Even as business owners and attorneys are struggling to learn about the federal Corporate Transparency Act, state legislatures are considering legislation to impose similar corporate transparency obligations on the state level.
Earlier, we wrote about Maryland, where Senate Bill (SB) 954 proposes to require entities formed in Maryland to file a transparency report with the Maryland Department of Assessments and Taxation (the “Department”).
California is also proposing its own legislation through SB 1201.
Summary of California SB 1201
California SB 1201 was introduced into the California Senate by Maria Elena Durazo (D). Senator Durazo, an attorney, was previously a Vice Chair of the Democratic National Committee and National Co-Chair of the Barack Obama Presidential Campaign.
California SB 1201 amends the California Corporations Code to require an annual transparency report from every corporation formed in the state (Bill Sec. 1) and every foreign corporation that registers to do business in the state (Bill Sec. 2). The transparency reporting requirement would also apply to limited liability companies (both domestic and foreign) and “real estate investment trusts.”
The transparency report would require the reporting entity to report the “names and complete business or residence addresses of any beneficial owner.”
California SB 1201 defines “beneficial owner” as “a natural person for whom, directly or indirectly and through any contract arrangement, understanding, relationship, or otherwise, either of the following applies with respect to a corporation: (1) the person exercises substantial control . . . (2) the person owns 25 percent or more of the equity interest . . . “
California SB 1201 refers to FinCEN’s Final Rule on beneficial ownership reporting for the definition of “substantial control” but not for its rules on calculating percentage ownership
Timing of Reports Under California SB 1201
If adopted into law, California SB 1201 would require a newly formed corporation, LLC or real estate investment trust to file its initial report within “90 days after the filing” of the document that forms the entity.
California corporations and foreign corporations would need to file updates on an annual basis. (Bill, Sec. 1 and 2). California LLCs and foreign LLCs would need to file updates on a biennial basis. (Bill, Sec. 3).
California SB 1201 does not specify when the subsequent annual report is required.
California SB 1201 does not specify when entities formed before the effective date of the law should file an initial transparency report, although the transparency report would presumably be required in the next annual or biennial report.
California SB 1201 does not contain an amendment rule that would require a covered entity to report a change in beneficial ownership after one occurs. Presumably, any change would be reported in the next subsequent annual report.
Rule Regarding Minors
California SB 1201 does not contain a rule that excludes the reporting of minors. If a minor is a beneficial owner of an entity that must report under California SB 1201, the entity would be required to report the name of the minor.
Penalties for Violating California SB 1201
California SB 1201 does not contain any express provisions regarding violations or penalties.
California law contains many provisions, however, that can convert violations of administrative requirements into civil penalties or civil liability.
In addition, California’s Unfair Competition Law, Cal. Bus. Prof. Code 17200, empowers competitors to sue each other over legal violations even where the injury suffered by the plaintiff is indirect and difficult to quantify. (See, e.g., Law Offices of Matthew Higbee v. Expungement Assistance Services, C.A. Mar 14, 2013). As a result, California SB 1201 raises the potential that plaintiffs’ attorneys might use California’s UCL statute as a means to punish companies that fail to file as required in California.
Comparison to CTA
California SB 1201 is analogous the CTA but different in several respects.
Scope
Although the CTA applies to any reporting company formed in the U.S. or outside the U.S. (if registered to do business in the U.S.), California SB 1201 only apply corporations, LLCs and real estate investment trusts that are formed within the state or registered to do business as a foreign entity in the state.
Exempt Entities
The CTA contained 23 categories of exempt entities that would not be required to file. The CTA also empowers FinCEN to create new exempt categories in the future. California SB 1201 does not contain any categories of exemption. California SB 1201 does not expressly empower the implementing regulator to create categories of exemption.
Substantial Control
Both the CTA and California SB 1201 define “beneficial owner” to include any individual who exercises substantial control over the reporting company. California SB 1201 incorporates by reference the CTA definition of the term contained in FinCEN’s Final Rule on beneficial ownership reporting.
Excluded Individuals
Although the CTA has a rule that excludes minors from being reported, there is no similar exclusion in California SB 1201.
Timing
The CTA requires a newly formed entity to file its initial BOI report within 30 days after its formation. (During 2024, the 30 days are extended to 90 days). California SB 1201 would require an initial report within 90 days after formation.
The CTA does not contain an annual filing requirement. Instead, reporting companies must amend their reports within 30 days after any change in beneficial ownership.
California SB 1201 does not contain a 30-day amendment rule. Instead, each reporting company must file a new transparency report on either an annual basis (for corporations) or a biennial basis (for LLCs).
Conclusion
California SB 1201 has merely been proposed in the California Senate and may never be adopted into law. If the bill becomes law, however, it could be the second state-level transparency statute (after New York) to come into existence.
Practitioners with clients formed or doing business in the State of California should stay apprised of SB 1201 as its passage could complicate the regulatory requirements on California companies if the law takes effect.
