Still No News on New York LLC Publishing Requirement
New York state has imposed an unusual requirement on newly formed LLCs. Each LLC is required to publish a legal notice of its formation in newspapers designated by the county clerk for six weeks. Because not all newspapers are designated, there is a noticeable lack of competition in pricing; LLCs publishing in the NYC area regularly budget $1500–2000 for this task.
The publishing rule also includes, under a parallel statute, foreign LLCs qualifying to do business in New York. So forming in Delaware doesn’t solve your problem!
As recently as 2006, the state legislature amended the statute – but they made it more onerous, not less, by increasing the effective penalty for failing to publish. Now, the penalty is that the LLC’s authority to transact business in the state is suspended on the 120th day after formation; BUT contracts are not voided, the ability to defend a lawsuit remains, and, most importantly, limited liability is not lost. And, publication and filing after the 120th day annuls the suspension of authority to do business, meaning it is as if the LLC were never suspended. As a practical matter, it means that any potential problem that arose during the interim is intended to be nullified.
Here’s the specific language:
If within one hundred twenty days after its formation, proof of such publication, … has not been filed …, the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended ….
The failure … to … publish and … file … or the suspension of … authority to carry on, conduct or transact business in this state … shall not limit or impair the validity of any contract or act of such limited liability company, or any right or remedy of any other party under or by virtue of any contract, act or omission of such limited liability company, or the right of any other party to maintain any action or special proceeding on any such contract, act or omission, or right of such limited liability company to defend any action or special proceeding in this state, or result in any member, manager or agent of such limited liability company becoming liable for the contractual obligations or other liabilities of the limited liability company.
With no relief on the horizon, what should LLCs do? Well, the easy answer, of course, is do the publication. There are services that purport to form your entity with a registered agent address in a cheaper county upstate, or in the Southern Tier, which may work out. You may be required to buy their registered agent service for a period as well, before changing it out to serve as your own registered agent in NY. (And if you’re an out-of-stater, (1) you need a registered agent regardless, which might be your lawyer and (2) why are you forming in New York?)
The more complicated analysis that a company would go through would take into consideration the cost of publishing, determine what alternative use there is for that capital, analyze whether any contracts will be in default or breached if the company is not authorized to do business in New York (hint: most lawyers would expect that any bank debt will be in default, so read carefully).
After all that, the founders might sit down and figure out if they create shareholder value by trying to optimize the timing of the publication expense or by doing something that actually creates value. My guess is that many of my clients, and certainly all my more successful ones over the years, realize that they could create a few thousand dollars of value in the time they would spend researching how to finagle the publishing requirement now and incur the legal debt of having a known problem out there just waiting for you, like a bear trap hidden under the snow in your backyard.