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Limited Liability Corporations and the LLC Loophole

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WNYC has been reporting on the fundraising efforts of Democratic gubernatorial candidate Andrew Cuomo. He's raised more than $25 millionĀ  -- and more than $3 million of it comes from "limited liability companies," or LLCs. The practice is legal, but government watchdogs say it's a loophole that lets wealthy individuals get around contribution limits by setting up shell companies.

Candidate Cuomo has pledged to close the LLC loophole, but he says in order to win office and reform the campaign law, he first needs to get elected. And to get elected, he says, he needs to keep the loophole open for just a little while longer, because he is not rich enough to finance his own campaign.

Blair Horner, the legislative director for the New York Public Interest Research Group, discusses the issue with WNYC's Richard Hake.

WNYC: You actually worked with Attorney General Cuomo's office in an initiative to bring better transparency to the way our state government works. And part of the goal of that initiative is to help the public understand the state's campaign finance system. Can you talk a little bit about what's good about the current system, and what's lacking?

HORNER: Well, the current system -- the best part of the current system is that the disclosures of campaign donors are made publicly available on the internet so anyone can search for donors or contributors that they're interested in. The bad news is the system is a mess outside of that. The disclosure requirements are weak compared to the rest of the country. There are loopholes that make the law more loophole than law. And it's basically not enforced. The state Board of Elections does not have the resources or the political will, frankly, to crack down on campaign finance coffers. So it's a bad system, it needs overhaul, and so far it hasn't happened.

Tell us about the LLC loophole. First of all, for those of us who don't know, what is a company that's an LLC?

A Limited Liability Corporation, an LLC, is a way to organize a business that is not considered technically a corporation or a partnership -- it's sort of in between. The IRS considers LLCs -- you actually can choose how you want to be treated -- as a Limited Liability Partnership or a Corporation. So it's a mechanism to insulate the owner or owners of a business from liability and still have a business. Unfortunately, it's become a gigantic loophole in the campaign finance system across the country. And the feds have done some work to tighten the restrictions on that. New York hasn't. And so tens of millions of dollars flow through these Limited Liability Corporations with essentially no real meaningful oversight.

The federal government closed the LLC loophole. How come it's not the same on the state level?

It's sort of a crazy story. The LLCs become numerous starting in the early '90s. The FEC says we're going to treat LLCs the same way we treat partnerships. New York State then follows suit, basically treating them as individuals. The feds then change their rules and say we're going to follow the IRS code, and say if an LLC lists itself as a corporation, then it'll be treated as a corporation. New York never follows suit. And so therein lies the rub. The state never updated their interpretation, and so now for the last roughly 15 years, wealthy individuals interested in giving as much money as they can afford can create LLC entities -- sometimes the name of it is just the street address -- and then make the maximum campaign contribution of $150,000 per year, through multiple entities, including themselves.

Tell us about the bills in both the state Senate and Assembly that aim to address the issue. What are they, and what's the progress?

There are different kinds of bills that basically either eliminate the use of LLCs for campaign contributions or treat them like a corporation or follow the way the feds do it. There are different bills that are trying to approach it. The one that had the most action last year was one that would treat LLCs as corporations, and those limits are only $5,000 a year instead of $150,000. But it got jammed up. There's a lot of rhetoric for reform in Albany, but the reality is, political parties and many candidates are addicted to the motherload of money that comes through the LLC.