One New York LLC law is hurting small businesses

By Cale Guthrie Weissman , written on December 26, 2013

From The News Desk

Whenever you talk to New York politicians, the city's thriving tech and entrepreneurial scene gets thrown into the conversation. They generally talk about the numerous tech initiatives passed over the years, the millions of dollars being funneled into new startups, and how warm and fuzzy it feels to start a business in the wonderful utopia that is New York City.

One thing they won't mention, however, is the unforeseen costs of starting an LLC that the state incurs on burgeoning entrepreneurs. If small businesses are looking to do this, they should expect a few financial road bumps, however, one lawyer thinks one specific legal stipulation is truly excessive and actually hurting small businesses.

New York's Limited Liability Company Law, which was passed in 1994, contains a section that stipulates that businesses must publish information about the LLC that's being started in two newspapers for six weeks. Which newspapers are approved are at the discretion of each county's clerk.

Nehal Madhani, a lawyer and entrepreneur, says these notices cost anywhere from $250 to $1,800. On its face, that doesn't seem too extravagant, but when run in two separate publications for at least six weeks it can add up. Especially for small businesses with very little capital.

Madhani is spearheading LLC Reform, a campaign to strike this needless burden from law. His position is one that people generally agree upon, yet legislators haven't taken it up yet. "Everyone understands that it should be repealed," he told me.

It was Madhani starting his own business that made him aware of the issue. In 2009 he graduated from law school and practiced for a few years at a large firm. He then decided to start his own company called PlainLegal to provide legal resources and support to small businesses. His tribulations beginning PlainLegal were what caused him to start the LLC Reform campaign.

Historically, this sort of stipulation makes sense. "The original intent was to educate the public that an entity has been formed," Madhani said. And it's true that before the internet, newspapers were the only vehicle by which to convey this sort of news. But now, with blogs and other cheaper forms of communicating information, formally printing these ads seems a waste of time and startup funds.

He offers the example of New York Law Journal, one of the publications New York county approves. An ad in the journal costs a minimum of $723. In the past year, it has run more than 20,000 in the past year, meaning it raked in at least $15 million from these notices alone. Madhani doesn't see that money helping small business.

"Small business regularly face the risk of losing their revenue," he said, and believes this is why.

Now he is just trying to get the word out, hoping those in various entrepreneurial communities will talk to their legislators. Law makers in the past have tried to repeal it, but it has never even been brought to a vote. While the reasons are not entirely clear, Madhani speculates it could be due to the newspaper lobby.

Whether or not this is true, it's outrageous that small businesses are forced to spend money that does not go to the state nor help with the process of actually starting a business.

Illustration by Brad Jonas