By: Dan Carroll

Given the controversy surrounding the Supreme Court’s decisions upending federal campaign finance law in Citizens United v. Federal Election Commission and McCutcheon v. Federal Election Commission, the average voter might be surprised to find out that federal law still prohibits corporations from making direct contributions to candidates for federal office and limits the amount individuals can contribute to a particular campaign. On the other hand, twenty-two states allow but limit direct contributions from corporations to candidates for state office.

In 1974, New York State lifted a long-standing ban on corporate contributions but in its place implemented a $5,000 aggregate annual contribution limit and strict disclosure requirements. Individuals in New York also face per candidate and aggregate contribution limits, but recognizing the lower potential for corruption compared to corporate contributions, restrictions on individuals are far more lenient (currently $60,800 limit for contributions to a candidate for statewide office and $150,000 in aggregate annual contributions).

New York’s campaign finance laws appeared to be fulfilling their intended purpose of providing transparency and preventing corruption in state elections until an increasingly trendy legal entity known as a limited liability company (LLC) came along. New York enacted a statute allowing for the creation of LLCs in 1994, and because the election laws had not been amended to reflect the existence of this new legal entity, the decision of how they would be treated under election laws was left to the New York State Board of Elections.

In a widely derided decision, the Board of Elections in 1996 found that LLC’s should be treated like individuals rather than corporations, and thus were entitled to directly contribute up to $60,800 to an individual candidate while traditional corporate entities were still limited to $5,000 in aggregate contributions to all candidates in a year. Further, each LLC is considered to be an independent entity, regardless of the person or business that created the LLC. Each LLC is subject to the individual contribution limits, thus a wealthy individual could create any number of LLCs, each with the capability of contributing up to $60,800 to a single candidate.

Perhaps most troubling to critics and good government groups is that LLCs need not disclose the identities of their founders, membership or officers. As a result, the amount of money a wealthy contributor can donate—essentially without disclosure—to his candidates of choice is limited only by the number of LLCs he creates.

It may be no wonder then, that wealthy individuals with significant interests before the state legislature have taken advantage of such a loophole. Indeed, investigations by good government groups uncovered that Developer Leonard Litwin, over a two-year period beginning in 2013, utilized 27 LLCs to contribute no less than $4.3 million to New York candidates and committees. In the past year, two individuals—the former New York State Assembly Speaker and former Senate Majority Leader—whose campaigns and political capital benefited immensely from LLC contributions—were indicted on federal corruption charges and pushed out of their top leadership positions.

A follow-up post will cover the nexus between the LLC and the criminal charges filed against (now former) Assembly Speaker Sheldon Silver and (now former) Senate Majority Leader Dean Skelos (both men have ties to Mr. Litwin), as well as legislative and legal efforts seeking to close the LLC loophole.

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