Doing Business in CA? Be Sure to Register

Seal of the California Secretary of State, which provides a registration form for a foerign entity doing business in CaliforniaSometimes 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).

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 isoperating a website on servers located thousands of miles away. As a result, the entity will need to register in CA.

For corporations, registration is required before transacting intrastate business (Section 2105(a)). In contrast, Section 17708.02(a) says that a foreign LLCmay 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.

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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.

44 comments

  1. dan nguyen says:

    I still get questions about creating an LLC or corporation in NV, DE, etc because they heard about the benefits of filing there. As you said, if they are based in CA, they still have to register in CA as a foreign entity. I remember researching this issue for a client and the example the CA SS gave was that even for rental property located in another state, if the single member LLC banked in CA for that property, then that is considered doing business in CA in which they would have to register as a foreign LLC.

    Now I’m going to end my day on a high note and read the latest xkcd comic by clicking your link :).

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  3. Morness says:

    Hi Dana, I had asked a question on avvo.com that your responded to pointing me here, so I thank you.

    http://www.avvo.com/legal-answers/what-is–doing-business-in-ca–really-mean–354640.html?cm_mmc=Avvo-_-Notification-_-Answers_Notify-_-question

    However, I’m still not clear.

    If a Canadian corporation has a partner based in California that works from home doing software programming using his own equipment (not the companies) and we don’t have a physical product nor location within California and we are selling our product worldwide on the internet, do we still need to register in California? The idea is that the Canadian corporation would treat all foreigners as subcontractors.

    Our goal is to form a business entity and keep it simple. If possible, we would prefer not to have to register/qualify entities all over the US.

  4. Dana says:

    @Morness
    The additional information that you have provided makes your question easy to answer.

    I was misled because I thought you used the term “partner” to refer to one of the owners of your business, which I assumed was a partnership. In your Avvo Q, you did not state that your business would be a corporation.

    If the individual in CA is an independent contractor, then his software-development activities in CA are *not* imputed to your Canadian corporation; there is no need for the Canadian corporation to register in CA because it is not transacting intrastate business.

  5. [...] say that you live, and intend to do business (in the legal sense – see Doing Business in CA? Be Sure to Register), in California, but you form your LLC in Nevada or Wyoming. Guess what: Because you are doing [...]

  6. paul says:

    Hi Dana, you responded to my post on avvo.com also. I was the one talking about the Delaware LLc.

    I was trying to understand the link you posted about doing business in California.

    If my entity is based in Delaware and banks in Delaware, why is it doing business in California any more than anywhere else.

    Is it because the owner of the LLc lives here?

  7. paul says:

    ps. I did want to add that we are selling a product over the internet and aren’t involved in manufacturing, warehousing or operating any kind of store in California.

  8. Dana says:

    @paul
    I didn’t write that your LLC *is* doing business in CA – I wrote that the issue is *whether* your LLC is doing business in CA, the test being ?entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce?.

  9. paul says:

    Dana :
    @paul
    I didn?t write that your LLC *is* doing business in CA ? I wrote that the issue is *whether* your LLC is doing business in CA, the test being ?entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce?.

    I see what you are saying, but isn’t Amazon (the company I want to sell through) entering into successive transactions, if they sell to people in California?

    If my supplier, who isn’t affiliated with me, is in California, does that constitute the sort of transactions they are talking about?

    The way it sounds, I might have to collect sales tax in many states.

    Very confusing

  10. Dana says:

    @paul
    I’m not discussing sales tax (I am not a tax expert); I’m discussing whether your entity needs to register with the Secretary of State as a foreign entity. (Those are two different issues with different tests.) For the issue I am discussing, Amazon’s actions are irrelevant. The Q is whether your LLC has repeated and successive transactions in CA.

  11. Quora says:

    How does the legal phrase, “doing business,” apply to companies that only sell mobile apps on app stores (such as the Apple App Store or Android Market)?…

    If the phrase in question, “doing business” (technically, “transact interstate business”) is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (as stated in Se…

  12. Lalit says:

    Hi Dana,

    Does one need to file as a foreign corporation in other states if I am incorporated in CA. Planning to sell food products, but a lot will be sold online as well so do I have to register in all states. One partner is planning to live in CA and the other in Pennsylvania, does that mean we have to register in PA?

    Thanks

  13. Dana says:

    @Lalit
    Unfortunately, I am not familiar with Pennsylvania law, so I cannot answer your question.

  14. Quora says:

    Is it necessary to incorporate in the state where a business will have most physical presence?…

    Expanding upon Wray’s and Bart’s answers: The test for “doing business” in CA for the purpose of having to register as a foreign corporaiton is whether the business is “entering into repeated and successive transactions of its business in this sta…

  15. Bev says:

    Dana:

    Wondering if our OR nonprofit corporation needs to file as a foreign corporation with the CA Secy of State when one of our employees moves to CA and will have a home office. He would not be doing anymore or less CA activities than he does now. He is moving for personal reasons not because our corporation wants to have a CA presence.

  16. Dana says:

    @Bev
    As noted in the post, the test is whether, on behalf of your corporation, he will be “entering into repeated and successive transactions of its business in this state”. I cannot answer that question, but you should be able to.

  17. Kay says:

    I am starting a service web-based company. I currently reside in CA, but am considering forming my LLC in WY, DEL, or NV. Since I do not know where the main source of my client base will come from (i.e. I don’t know which state I will primarily get clients from) do I still need to register as a foreign entity with the state of CA?

  18. Kay says:

    Also, I am assuming that your answer to my question above will be that I must register with CA. Is there anyway to get around paying the wopping $800 annual franchise tax? So much money for someone that is just starting out…

  19. Dana says:

    @Kay
    As stated in the post, the test for doing business in CA is whether your entity is ?entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce?. I do not know the details of your business; however, it is common for entrepreneurs who reside in CA to satisfy the foregoing test and, thus, find themselves obligated either to form the entity in CA or to register it in CA as a foreign entity. I know of no way around the $800 annual franchise tax when it applies.

  20. Kay says:

    Thanks for the quick response. Would it be worth forming as a corporation (via DEL, WY, or NV) at least for the first year of my operations — as a way to avoid the $800 franchise tax? I’d like to note that I will for sure be moving out of the state of CA by the end of 2012.

  21. Dana says:

    @Kay
    I’m afraid that I do not understand your question. As discussed above, the obligation to pay $800 depends on whether you are entering into repeated and successive transactions in CA, not on where you form the corporation.

  22. Steven says:

    I have a home business that I am forming in Delaware and live in California. When I register as a Foreign business in California I will have to list my home address as the “main office” of business. Is this address going to be made available to the public or is this only for internal purposes at the Secretary of State. I am curious because I don’t really like the idea of my home address being available for anyone and everyone. I am asking because I know that if my business were to be looked up in Delaware, only the address of my registered agent would be made available.

    Also, would I have to list my home address as the address for the LLC’s headquarters as well?

  23. Dana says:

    @Steven
    Some of the Form LLC-5 information, including the main office in CA, will be available in the Secretary of State’s online database. In addition, the entire Form LLC-5 will be available to anyone who is willing to pay the Secretary of State to provide a copy.

    That is part of the price that you pay for the privilege of forming a limited-liability entity in CA. If you do not want to disclose your home address, rent a virtual office.

  24. DTE says:

    I am a partner in an LLC organized in NY. For personal reasons I have moved to CA, and my partner has as well. I doubt there will be physical presence in NY again.

    There seem to be a lot of steps involved in moving the company (we already have been tapped on the shoulder by the city where that rental office is) … if we go thru and set up as a foreign corp, will it make sense at some point to re-incorporate or do we just have to grin and bear it and pay franchise tax in NY (which is minimal for LLCs)?

    If we maintain a mailing address in NY does that mean NY will consider us “there” even if physically not? We want our “local” clients there to consider us as local, but on the other hand, we would like to simplify our legal and tax obligations.

    • Dana says:

      It appears that your decision will be largely tax-driven, so you need to consult with a tax advisor who is familiar with multistate (especially CA and NY) entities (sorry, I do not provide tax advice).

      You may be interested in When ?Doing Business? isn?t ?Doing Business?, which discusses what “doing business” means for three different purposes in CA and in NY.

  25. Quora says:

    If I live in California and want to start a single member LLC, is there any benefit to incorporating in Delaware?…

    An aside re terminology: LLCs are formed, not incorporated (only corporations are incorporated). Given that you will be forming an LLC, you (apparently) have no expectation of seeking institutional funding. As a result, there is no apparent reason to f…

  26. Mike says:

    @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

    • Dana says:

      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.

  27. Dave Bell says:

    @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”.

    • Dana says:

      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?

  28. Thuy says:

    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

    • Dana says:

      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.

  29. AC says:

    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.

  30. Jim Watson says:

    @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

  31. Jim Watson says:

    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.

    • Dana says:

      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.

  32. JS says:

    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

    • Dana says:

      The test for “doing business” is explained in the post. The reason for creating the LLC, whether asset protection or otherwise, is irrelevant.

  33. Facebook User says:

    I do internet marketing from home in CA. If I can’t find a way around the “entering into repeated and successive transactions of its business in this state” question, can I form another LLC in Wyoming, and have the CA LLC pay the WY LLC royalty fees to minimize what’s owed in CA?

    • dhshultz says:

      Your reference to “what’s owed” suggests that you might be confusing two different taxes.

      This post pertains to registration in CA, which invokes the $800 per year franchise tax.

      It appears that you may have income taxes in mind. Those are separate from the franchise tax; I am not qualified to discuss them.

  34. California Mail says:

    Hi Dana, first and foremost a big ‘thank you’ for creating this wonderful resource. As a new entrepreneur I learned a lot from this blog.

    I am a CA resident and formed a DE corporation few years ago.It is in ‘good standing so far. However no revenue has been generated. There is no end to learning, but residing in CA as an officer/director of a foreign corporation, I am somewhat afraid and frustrated with all the complexities behind ‘doing business’ as a foreign corporation in CA. Therefore, I am now planning to start a simple ‘Sole Proprietor’ entity in my home city in CA. Of course, I will obtain the required licenses to ensure compliance, but my question is, am I violating any CA Law/code by starting ‘Sole Proprietor’ businesses while also maintaining a foreign corporation in a foreign state? My understanding is that they are two different ‘entities’ with different liabilities? Would be grateful if you can share your expertise and input. Thank you.