Register a Foreign Business in California Details

A Corporation, S-Corporation, LLC, or LP formed in a state other than California that will do business with one or more states including California may be required to register as the foreign business as a foreign entity with the State of California. There are two main bodies of law which will dictate whether a foreign corporation, S-Corporation, LLC, or LP will be required to register as a foreign entity doing business in California: the California Corporations Code and the California Revenue and Taxation Code, both of which are examined below.

The foreign entity registration requirement not only requires the filing of documents and payment of filing fees, but also carries tax ramifications, including the $800 minimum franchise tax paid annually by a corporation, S-Corporation, LLC, or LP to the California Franchise Tax Board. Since registering a foreign business entity with the State of California as a foreign entity doing business in California carries a significant cost, it is worth examining what California defines as “doing business” to ensure the foreign business entity does not register unless legally required to do so.

Per the California Corporations Code

The concept of “doing business” in California is laid out in the definition of “transact intrastate business” for a corporation or S-Corporation as entering into repeated and successive transactions of its business in California, other than interstate or foreign commerce. California Corporations Code § 191(a). For LLCs, the California Corporations Code utilizes the exact same definition. California Corporations Code § 17001(ap). The California Corporations Code does not define what constitutes interstate or foreign commerce but does specify activities that, in isolation, do not constitute transactions of intrastate business.

What Does Not Constitute Intrastate Business in California

Under California Corporations Code § 191(b), the following are not considered to be transacting intrastate business by a foreign corporation or S-Corporation, and under California Corporations Code § 17001(ap)(1) are not to be transacting intrastate business by a foreign LLC:

• Having a subsidiary that transacts intrastate business;

• Being a shareholder of a domestic corporation;

• Being a shareholder of a foreign corporation transacting intrastate business;

• Being a limited partner of a foreign limited partnership transacting intrastate business;

• Being a limited partner of a domestic limited partnership;

• Being a member or manager of a foreign limited liability company transacting intrastate business; or

• Being a member or manager of a domestic limited liability company.

Under California Corporations Code § 191(c), the following are not considered to be transacting intrastate business by a foreign corporation or S-Corporation, and under California Corporations Code § 17001(ap)(2) are not to be transacting intrastate business by a foreign LLC:

• Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof, or the settlement of claims or disputes;

• Holding meetings of its managers or members or carrying on any other activities concerning its internal affairs;

• Maintaining bank accounts;

• Maintaining offices or agencies for the transfer, exchange, and registration of the foreign limited liability company’s securities or maintaining trustees or depositaries with respect to those securities;

• Effecting sales through independent contractors;

• Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance without this state before becoming binding contracts;

• Creating or acquiring evidences of debt or mortgages, liens, or security interests in real or personal property;

• Securing or collecting debts or enforcing mortgages and security interests in property securing the debts; or

• Conducting an isolated transaction that is completed within 180 days and not in the course of a number of repeated transactions of a like nature.

In addition to these mirroring provisions for corporations and S-Corporations and LLCs, the California Corporations Code has unique definitions of what shall not be deemed intrastate commerce for each entity.

LLC Specific Definitions

Under California Corporations Code § 17001(ap)(3), a person shall not be deemed to be transacting intrastate business in this state merely because of its status as a member or manager of a domestic limited liability company or a foreign limited liability company registered to transact intrastate business in this state.

Corporation and S-Corporation Specific Definitions

Under California Corporations Code § 191(d), any foreign lending institution shall not be considered to be doing, transacting, or engaging in business in California solely by reason of engaging in any or all of the following activities either on its own behalf or as a trustee of a pension plan, employee profit sharing or retirement plan, testamentary or inter vivos trust, or in any other fiduciary capacity:

• The acquisition by purchase, by contract to purchase, by making of advance commitments to purchase or by assignment of loans, secured or unsecured, or any interest therein, if those activities are carried on from outside this state by the lending institution;

• The making by an officer or employee of physical inspections and appraisals of real or personal property securing or proposed to secure any loan, if the officer or employee making any physical inspection or appraisal is not a resident of and does not maintain a place of business for that purpose in this state;

• The ownership of any loans and the enforcement of any loans by trustee’s sale, judicial process or deed in lieu of foreclosure or otherwise;

• The modification, renewal, extension, transfer or sale of loans or the acceptance of additional or substitute security therefor or the full or partial release of the security therefor or the acceptance of substitute or additional obligors thereon, if the activities are carried on from outside this state by the lending institution;

• The engaging by contractual arrangement of a corporation, firm or association, qualified to do business in this state, that is not a subsidiary or parent of the lending institution and that is not under common management with the lending institution, to make collections and to service loans in any manner whatsoever, including the payment of ground rents, taxes, assessments, insurance, and the like and the making, on behalf of the lending institution, of physical inspections and appraisals of real or personal property securing any loans or proposed to secure any loans, and the performance of any such engagement;

• The acquisition of title to the real or personal property covered by any mortgage, deed of trust or other security instrument by trustee’s sale, judicial sale, foreclosure or deed in lieu of foreclosure, or for the purpose of transferring title to any federal agency or instrumentality as the insurer or guarantor of any loan, and the retention of title to any real or personal property so acquired pending the orderly sale or other disposition thereof; or

• The engaging in activities necessary or appropriate to carry out any of the foregoing activities.

However, nothing contained in California Corporations Code § 191(d) permits any foreign banking corporation to maintain an office in California unless otherwise provided for by the laws of the State of California to limit the powers conferred upon any foreign banking corporation as set forth in the laws of the State of California or to permit any foreign lending institution to maintain an office in California except as otherwise permitted under the laws of the State of California.

Per the California Revenue and Taxation Code

Doing business in California is defined as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. California Revenue and Taxation Code § 23101(a). Under California Revenue and Taxation Code § 23101(b), a foreign entity will be deemed to be doing business in California for a taxable year if any of the following conditions are satisfied:

• The taxpayer is organized or commercially domiciled in this state;

• Sales, as defined in subdivision (e) or (f) of § 25120 as applicable for the taxable year, of the taxpayer in this state exceed the lesser of five hundred thousand dollars ($500,000) or 25% of the taxpayer’s total sales. For purposes of this paragraph, sales of the taxpayer include sales by an agent or independent contractor of the taxpayer. For purposes of this paragraph, sales in this state shall be determined using the rules for assigning sales under §§ 25135 and 25136 and the regulations thereunder, as modified by regulations under § 25137;

• The real property and tangible personal property of the taxpayer in this state exceed the lesser of fifty thousand dollars ($50,000) or 25% of the taxpayer’s total real property and tangible personal property. The value of real and tangible personal property and the determination of whether property is in this state shall be determined using the rules contained in §§ 25129 to 25131, inclusive, and the regulations thereunder, as modified by regulation under § 25137; or

• The amount paid in this state by the taxpayer for compensation, as defined in subdivision (c) of § 25120, exceeds the lesser of fifty thousand dollars ($50,000) or 25% of the total compensation paid by the taxpayer. Compensation in this state shall be determined using the rules for assigning payroll contained in § 25133 and the regulations thereunder, as modified by regulations under § 25137.

The sales, property, and payroll of the taxpayer include the taxpayer’s pro rata or distributive share of pass-through entities. California Revenue and Taxation Code § 23101(d). For purposes of this subdivision, “pass-through entities” means a partnership or an “S” corporation. Id. The Franchise Tax Board shall annually revise the amounts subdivision (b). California Revenue and Taxation Code § 23101(c)(1).