United States: New York Court Upholds Publication Requirement for Newly-Formed LLCs

Article by Jerry P. Peppers, David S. Baxter and Karen Dawson

The New York Supreme Court, Appellate Division, First Department, recently upheld the newspaper publication requirement for newly-formed New York limited liability companies (LLCs) under the New York Limited Liability Company Law (LLC Law). Barklee Realty Co. LLC v. Pataki, 2003 N.Y. Slip Op. 17543 (App. Div. 1st Dep’t Oct. 16, 2003). Newly-formed New York LLCs therefore must continue to budget for what can be a high cost of publication (upwards of $3,500 in some cases).

Section 206 of the LLC Law requires a newly-formed New York LLC to publish notice of formation – including general facts about the LLC such as its name and the date of its formation – in 2 newspapers designated by the county clerk in the county in which the LLC’s office is to be located, once each week for 6 consecutive weeks, within 120 days of the LLC’s formation. This publication must be followed by the filing with the New York Department of State of an affidavit of the printer or publisher evidencing proof of such publication.

The main consequences of failing to satisfy the newspaper publication requirement are the inability to maintain an action or special proceeding in New York (e.g., filing a lawsuit) and potential hindrance of transactions (e.g., inability to obtain an opinion of counsel that an entity has been duly formed). However, such failure would not impair the validity of any other act or contract of the LLC, would not prevent the LLC from defending itself in New York and should not otherwise affect the limited liability of the LLC’s members.

Other entities are subject to comparable publication requirements in New York. These include foreign LLCs (i.e., those formed outside New York), domestic and foreign professional service LLCs, domestic and foreign limited partnerships and domestic and foreign registered limited liability partnerships. Corporations, whether domestic or foreign, are not subject to similar publication requirements in New York.

The plaintiff LLC in Barklee sought to have the court declare the publication requirement unconstitutional for reasons of due process, equal protection and unencumbered access to the court system.

In a unanimous 5-0 decision, the Appellate Division declared Section 206 to be constitutionally sound, overturning a November 28, 2001 decision of the Supreme Court, New York County, holding it unconstitutional. The appellate judges reasoned that the publication requirement is simply a non-discriminatory administrative regulation, and deferred to the legislature as to whether it is wise or effective.

LLCs and other unincorporated entities forming or qualifying to do business in New York should keep in mind what can be high costs of publication. For instance, in New York County, the publication fees often range from $1,500 to $3,500 (depending on which Manhattan newspapers the county clerk designates for publishing), which dwarf the usual document filing fees.

Most other jurisdictions, including Delaware, do not have similar publication requirements, so entities not doing business in New York should contemplate forming outside of New York. Entities that must form or qualify to do business in New York should consider the corporate form. If an unincorporated structure is important, a representative of the entity should try to speak to the county clerk directly about publishing in certain newspapers charging lower advertising fees rather than simply hoping the clerk will not assign a newspaper with high publication costs.