Thursday, March 26, 2009

Registration of foreign business entities in California

I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.

If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.

If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.

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