Business Law

California Secretary Of State Experiences Uptick In Bogus Entity Formations Following Implementation Of Filing Fee Waiver

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Since July 1, 2022, the filing fees required to be paid for the registration of new corporations, limited liability companies (“LLCs”) and limited partnerships (“LPs”) with the California Secretary of State (the “Secretary of State”) have been waived. California’s Budget Act of 2022 (the “Budget Act”), which provides for the waiver of such fees until June 30, 2023, was signed into law in June 2022 with the aim of encouraging business growth in California. Since the effectiveness of the registration fee waiver, however, the Secretary of State has seen a significant uptick in bogus entity formations.

Waiver of Filing Fees for Entity Registrations 

Prior to the effectiveness of the Budget Act, the registration fee to form a new corporation in California was $100, and the registration fee to form a new LLC or LP was $70. The Budget Act temporarily waives such fees for the State’s 2022-2023 fiscal year. The fee waiver included in the Budget Act was intended to eliminate a barrier to entry for new businesses in California, thus fostering business growth in the State. 

Unintended Consequence?

While the Budget Act has resulted in savings to those forming corporations, LLCs or LPs in California since July 1, 2022, in the months following the effectiveness of Budget Act, the Secretary of State has received a significantly greater number of new entity registrations that contain names and addresses of individuals who are not associated with such entities, and who were not aware of and did not consent to the entity registration in their name prior to the filing. However, if the address used in an entity registration filing is a valid and existing address, the Secretary of State may have no basis on which to reject the filing. 

Many of the affected individuals only become aware that a legal entity has been formed or incorporated in their name after receiving mail from the Secretary of State or other parties with respect to that entity. 

What to Do to If Your Personal Information Has Been Used in a Bogus Filing 

There are a couple courses of action that an individual whose personal information has been used in an entity registration without consent may take to remedy the situation. Individuals who have been named as an agent for service of process in a bogus filing may file a disclaimer of proper appointment with the Secretary of State to have themselves removed. To have one’s personal information redacted from a bogus filing, however, a court order would need to be obtained. 

The Secretary of State is currently monitoring this situation. If and when additional remedies become available, updates to this article will be forthcoming. 

This e-Bulletin was prepared by Angela Bernardi of Dentons US LLP and Marek Adamo of Paradigm Counsel LLP. The authors are members of the Corporations Committee of the Business Law Section of the California Lawyers Association. The views expressed herein are those of the author and do not necessarily reflect the views of Dentons US LLP or Paradigm Counsel LLP.

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