The formation of an LLC or corporation creates a limited liability shield around the entity's constituents (e.g., directors, members, shareholders). Those constituents are protected from personal liability as long as that so-called corporate veil is intact.
Enter California's SB 1201. This bill, if enacted, would require the disclosure of information about certain owners of those entities. And California would require that information be publicly available. In effect, the formation of an entity in California would create a window rather than a veil.
Introduction
As we have covered before (see here and here), the federal government currently requires most new business entities to report certain beneficial ownership information to the Treasury. The information is not publicly available, but must still be reported. The stated purpose is to curb illegal financial activities. And, perhaps to an extent, it will fulfill that purpose while still keeping that information (somewhat) private.
SB 1201, cleverly called California's Corporate Transparency Act, would require that beneficial owners disclose their identities and addresses in a publicly available database. Here are the details:
What information will have to be disclosed?
California law already requires the disclosure of certain information on the annual or biannual statement of information (as opposed to some other states; e.g., Wyoming). Corporations must annually disclose their principal office address and mailing address, and the names and addresses of their officers, directors, and agent for service. But they do not have to disclose shareholders' names or addresses. Similarly, manager-managed LLCs do not typically disclose their members' names or addresses.
SB 1201 would require reporting entities to disclose their "beneficial owners" (defined below), including many shareholders and LLC members.
SB 1201 does allow beneficial owners to report business addresses instead of their residences. But if you're a shareholder, you might not have a "business address." Beneficial owners might want to confer with the entity that you can use its address instead.
Whose information will have to be disclosed?
Entities would have to disclose beneficial ownership contact information. A "beneficial owner" is defined as an individual 1) who exercises substantial control over the entity, or 2) who owns 25% or more of the equity interest in the entity. "Substantial control" is defined, by reference to section 1010.380 of the Code of Federal Regulations. Typically, this will be directors and senior officers.
As with the federal CTA, beneficial owners are individuals. If your LLC is managed by another LLC, the managing LLC would need to report its beneficial owners. Entities would have to disclose individuals and their addresses.
What entities will have to disclose?
There are no exemptions (unlike the federal CTA). All entities registered to do business in California would have to disclose their beneficial ownership information.
When does the information have to be disclosed?
If SB 1201 is enacted, the information will be included on the entity's statement of information (publicly available through the California Secretary of State website). This means it will need to be disclosed within 90 days of formation (for California entities), within 90 days of registering to do business in California (if it's a non-California entity), and prior to the deadline for filing a statement of information annually or biannually (depending on your entity type.
California also requires a new statement of information when an entity's agent for service changes. If there have been beneficial ownership changes prior, that will need to be reported with the new statement of information as well.
When does this become effective?
As of now, SB 1201 is scheduled to go into effect on January 1, 2026. SB 1201 was read in the California Assembly on May 22, 2024. As of today's date, it remains pending.
What will the penalty be for failure to disclose?
There's nothing in SB 1201 for fees or penalties for failure to comply (at this time). Indeed, there doesn't seem to be any kind of enforcement mechanism.
What is the purpose of SB 1201?
As with the federal CTA, the purpose is to prevent illicit financial dealings. California wants to prevent the use of shell corporations to hide illegal transactions.
In addition, consumer rights groups have also suggested that it is often difficult to determine who the bad actor is (e.g., a tenant wants to sue their landlord, or a government agency wants to prosecute someone, but has to go through several entities to find who the landlord is). Certainly it will be cheaper for agencies to search the database rather than subpoena that information.
What will the adverse effects be?
Any business regulation brings unintended results (including costs). Although SB 1201's cost to a business may be minimal, it's another regulation imposed on California businesses, and these costs add up. Expect businesses and small business advocates to oppose SB 1201.
Opponents of SB 1201 (including the California Association of Realtors and California Chamber of Commerce) worry about the loss of privacy and potential for increased harassment, and that those detriments are not worth the slight benefit of easier access to this information.
There are investors for whom privacy is critical. California (and even Texas) business attorneys see this every day: a client wants a Delaware or Wyoming LLC to own their California entities because of the anonymity. We may see those with the resources to relocate to avoid losing that anonymity.
How else is this different from the federal CTA?
It looks like the California CTA doesn't require a copy of identification, so you don't have to scan your identification or driver's license.
However, California will require a $5.00 fee for submitting the report (this is apparently in addition to the fees for a statement of information). The federal CTA does not have a fee (for now).
What are the chances of SB 1201's enactment?
It's early, but SB 1201 received substantial support in the California Senate. It passed committee 5-2, and passed the Senate 23-10 (with seven abstentions). A similar result is expected in the Assembly. At that point, it's up to the governor.
Conclusion
If SB 1201 goes into effect, entities registered in California will be largely transparent to the public. Although the stated aim is to curb illicit activity, the result will be an added cost to business owners, and a deterrent (however slight) to the formation of limited liability entities. California businesses should follow the status of SB 1201 closely, inform their constituents, and consult with their business attorneys.
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