After deciding that they are going to incorporate their business, many California-based founders are persuaded, for a variety of reasons, to incorporate in some jurisdiction other than California. Many decide to incorporate in the states of Nevada or Delaware, usually because they believe that those states offer more favorable tax treatment, or because they believe the identities of the corporation’s officers and shareholders will be protected from disclosure. What many do not realize is that even if they incorporate in Nevada, if they intend to do business in California, they must register as a foreign corporation with the California Secretary of State.

Under California Corporations Code Section 2105, most foreign corporations are required to first obtain a Certificate of Qualification from the Secretary of State prior to conducting business in California. To obtain this Certificate, the foreign corporation must complete and file with the Secretary of State a Statement and Designation by Foreign Corporation which contains all of the following:

• Its name and place of its incorporation
• The street address of the corporation’s principal executive office
• The street address of the corporation’s principal place of business in California
• The mailing address for the principal executive office in California, if different from its principal place of business
• The name and address of its registered agent for service of process in California
• Its “irrevocable consent” to service of process upon the California Secretary of State if the agent previously named is no longer authorized to accept service

In addition to the information required on the Statement and Designation by Foreign Corporation, information must be provided by an officer of the state of incorporation that the foreign corporation is in good standing with that state. Filing the Statement and Designation by Foreign Corporation subjects the foreign corporation to payment of a “minimum franchise tax” in the amount of $800.00 per year, whether any income is generated in the State of California or not.

A foreign corporation that fails to register with the Secretary of State when required is subject to a fine of $20.00 per day for every day it transacts business in California prior to registration .In addition to the fine imposed for failure to register, which may seem inconsequential to some, the foreign corporation is deemed to have consented to the jurisdiction of the California courts in any civil action brought in which it is named as a defendant. Again, many would argue that these two penalties are inconsequential and that it is worth taking the chance that the corporation will be able to avoid its obligation to register – at least until a lawsuit is brought and they are named as a defendant, or it must enforce a contract to be paid for its goods or services.

When a foreign corporation (i.e., a Nevada corporation) fails to register with the California Secretary of State, not only can it be fined and deemed to have consented to be sued in California, the non-complying corporation is prohibited from filing suit or defending a lawsuit against it until it has paid a fine of at least $250.00, all fines due for its failure to register, all franchise taxes due but unpaid as a result of the conduct of business in California, and a certificate has been filed with the Clerk of Court in which the action is pending. The bottom line is that the longer the corporation transacts business in California the more it will have to pay before it can sue or defend a lawsuit.

As a general proposition, where a defendant to a lawsuit fails to take action to protect its rights, that defendant typically loses its right to defend against the suit, even if they would otherwise have prevailed in the suit. Because a foreign corporation cannot defend itself against any lawsuit in California unless it is registered and qualified to do business as a foreign corporation, the potential failure to register takes on catastrophic consequences to a small business.

If you have incorporated in Nevada, or any other jurisdiction for that matter, you must determine whether your corporation must be registered with the California Secretary of State. Michael Leonard, Esq. of San Diego Corporate Law can assist you with that determination and, if necessary, registering your corporation or curing any potential failure to register. To schedule a consultation with Mr. Leonard to discuss your registration needs, or any other business-related matter, you can visit San Diego Corporate Law or call (858) 483-9200.