MAY 2002

THE FORMATION OF LIMITED LIABILITY

COMPANIES MADE SIMPLER AND LESS EXPENSIVE.

Over the last decade, the limited liability company has grown increasingly popular as an alternative to the S corporation. Limited liability companies combine the advantages of a corporation, i.e. limited liability, with the tax advantages of a partnership. Although a separate corporate entity, profits and losses from a limited liability company pass through to its members individual tax returns, rather than incurring any tax at the corporate level.

While seemingly interchangeable with minor differences, the limited liability company has always been more expensive to establish. While having similar filing fees to a corporation, Limited Liability Law § 206 requires publication of notice of the formation of the limited liability company for six successive weeks in two newspapers in the county in which the office of the limited liability company is located. The published notice must include essentially all of the information which is filed with the Secretary of State on the limited liability companys articles of organization. Publication of such a lengthy legal advertisement for six weeks in two newspapers can be quite costly. In Western New York, the costs range from $500 to $800. Downstate, the cost could be as high as $1,500 to $2,000. While a limited liability company failing to publish the necessary notice does not cease to exist as a corporate entity, the limited liability company can not commence a lawsuit in New Yorks courts until it has complied with the publication requirement.

The owner of a real estate company in the greater New York area challenged the publication requirement, stating that the publication requirement serves no useful purpose and violates the state and federal constitutions. The Supreme Court in New York County agreed in Barklee Realty Company, LLC v. State of New York, index number 120546/99 (2001). Stating it is doubtful that any potential defendant in a lawsuit commenced by a limited liability company would be perusing classified ads on a regular basis to ensure he or she was informed as to the organizing information of a newly formed limited liability company, the publication requirement was found to be unconstitutional. With the Barklee decision, limited liability companies are now as easy and inexpensive to form as S chapter corporations.

The State of New York has appealed the Barklee decision so stay tuned for further developments

THE PROPERTY CONDITION DISCLOSURE ACT BECAME EFFECTIVE MARCH 1, 2002, ALTERING THE LIABILITY OF SELLERS OF RESIDENTIAL REAL ESTATE.

The rule in New York has long been that a seller of residential real estate can only be held responsible by the buyer of that real estate for defects in the property learned after closing if it is established that those defects were known by the seller and affirmatively concealed by the seller. That rule has now been changed with the enactment of the Property Condition Disclosure Act which became effective March 1, 2002. Sellers of residential real estate are now required to complete a lengthy questionnaire disclosing items in the sellers knowledge regarding the condition of the physical structure on the property, environmental information including the presence of asbestos, lead and fuel storage tanks, and legal information including easements and title issues.

The buyer is entitled to rely upon the information disclosed on the questionnaire completed by the seller. If the seller provides inaccurate information, the purchaser will then have a cause of action against the seller for breach of contract. If the seller fails to provide the required disclosure statement, the purchaser is entitled to a $500 reduction in the purchase price at the time of closing. Thus, sellers of real property must determine whether the added risk of a breach of contract action is worth the $500 penalty at the time of closing. As a new requirement, there is no case law interpreting the requirements of the Disclosure Act, or breach of contract actions based upon an inaccurate disclosure.

Matthew A. Lenhard