank account and depositing any funds into such bank account); 
6. A Majority of the Managers or Members voted to dissolve the entity; and
7. Any investments received from investors have been returned to those investors.

Looking to cut costs? Start with your LLC

Virtually everyone these days is looking for ways to save some money, and the first place to look for California investors should be your LLC.California notoriously taxes LLC gross revenue. Read more

California Cracks Down on Deadbeat LLCs

Prior to 2009, California did not impose any suspension or forfeiture penalties for LLCs that failed to pay their annual franchise tax, any associated penalties, interest, of failure to file a return. Consequently, unlike corporations, LLCs were able to continue to operate without consequence for not following the statutory tax prescription.That has all changed. Read more

Debunking the Myth of LLC Poison Pills

The celebrated psychologist Sy Kosis is sued for malpractice. After a trial, Sy’s patient has a $1 million uninsured judgment against him and then begins turning over every stone to find Dr. Kosis’ assets. It turns out that Sy owns a 25% interest in a LLC that owns an apartment building. Can the creditor grab Sy’s interest in the LLC? Read more

Do Single Member LLCs Provide Limited Liability Protection?

One of the single most important reasons why people form business entities is liability protection. In the eyes of the law, single member limited liability companies, despite having only one member, provide the exact same protection as limited liability companies with more than one member. Read more

LLCs Ain’t For Everyone

Not all types of business ventures are created equally in California. A California LLC or a foreign LLC registered to do business in California may not engage in a business which is registered, licensed or certified. Accordingly, professional LLCs are prohibited in California. Read more

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