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.

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.

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.

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/

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.

In a lousy economy, everyone is looking for a way to save a buck. The first place to start is your LLC. This article will benefit two types of LLCs owners: (1) LLC owners who should’ve formed a corporation rather than a LLC, and (2) LLCs owners who have multiple LLC with revenue that triggers the gross receipts fee.

A Pet Shop Does Not Need to be a LLC

Peter and Lillian own a pet shop with $2 million in gross revenue. Peter and Lillian are a sweet married couple, who are throwing away $6000 each year in gross receipts fees. Although LLCs have developed a certain sex appeal and have become the “knee jerk” reaction to new business formation, it’s important to recognize that in California a LLC can pay a lot more in taxes than a corporation, because of the gross receipts fee. In fact, a LLC should be an entity of last resort – not a first choice, and only used in situations where, for example, an S-Corp is not available, depreciable real estate is involved, or the business structure requires flexibility not available in a corporation.

There might be a few special situations where it’s worth it and necessary to pay the gross receipts fee, but if your company does not have to be a LLC (like Peter and Lillian’s pet shop), and its annual gross revenue exceed $250,000, save some money by converting to a S-Corporation. The transaction should be analyzed by your CPA, but in general the process is simple (new corporate documents are prepared, membership interests are converted to shares of stock, and Articles of Incorporation with a statement of conversion are filed with the Secretary of State). A word of caution – it’s not a great idea to simply elect to be treated as a corporation by filing a federal tax election. Do it right, convert the LLC to a corporation properly, and stop paying the gross receipts fee.

Lotsa LLCs Means Lotsa Gross Receipts Fees

About three years ago, I was contacted by a real estate investor who had quickly formed 11 LLCs to own some very substantial office buildings in Los Angeles. The investor’s annual tab for gross receipts fees was $74,800 – even worse, a couple of these properties were losing money. By converting each of these LLCs to limited partnerships (and forming three corporations to act as the general partners of these limited partnerships), we reduced the annual fee from $74,800 to $11,200 – an annual savings of more than $60,000! While there are some costs associated with this sort of restructuring (ranging from lender’s consent to title insurance), the substantial annual savings is worth the cost.

The new crackdown will force LLCs to comply or suffer the consequences of not being able to transact business in the state. Noncompliance, along with the dire financial state of California has motivated the FTB to begin the policing. To implement the program, the FTB will send notification to all entities at their last known addresses, 60 days before imposing suspension and forfeiture.

To recover from suspension or forfeiture, LLCs will have to go through the same “revivor” process followed currently by suspended California corporations. Similarly, the suspended or forfeited LLCs will be subject to contract voidability – just like suspended corporations. Contract voidability prevents the suspended or forfeited entity from enforcing any claim that they might otherwise have under a contract that was entered into during the suspension or forfeiture.

To avoid the hassles associated with recovering from suspension or forfeiture, LLC owners who have missed some deadlines, failed to file returns or not paid franchise taxes, should proactively clean up the mess before their businesses are stopped in their tracks.

Charging orders provide a remedy by granting the creditor the right to distributions that would be paid to that member. However, the judgment creditor does not get management or voting rights in the LLC. Further, the creditor will only receive distributions if and when the manager of the LLC determines that it is in the best interest of the company to make a distribution. If the manager sees fit, he may decide to reinvest capital available for distribution instead of distributing it to the members (and the creditor).

In some jurisdictions, courts can order the charging order to be foreclosed, forcing the charged membership interest to be sold to the judgment creditor. Foreclosing on a charging order makes the judgment creditor the permanent owner of the economic right. The creditor may then sell the right to a third party. Alternatively, other jurisdictions, including Delaware and Nevada, have revised their statute to make charging orders the exclusive remedy of a judgment creditor of a member, thus preventing foreclosure of charging orders.

To avoid situations where a creditor forecloses and becomes a member, a LLC Operating Agreement can be prepared with a so-called “poison pill” provision, which permits the LLC to redeem (i.e., purchase) the charged LLC’s interest. In Sy’s LLC, suppose the Operating Agreement provides that when a membership interest is “charged” by a “charging order” the LLC can repurchase it for $1,000 or some nominal sum. California Corporations Code Section 17100(c) makes any such provision enforceable in most instances.

Theoretically, a “poison pill” provision may sound appealing. However, in practical situations it does very little for the member whose interest is charged. Only the remaining members benefit. The remaining members get to pick up Sy’s interest for a bargain purchase price, and they do not have to be in business with Sy’s patient. Talk about taking advantage of someone else’s adversity! But look at poor Sy – he still owes his debt to the extent that the predetermined purchase price for his membership interest does not satisfy the debt. In other words, after the LLC redeems Sy’s membership interest for $1,000, Sy’s creditor will still pursue him for the remaining $999,000.

While Sy still faces the judgment creditor, the remaining members of the LLC have benefited by purchasing Sy’s interest for $1,000! Why in the world would Sy be happy about that? Most writers explain that LLC members would be willing to enter into such an arrangement in a family situation where the remaining members are agreeing to “take care” of the member whose interest is purchased at a bargain price. First of all, that means that some degree of fraud is occurring, but even overlooking the likelihood of a creditor figuring out the plan and overturning it, what happens to Sy if the other members change their mind about “taking care” of him? Or what if they file bankruptcy, get divorced, or die? Would the heirs of the other members be willing to “take care” of Sy? Not so much.

Single member LLCs are often given a bad name, because with only one member, a “poison pill” provision can’t be added to a Operating Agreement. In other words, there’s no other members to purchase the interest of a member who faces a charging order. However, as the “poison pill” provision is by and large a myth of asset protection, single member LLCs should be formed without hesitation. See, Do Single Member LLC Provide Limited Liability Protection?

However, from a legal standpoint, a single member LLC is entirely separate from the individual that owns it, thus allowing the member to enjoy liability protection. Section 17101(a) of the Beverly-Killea Limited Liability Company Act provides that ,”no member of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a member of the limited liability company.” The statute does not differentiate between the liability protection provided to a member of a multi-member LLC and a single member LLC- they are the same in the eyes of the law.

There has been a trend to avoid the single member LLC by adding a second member with a 1% membership interest in the LLC. This achieves the useless goal of having a multimember LLC while also causing additional administrative hassle. The 1% membership interest is responsible for preparing and filing a K-1 despite having a miniscule interest in the company.

It should be noted that regardless of the number of members, a member of a LLC is also subject to personal liability under an alter ego theory in the same circumstances and to the same extent as a shareholder of a corporation.

The Secretary of State will not always prohibit the creation of an LLC for any of the above listed business purposes. However, the consequences of organizing a prohibited activity as an LLC run from no liability protection to fines and suspension with the professional’s licensing body.