In the dynamic landscape of California real estate, the practice of holding properties under the name of a California registered Limited Liability Company (LLC) has become increasingly popular among property owners. Utilizing an LLC offers various advantages, the most prevalent being to preserve privacy, especially in Silicon Valley. However, as of January 1, 2024, LLCs in California face a new regulatory landscape with the introduction of the Corporate Transparency Act (CTA). This legislation significantly impacts how LLCs operate and their reporting requirements, particularly concerning real property ownership.

The CTA was enacted with the primary goal of enhancing transparency in corporate ownership and combating illicit financial activities such as money laundering and terrorism financing. By requiring certain entities to disclose their beneficial ownership information, the CTA aims to close existing loopholes that have allowed individuals to conceal their identities behind anonymous shell companies.

Under the CTA, LLCs engaging in real estate transactions in California are subject to reporting requirements. Specifically, LLCs must file reports disclosing information about their beneficial owners. This includes individuals who directly or indirectly exercise “substantial control” over the reporting company, or directly or indirectly own or control 25% or more of the “ownership interests” of the reporting company.

Reporting under the CTA involves providing details such as the beneficial owners’ names, dates of birth, addresses, and unique identification numbers, such as a driver’s license or passport number. Additionally, LLCs must designate a “responsible party” who will serve as the primary point of contact for the company’s compliance with the CTA.

Compliance with the CTA is not optional. Failure to file the required reports or providing false or misleading information can result in severe penalties including civil fines, criminal prosecution, or other enforcement actions imposed by regulatory authorities.

California has mirrored the federal CTA by introducing its own rendition (Senate Bill 738), specifically targeting corporations incorporated outside of California’s jurisdiction or LLCs registered to operate within the state. This proposed legislation mandates the submission of Beneficial Ownership Information (BOI) to the Secretary of State. The bill is currently before the Secretary of Senate.

One significant distinction between state reporting requirements and those imposed by the CTA is the level of confidentiality. While state-level disclosures may be accessible to the public, information submitted under the CTA remains confidential and is accessible only to authorized government agencies for law enforcement purposes. This confidentiality provision is intended to safeguard sensitive information while enabling law enforcement agencies to effectively investigate and prosecute illicit activities.

In essence, the CTA represents a significant shift in the regulatory landscape for LLCs, particularly those involved in California real estate transactions. By requiring greater transparency in corporate ownership, the CTA aims to enhance the integrity of the financial system and protect against illicit activities. While compliance with the CTA may present additional administrative burdens for LLCs, it is essential for property owners to understand and adhere to these new reporting requirements to avoid potential legal consequences.

While the stated objectives of the CTA are laudable and generally palatable provided the information is kept confidential and used only for law enforcements purposes, the California legislation would be more objectionable if the homeowner’s identity is made public. Various privacy and safety issues are at play here, warranting careful consideration.

by Michael Repka, Esq.