Delaware LLC Doing Business in California
If you are a Delaware LLC doing business in California, make sure you have taken all the right steps in order to protect both you and your company long-term. 5 min read
2. Register a Delaware LLC as a Foreign Entity in California
3. What Is the Purpose of a Registered Agent in California?
4. California Costs and Fees
5. What Kind of LLCs Are Allowed in California?
6. Forming an LLC in Delaware Is Better for Business
Updated June 24, 2020:
Conducting Business as a Delaware LLC in the State of California
In Delaware, your LLC is known as a domestic entity. However, when operating in another state, including California, your LLC is considered a foreign business.
You will need to register in California if you fall under the following conditions:
- You are physically operating in California as a business.
- You are hiring employees in the state of California.
- You are banking or own a California-based asset.
In order to legally conduct business outside of Delaware, you will need to complete what is referred to as foreign qualification. If you do not complete this process, your company may be at risk.
When you first formed your LLC, the owners should have agreed whether or not the company would do business outside of Delaware. This is typically discussed at an LLC meeting, though written consent is also acceptable.
Most often, California banks will not let you open an account at a California address if you do not have entity number from the Secretary of State. The same is true in terms of employees. If you have not yet registered as a foreign corporation, then you cannot yet hire employees or conduct business operations.
Once you are registered, you will be subject to California income and franchise tax.
Register a Delaware LLC as a Foreign Entity in California
Before any business can conduct and transact interstate or intrastate business in the state, the company must register and qualify with the California Secretary of State. This is achieved by filing a Statement and Designation by Foreign Corporation. This means that if you plan to do business in California, your business must be registered.
In order to register in the state of California, you must include your Certificate of Incorporation and Certificate of Good Standing from the state of Delaware. It is important to note that your Certificate of Good Standing must have been issued within the last six months.
You will also need to select a California-based registered agent. This agent will sign on your behalf regarding matters of law within California. Please know that you will need to provide the agent's address and name on the application. It's important to note that all information provided during your California application will be made public, although there is no requirement for publication unless it is specifically required in the county where your registered agent is located.
Once your company is registered as a foreign entity, you will also need to file an initial report within 90 days of filing your application. You will also need to complete biennial reports, which are due on the last day of the month from your filing date.
What Is the Purpose of a Registered Agent in California?
Your registered agent will be the go-between with the state and will provide you with a physical address within California. This is the address where you will receive service of process from the state or any legal documents that need to be delivered. Some business owners opt to serve as their own registered agent while others prefer to enlist support from their registered agent in Delaware. In some instances, the Delaware registered agent will also offer services in California as well. If you are a Delaware corporation, you are still required to have a registered agent in Delaware. Your California agent will not be required to sign the filing.
California Costs and Fees
As a Delaware LLC doing business in California, you can expect to pay some additional fees. These may include the following:
- To file your report, you will need to pay a fee of $20 (the same fee applies to your biennial report).
- If you do not file on time, you may be subject to a $250 late fee.
- A franchise tax, with a minimum of $800 per year. This applies whether a business is active, inactive, or currently operating at a loss.
- A $100 fee to file the Statement of Designation.
- A $50 fee to obtain a Certificate of Good Standing from Delaware.
The California Franchise Tax Board has clarified that the $800 franchise tax applies to all LLCs and corporations who meet certain requirements:
- They have incorporated or are organized in the state of California.
- They are a foreign qualified corporation or registered to do business in the state.
- They are doing business in California, no matter whether they are incorporated, organized, qualified, or registered in the state.
By registering a corporation as a foreign business in the state, the $800 a year minimum franchise tax will be triggered at the start of the year following the close of the first fiscal year. Regular franchise taxes may still apply even if there is no minimum franchise tax imposed. Essentially, anyone who lives and operates a business in California will be subject to California taxes regardless of whether you incorporate in Delaware or not.
What Kind of LLCs Are Allowed in California?
California differs from other states in that an LLC cannot operate as a professional LLC within the state itself. The state will typically advise that you get in touch with your business licensing authority prior to application. This will ensure that your business has been fully licensed, certified, and registered.
Since 2011, you are operating as a business in the state of California if your LLC meets any of the criteria below:
- Engaging in transactions for the purpose of financial profit.
- Conducting trade or managing your business from the state of California.
- Operating a business in California with sales that exceed either $500,000 annually or 25 percent of total sales.
- In ownership of real property that is either more than $50,000 or 25 percent of the LLC's total property.
- Exceeding either $50,000 annually in compensation or 25 percent of the total compensation that is paid by the LLC.
Forming an LLC in Delaware Is Better for Business
Delaware has been ranked #1 by the United States Chamber of Commerce for the past 10 years. This is in regard to the state's litigation system and incorporation climate. Delaware also has no sales tax. With Delaware being the "gold standard," it is recommended that you incorporate in that state. Since Delaware has some of the most desirable business laws of any state, it is important to understand how California laws differ. Some of the advantages of incorporating in Delaware include:
- There is no sales tax in Delaware.
- Referred to as the “Delaware loophole,” Delaware does not have an intangible personal property tax, which differs from most other states.
- There is no requirement to file and/or pay income tax or to have a business license if the Delaware LLC does no business in the state. However, you are still required to pay taxes when you conduct business.
- The state has a chancery court system, and there are laws in place that limit liability for boards of directors and shareholders.
If your Delaware LLC is doing business in California and requires assistance, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.