One New York LLC law is hurting small businesses | Hacker News Reader

One New York LLC law is hurting small businesses

pando.com

35 pointsnehalm44 comments

The explanation in the article leaves out a key piece of the whole rationale for the law. The person spearheading the change says that "[t]he original intent was to educate the public that an entity has been formed." This is only part of the story. The real purpose is to give the public notice that a limited liability entity has been formed.

Historically, limited liability has not been the default, but rather has been the exception. Thus, it was considered important to give the public, including service providers and potential vendors, notice of the existence of a new limited liability entity. This way, the public, in contractual dealings with the entity, knows that their legal right to sue is circumscribed to suing only the entity itself, not the people who own and control the entity. This is a real consideration for, e.g., manufacturers that provide inventory on credit.

Of course, in the internet age it's easy for any vendor to quickly check the status of a potential customer with an internet search. Also, limited liability has basically become the default for business entities, so potential service providers and vendors are always wary of the issue. And of course: nobody reads newspapers anymore. But people saying that the law is "corrupt" are way off the mark. There was a very legitimate purpose behind such notice requirements, which have long been a part of the process of creating limited-liability entities.

Unfortunately, no—by the statute the company’s name must include the string ‘Limited Liability Company’ or ‘LLC’ [1]. Practically speaking it would be impossible for anyone dealing with the entity to be unaware it has limited liability when the entity’s very name has to include the words ‘limited liability’.

[1] http://codes.lp.findlaw.com/nycode/LLC/2/204

The general history is right, but the timing is off. NY LLC law was passed in the mid-1990s. Unlimited liability partnerships and sole proprietorships were long since out of style by then.

In 1996, the U.S. had almost 17 million sole proprietorships file a tax return versus about 4.6 million corporations.

> Historically, limited liability has not been the default, but rather has been the exception. Thus, it was considered important to give the public, including service providers and potential vendors, notice of the existence of a new limited liability entity. This way, the public, in contractual dealings with the entity, knows that their legal right to sue is circumscribed to suing only the entity itself, not the people who own and control the entity. This is a real consideration for, e.g., manufacturers that provide inventory on credit.

My understanding is that there is no difference, with respect to liability, between LLCs and traditional corporations. Thus, how can you justify this requirement applying only to LLCs?

LLCs were actually quite controversial when they were introduced, because they offer the limited liability of a corporation without a lot of the procedural protections to the public of the corporate form. A corporation is "less dangerous" because those procedural formalities create greater separation between corporations and their owners, reducing the risk that they will be used to simply limit liability that should rightfully be borne by the proprietor.

The law firm I used to work for had a great hack for this law. Essentially the LLC was formed with a mailing address in a county where the publishing was exceptionally cheap and after the publishing was completed the LLC address was amended to the HQ/principal place of business address. We did the publishing requirement for clients at the time of formation, for $284.95 (this was in addition to: NEW YORK STATE FILING FEES, ATTORNEY'S FEES, LLC SEAL AND BOOK, ARTICLES OF ORGANIZATION, LLC MINUTES, LLC REGULATIONS, MEMBERSHIP CERTIFICATE AND PRELIMINARY NAME SEARCH which we charged $234.95). Total w/publication $519.90, which falls in line with the article to some degree, whether that is reasonable is for the client to decide.

For those that care. Section 206 of the Limited Liability Company Law of the State of New York states: Upon the effectiveness of the initial Articles of Organization of an LLC, a copy of same or a notice containing the substance thereof shall be published once each week for six successive weeks, in two newspapers of the county in which the office of the LLC is located, one must be a daily newspaper and the other a weekly newspaper designated by the County Clerk. Proof of such publication by the Affidavit of the publisher or printer of each newspaper must be filed with New York State within 120 days after the effective date of the Articles of Organization of the LLC.

As a side, I am generally pro-LLC (this is a serious legal analysis, do not just make a decision based on others advice see a corporate lawyer), but my understanding this runs counter to the general principal of SV where they are pro-Corp.

Are there any issues with filing articles of organization with an address that you know will change?

I can not answer your question as I am not a New York lawyer.(unauthorized practice and all)

However, more generally it is very common for a small business to file articles with different address and immediately amend after filing. Why? Because it is the chicken and egg problem, a business can not sign a business lease in the business name without the articles being filed and articles can not be filed with a business address before the lease is signed. Therefore it is normal course of business for small businesses to file articles with a home address, then upon formation sign a lease in the business name, then amend the articles to reflect the new business address, and all along the businesses know they will do this.

Checked out plainlegal.com (mobile), very nice.

Edit: for clarification I am a FL attorney, my old firm has offices in 7 states (including NY) and the UK

I hate this law.

This fee is to have your LLC advertised in a newspaper. This is not going to the state, but to a newspaper or journal. The fees can be high, over a $1000 in Manhattan from what I understand.

This is to inform the public that you have formed an LLC with the name so they can contest it or what not.

The most amazing thing is the moment you register your LLC it is published on a state website. The day after I formed mine I got about 6 calls from banks wanting to setup my business account.

So the law is 100% unnecessary and corrupt.

I didn't pay to have advertisements taken out. My LLC is not in good standing.

What does that mean, well from what I have read I am not allowed to sue as an LLC until I come in compliance.

http://www.masurlaw.com/1182/new-york-llc-publication-requir...

"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."

Now, my LLC is small and exists purely for organization of income, banking and taxes. If I had real liabilities, employees or large contracts, I would think twice.

--edit--

I just remember one more thing about the law, theater groups are exempt.

http://www.dos.ny.gov/corps/llcfaq.asp#pubreq

Others have suggested that the implications of not publishing may be worse, and you may lose limited liability protection. http://www.businesslawpost.com/2010/05/llc-publication-requi... http://www.kramerlevin.com/files/Publication/71ccb940-3fa6-4...

"Whether or not this is true, it’s outrageous that small businesses are forced to spend money that does not go to the state nor help with incorporation."

How does a journalist end a story with "whether or not this is true"?

"Madhani speculates it could be due to the newspaper lobby."

That's the end of the previous sentence and the antecedent to "this".

On the other hand, one New York benefit for tech companies is ST121.3 (sales tax exemption for hardware): http://www.tax.ny.gov/pdf/current_forms/st/st121_3_fill_in.p... I had some issues with the 5th ave apple store, but the lincoln center store handled everything smoothly.

The publication cost, even in manhattan, is less than the savings on a few new macs

To clarify, this law also applies to LLCs formed in Delaware or elsewhere if they are operating within New York. It does not apply to corporations, regardless of the state of incorporation or the tax status (C or S).

Its interesting that its more difficult and expensive to create an LLC while in New York than to create a corporation.

An idea - don't incorporate in business unfriendly state like NY.

Even if you incorporate in say Delaware, if you are physically present running your business in New York you must register your LLC there (Authority to Transact Business) which comes with the same requirements.

That's right - "foreign LLCs" seeking authority to do business in NY are subject to the same requirement: http://www.dos.ny.gov/corps/llcfaq.asp#pubreq

Interesting - sounds like things are worse than I thought. What does "physically present running your business" mean for a web service?

(Really curious here because my cofounder lives in NY.)

if you are living and working in a state that your company should be registered in that state

What if owners of a company don't live or work in the same state as each other? What if they don't even live in the US?

i honestly dont know about operating a us company from a foreign country but if you have two owners in two states you would have a primary state where you incorporate and the other state you would set up a foreign corp (basically says one company is working in a new state) additionally you could choose a third state like delaware then have a foreign corp in each of the other states

nit pick: LLCs are formed, or organized, not incorporated. only corporations can be incorporated.

When I turned my sole proprietorship in NYC into an LLC, I researched this rule extensively, and came to the conclusion that you can safely ignore it. I believe the law is silent on actual consequences of publishing the notices later when you supposedly need it (for legal purposes). IANAL.

It's a bet, but a pretty safe bet. After all, opening a small business is already betting with your time and money. Just add this decision to the risk and forget about it. I'd rather bet the $1000 towards an endeavor with more potential upside.

As someone who has been living in NYC and is currently considering what state in which to register an LLC, I feel like the sub-$1000 difference filing in NYC would make to my registration is barely a factor. If you're trying to do business in NYC, this is not a significant amount of money.

I agree. This public notification requirement is a small nuisance, not a true impediment to building a business.

Of course, I'd rather it not exist but there are many, many more important things to focus on than this when building a business.

There are also better uses of startup capital than expensive newspaper notices that aren't benefiting the public as the same information is available on state websites. In the aggregate, millions of dollars are being transferred to newspapers each year through this law.

All that's probably true, but the effort to change a largely inconsequential (my view) law would not be worth the cost (time and effort) that could be more effectively spent elsewhere.

And the fair dealer in me doesn't feel too bad about giving some free revenues to an industry largely gutted by start ups.

A $1000 might not be a big fee to you, but to some small business that is a lot of money. That might be the choice between getting a new equipment or complying.

Think about small food vendors, a jewelry designer, contractors, a plumber, etc who wants to setup an LLC and are faced with this graft to a newspaper no one reads.

Would you feel the same if it was a fee that went to the state with no apparent benefit?

I was curious as to what the notice looked like and found the following:

http://classifieds.nydailynews.com/new-york-city/legalpublic...

Example text:

"GREEK ISLANDS TAXI LLC ARTS OF... Greek Islands Taxi LLC Arts of Org. filed NY Secy of State (SSNY) 12/3/13. Office: Queens Co. SSNY design. agent of LLC upon whom process may be served and shall mail copy to 3321 21st St. Astoria, NY 11106. Purpose: any lawful activity."

The state of California has a $850 (or so) minimum annual franchise tax. Let's lower that to $150. Or $15.

That's exactly right. There are a few exceptions for new non-profits and such, but I doubt the exceptions would apply to real corporations.

Just one? I feel like the victim of a cheesy "one weird trick" advert re: the link title.

In order to minimize the cost people generally initially file with an agent somewhere upstate with cheap publication costs and then if desired move the LLC once it's formed.

I agree that it's a rather silly rule as no one ever reads those notices. On the other hand if there were to be a major reform I'd just as soon see them abolish the LLC and instead make the ordinary corporate form a little more flexible and streamlined.

I think it makes sense to have two different structures. One with more formality, procedure, and capitalization requirements, and one with less but also a thinner shell of limited liability. It shouldn't be easy to set up an entity that insulates you from liability without following procedures to ensure that it is actually independent and capable of paying its own judgments, etc.

In practice is veil piercing any more common against LLCs than ordinary corporations?

I don't think so. I'm saying that given the dearth of formalities and capitalization requirements, it should be easier to pierce the veil with LLCs.

He offers the example of New York Law Journal, one of the publications New York county approves. An ad in the journal costs a minimum of $723. In the past year, it has run more than 20,000 in the past year, meaning it raked in at least $15 million from these notices alone. Madhani doesn’t see that money helping small business.

Pretty nice deal for New York Law Journal.

This varies by extreme amounts depending on county. I started an LLC in NY, including publishing for about $700.

It's an annoying law and should be repealed but why is this site asking for access to so much data in order to become a supporter? They want to be able to read your tweets and see who you follow and/or see 1st and 2nd degree connections on linkedin.

Does the author of the article really not understand that LLCs are not corporations? LLCs can't be "incorporated." Very sloppy reporting.

If there was ever proof of Karl Denninger's statement[0] that "one man's waste, fraud, abuse, scam, and theft is another man's paycheck," this is it. The law will never be changed, thanks to the influence of the newspapers that benefit...who, because they benefit, have the cash to influence the legislators.

[0] See e.g. http://www.market-ticker.org/akcs-www?singlepost=3149840

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