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.
Section references and content below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
Definition of Doing Business in CA
So what constitutes doing business in CA? The term used in the Corporations Code is to “transact intrastate business”. That term is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce”. (That term is defined in Section 191(a) for corporations and Section 17708.03(a) for limited liability companies).
Any foreign (non-CA) startup that is headquartered in CA is likely to enter into “repeated and successive transactions” with suppliers, customers and other businesses that are located in the state. This is true even if the business is operating a website on servers located thousands of miles away. As a result, the entity will be doing business in CA, thus will need to register.
For corporations, registration is required before transacting intrastate business (Section 2105(a)). In contrast, Section 17708.02(a) says that a foreign LLC “may apply for a certificate of registration” (emphasis added).
Another disadvantage for corporations that do not register before transacting intrastate business is that they are subject to financial penalties (Section 2203).
Finally, a foreign entity that conducts intrastate business without registering is precluded from maintaining in California courts actions arising from such business (Section 2203 for corporations, Section 17708.07(a) for 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.
- Why (not) form an LLC in Nevada (or Wyoming)?
- Why (not) Incorporate in Delaware?
- When “Doing Business” isn’t “Doing Business”
- “Doing Business” Requires More than an Employee and an Office
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
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.