In the last few blog posts we have undertaken a general comparison in the tax treatment and various other factors that are relevant when deciding whether it’s better to form an S-Corporation or a Limited Liability Company (“LLC”) for your next start-up. There’s one other requirement that’s worth mentioning in this context. Formation of either an S-Corp or LLC carries with it the same basic costs, except that in New York, Limited Liability Companies carry with them an additional publication requirement.
This requirement is a throwback to the original limited partnership law from one hundred or so years ago. It’s one of those arcane legal notice provisions that make little or no sense in our digital age (when information is much more readily available online than in print) except that it nicely serves the interests of newspaper companies like the New York Times and The New York Law Journal, who profit handsomely every time a legal notice runs in their paper.
The publication requirement can be expensive, depending on the county in which you form your entity (from $300 – $1,500 or so is a reasonable estimate). Failing to publish does not invalidate the formation, but it does add wrinkles to the life of your New York LLC.
Pursuant to the New York Limited Liability Company Law, an LLC is required to publish notice of its existence within one hundred twenty (120) days of its formation. The Limited Liability Company must make these publications in two general-circulation newspapers in the county where it was formed. The notice must run once a week for six weeks. I imagine this legal requirement still makes good sense to the Sulzberger family and a handful of others if to no one else.
The publication requirement applies to Limited Liability Companies formed within New York (we refer to these as domestic LLCs) and Limited Liability Companies formed in other states, but doing business within New York (we refer to these as foreign LLCs).
Pursuant to statute, if a Limited Liability Company doesn’t fulfill the publication requirements, the company’s authority to do business in New York can be suspended.
The Limited Liability Companies That Haven’t Published Haven’t Suffered Any Negative Consequences in New York
For whatever arcane and mysterious reasons, the New York Limited Liability Company’s Law requires publication notice in two general circulation newspapers. I do not encourage you (or any of my clients) to defy the law. However, the law – for either a foreign or domestic LLC – specifies that a company’s failure to file the required proof of publication shall not impair the validity of any of its contracts or impair the right of any other party to maintain any action or proceeding against the company or prevent the company from defending any such action or proceeding.
That means the Limited Liability Company can be sued and maintain its status and the limits on liability. A Limited Liability Company can enforce its contracts and can sue to enforce a contract, and may cure this defect after the commencement of the lawsuit.
Again, while I won’t advise you to ignore the law, legal research has not yet revealed a single case in which an LLC suffered any negative consequences because it failed to comply with the New York LLC publication requirement.