Tag Archives: LLC law

Some Misgivings about the End of Section 206

2023 could see the end of Section 206, the New York LLC publication requirement. I have supported its repeal ever since I first came up against it, and I still support it, despite some misgivings. The legislation currently on the table does little to quell them.

Currently, New York Limited Liability Company law requires newly formed LLCs and LLPs to publish a notice for six successive weeks in two newspapers designated by the county clerk, “one newspaper to be printed weekly and one newspaper to be printed daily.” At the end of that period, founders have 120 days to file an affidavit of publication (and pay a $50 filing fee). Costs can run into the thousands of dollars, since local newspapers where the notices are printed — and they must be printed — effectively have a monopoly.

This part of the 1994 LLC law reads like an artifact from a bygone, pre-internet era, and it no doubt helped prop up struggling local newspapers financially even as the internet hastened their demise. It has also given rise to a professional services cottage industry.

Legislation to repeal Section 206 has been making its way at a slow crawl through the New York Senate and the Assembly since 2008. It was last referred to the Committee on Corporations, Authorities, and Commissions in January, 2022. In March of this year, the New York Bar Association came out in support of repeal. In November, the bill’s sponsors, Liz Kreuger in the Senate and Rebecca Seawright in the Assembly, both won re-election. So prospects for a repeal in the next legislative session look favorable.

The proposed amendments would not only repeal the publication requirement, but also establish something called the Department of State modernization fund. Notices would be published in an online database maintained by the Department of State; associated filing fees would go toward “the modernization and security of the Department of State’s public-facing website, and for developing alternatives to physical publication of documents.” The bill’s sponsors say it will “remove onerous and unnecessary requirements on LLCs and partnerships forming in New York state” and that online filings “will improve a citizen’s access to this information.”

The Bar Association rightly observes that LLC and LLP filing notices running in local newspapers are generally ignored. Publication costs are high; the current requirement “serves no legitimate business or economic purpose,” they write; and it creates an unjustifiable disparity, since New York corporations are not subject to the same requirement as LLCs. These are all good points, as almost anyone who has contended with the publication requirement will tell you, and 97 percent of the lawyers surveyed by the Bar Association agree.

In addition, eliminating the publication requirement will benefit the State of New York in several ways. It will likely increase business activity in New York, which will benefit the Department of State’s revenues. More companies forming and locating within the State would similarly benefit New York’s economy. As a result, this bill will likely lead to higher employment and greater tax revenue in New York. More companies with offices in New York will employ more New Yorkers, resulting in increased tax revenue to the State.

Here is where my misgivings start to kick in. It’s hard to say how “likely” any of this really is. The publication requirement is an inconvenience and a burden, but how many companies have really been deterred from forming and locating in New York because of it? When it comes to choosing between New York and Delaware, how much does Section 206 factor into the decision? Delaware LLCs and LLPs that do business in New York still have to register to do business here, pay an annual filing fee, and comply with New York tax laws. Could the repeal make New York the new Delaware? Unlikely: Delaware will still enjoy institutional advantages (namely, the Court of Chancery) and a reputation, deserved or not, as the best place to form a business and raise capital.

Maybe Delaware sets the bar too high. Will the repeal significantly increase business activity and contribute to higher employment and greater tax revenues? Look at the trend line on this US Census Bureau graph. Is the repeal of Section 206 the thing to keep it moving north? Will the upward trend accelerate once the legislation passes?

Time will tell, and some measure of skepticism seems warranted. What’s more, the repeal could have adverse consequences as well as benefits. What happens to the small, local print publications that have been practically subsidized since 1994 by LLC listings? Those local newspapers may not matter so much in New York City, where we have several daily newspapers (but I’m not sure that argument can stand much scrutiny), and protecting New York City publishers’ Section 206 interests may be outweighed by the economic benefits anticipated from the repeal. But what about in more rural counties?

Do printed daily and weekly newspapers still serve rural, or, for that matter, urban communities in other ways? Let me overdramatize just to drive the point home:

No surprise that local print publications failed to catch this brazen fraud.* It’s the rare local newspaper that can support investigative journalism or take on a newly elected member of Congress; and a Section 206 zombie newspaper probably isn’t going to be up to the job anyway. Subsidizing publishers on the back of new businesses, which is essentially what 206 does, is not the same thing as supporting local journalism. Still, it would be good to know or at least see some public discussion of what these print publications contribute to their communities before they try to set up entirely online or just fail; it would be even better to see some legislative efforts to keep local journalism alive. The LLC publication requirement cottage industry will likely disappear, too. I have more trouble shedding a tear for its demise.

Another set of questions concerns the modernization fund, its reach and its governance.

The legislation places the fund under the custody of the State Comptroller and specifies that “on the warrant of the State Comptroller” the moneys in the fund will be paid to cover modernization and security upgrades to the DOS website and development of digital alternatives to the current publication system. Moneys in this fund are “to be kept separately and not to be commingled with other moneys” in the Comptroller’s custody.

But what falls under the fuzzy heading of “modernization”? What does the firewall between modernization and other Department of State projects look like, and how will it be maintained by successive Comptrollers? Is modernization a project without end, lasting as long as the filing fees keep adding to the coffers? At bottom, my concern is that the modernization fund could, over time, turn into a consulting industry slush fund.

If it becomes law in the next legislative session, the repeal of Section 206 could do all that it promises to do: relieve founders and partnerships of a costly, bothersome requirement, improve public access to corporate records, and even deliver some limited economic benefits. It could also undermine or fail to serve the public interest in other, unanticipated ways.

*Update, 23 December: It turns out a local newspaper, The North Shore Leader, was wise to Santos’ fraud months ago. And the Leader is among the newspapers designated for publication of legal notices by the Nassau County Clerk.

This Twitter thread is also worth reading: