Doing Business in CA? Be Sure to Register
Sometimes California-based entrepreneurs think that they can avoid CA registration fees and taxes by forming their business entities in another state. Usually, that belief is incorrect: If the entity is doing business in CA, then it must register with the CA Secretary of State, even if the entity was formed elsewhere.
So what constitutes “doing business” in CA? The term used in the Corporations Code is to “transact intrastate business”, which is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (Section 191(a) with respect to corporations, Section 17001(ap) with respect to limited liability companies).
Any foreign (non-CA) startup that is headquartered in CA – even if it is operating a website on servers located thousands of miles away – is likely to enter into “repeated and successive transactions” with suppliers, customers and other businesses that are located in the state and, thus, will need to register in CA.
Indeed, registration is required before transacting intrastate business (Section 2105(a) with respect to corporations, Section 17451(a) with respect to LLCs). A foreign entity that conducts intrastate business without registering is subject to financial penalties and is precluded from maintaining in California courts actions arising from such business (Section 2203 with respect to corporations, Section 17456 with respect to LLCs).
Fortunately, the registration process is reasonably straightforward and not too expensive. The correct Secretary of State form must be completed and submitted with a certificate of good standing from the state where the entity was formed and the applicable filing fee.
Related posts:
- Why (not) form an LLC in Nevada?
- Why (not) Incorporate in Delaware?
- When “Doing Business” isn’t “Doing Business”
- “Doing Business” Requires More than an Employee and an Office
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.
@Dana
Thanks for stating upfront that there is no way around the annual CA franchise tax. But what are the implications if you simply don’t pay them?
There is a Quora answer by David Feldman which claims that the FTB will never come after you for delinquency. I’m not advocating in favor of this type of practice, but would like to know–from your experience–how valid David’s points are.
http://www.quora.com/Business-Taxes/Does-a-Delaware-LLC-have-to-pay-California-taxes
I have never heard of the FTB coming after anyone for $800 (or for $800 times some number of years). On the other hand, no one can say with certainty that the risk of that happening is zero.
In any event, in my opinion one should not focus on whether the state will enforce unpaid annual fees. Instead, one should focus on striving to build a successful business, recognizing that there are risks in developing a startup and that one is willing to accept those risks.
@Dana
I had a very small business entity that conducted a few transactions in the state of California last year. It was in business for two months (Jan and Feb) this year (2012) and then was shut down.
We didn’t register with the California SOS, however, we did file our returns with FTB and they assigned us a “temporary ID number” so that we could continue to report as appropriate (which we have done). My question is: Do we have do ceremonially register and terminate the business with California SOS to prevent FTB from expecting us to pay another $800 for 2013?
I have read that since the business no longer exists, when we file for 2012 we simply need to mark the return as “Final”.
Sorry, but you have asked a tax question, but I am not a tax expert. It does make me wonder, however: If the FTB can start taxing your company without SoS involvement, shouldn’t it be able stop taxing, too, without the SoS?
Hi Dana,
I work for a small company which incorporated in Iowa. My boss is a motivational speaker and an author. He had gone to California to speak at some clients’ programs in 2011 and we were withhold 7% of the speaking fee so last year 2012 we decided to file as foreign corporation in the state. The business has been slow a lot and we did not have much revenue from the state and we thought we might make a mistake filling at the first place. We might have some occasional speaking engagements and book sales down the road but we will be happy to pay 7% withholding. Will those speakings (which we do not have any confirmed contracts now) considered “intrastate business”? We also do not have any employees or office in CA. We are considering filing for disclosure as we do not think we are required to file. Thanks
Keeping in mind the standard disclaimer that we have not established an attorney-client relationship, thus the following does not constitute legal advice:
The speaking engagements in 2011 were transactions of business within California. I do not know whether there were enough such engagements to satisfy the “repeated and successive” test.
However, at present there are no such engagements. Assuming that there are no other intrastate activities, the “repeated and successive” test no longer is being satisfied, thus qualification in California no longer is required.
Hello Dana,
I have recently registered my foreign LLC (Georgia) to do business within CA, but it seems like with the slow process times, I may not have a SOS number by the time the returns or $800 tax are due. In your past experiences, are you able to file the 568 Form without the SOS number?
Thank you for your insight.
I’m sorry, but I have had no experience with this issue.
@Dana
Responding to your exchange with “Kay” with this time: March 6th, 2012 at 17:46 -
I think she is referring to part of your comment: “it is common for entrepreneurs who reside in CA to satisfy the foregoing test” (I interpreted you to mean that with sundry items like office supplies, cell phone bills, web access, and the occasional business trip a CA resident can not help but have many transactions in CA)
Best Regards,
Jim
We have gotten conflicting advice from attorneys and CPAs on this question. You seem to know this area very well, so I hope you can help us…
We acquire all of the stock in a California C corporation which has been a going concern for many years, and will continue in the same way.
We want to hold the stock in a Nevada LLC. The NV LLC will do no (ZERO) business other than hold the stock. (actually 3 of these, one for each owner)
We are CA residents. For the purposes of the SOS, do we have to register, and more importantly, are we engaged in any thing that will require us to pay franchise tax?
Our income tax to CA should be zero as there is no income to the LLC. We will of course pay CA tax & franchise tax on the profits of the CA C corp.
A foreign entity that merely owns a CA entity, and otherwise has no activities in CA, is not engaged in “repeated and successive transactions” within CA, thus is not obligated to register with the CA SoS as a foreign entity doing business in CA.
Hi Dana,
Does operating a LLC with the sole intent being asset protection, fully knowing that no profit will ever materialize change anything? For instance if a LLC is being formed for a No-Budget Short Film production, with no paid employees, mainly to serve two functions : Protect the principals from asset exposure in the event of lawsuit : and to provide an credible umbrella company for Insurance purchases and budget expenses, would forming in Nevada pose any benefit if the film was being produced in CA. If there’s no income to ever report and the LLC isn’t a “for profit business” per se, would this LLC avoid CA’s foriegn registration requirements?
Thanks
The test for “doing business” is explained in the post. The reason for creating the LLC, whether asset protection or otherwise, is irrelevant.