Doing Business in California: Everything You Need to Know
In order to be doing business in California, you will need to legally incorporate in the state. 3 min read
2. Is Your Out-of-State LLC “Doing Business” in California?
3. Penalties if Failing to Comply with Legislation when Doing Business in California
4. Examples of Doing Business in California: The Swart Case
5. Exemptions of Taxation
6. Frequently Asked Questions
7. What if my company is an international franchise?
In order to be doing business in California, you will need to legally incorporate in the state. Special rules apply to foreign countries doing business in California, based on the Revenue and Taxation Code (R&TC) section 23101, which states that you are required to register your business if:
- You engage in transactions with the purpose to make profit in California
- Your business is organized, as well as commercially domiciled in California
- You have sales originated in California exceeding $500,000
- If you have real estate or property assets in the country exceeding $50,000 or 25 percent annually
- If you pay compensation over $50,000 annually in California
How to Register a Business in California
By law, you need to register your business in the state of California to start doing business. Every corporation and LLC will need to pay a franchise tax to trade in the state, according to the California Franchise Tax Board.
The franchise tax of $800 applies to the following companies:
- Organized and incorporated in California
- Doing business in California
- Foreign companies registered to do business in California
It is important to note that out of state businesses that have less than the above threshold sales and property interest in California might still need to register, as they can be considered as doing business in California.
Is Your Out-of-State LLC “Doing Business” in California?
If you have an out-of-state LLC, and you carry out business activities in California, you are liable to paying business tax in the state.
If you invest in a business, for example a limited liability company, you may be obliged to file tax obligations, even if your main business is not located in California.
When determining tax liabilities in California, the Board takes into consideration where the acceptance of sales takes place. As an example, if your company is located out-of-state, but you have agents conducting business in California on your behalf, you will still need to register and pay the tax.
Penalties if Failing to Comply with Legislation when Doing Business in California
According to the California Corporations Code, if you fail to register with the California Secretary of State and you engage in any transaction that has the sole purpose of financial gain or profit, you will face a penalty of $2,000 for each tax year your LLC was doing business in California.
If you don't file a tax return in the state, and you still do business in the state, you will need to pay the missed taxes due and the fees as well.
In case you are unsure whether your out-of-state LLC needs to file tax returns in California, you should get in touch with a qualified business law professional who can guide you on the California Corporations Code.
Whether or not you are required to file taxes in the state is determined by the FTB. If your LLC needs to pay a penalty, you will be notified through a written demand letter.
Examples of Doing Business in California: The Swart Case
In the past, the FTB has filed cases against companies that did business in California and did not comply with their tax obligation. As an example, Swart Enterprises, an out-of-state company from Iowa owned a 0.2 percent interest in a California investment fund. They paid their taxes and requested a refund.
The ruling of the FTB stated that Swart pays the minimum of $800 tax, as well as the penalties and interest. As the company had an interest in a California fund, they were required to file a tax return.
Exemptions of Taxation
You can apply to be exempt from California tax if you have an out-of-state status if you meet some special requirements. If you don't transact interstate business, you might need to talk to a California corporate lawyer who can advise you on getting an exempt status from the FTB.
Frequently Asked Questions
Do I still have to register my business if I run my venture online?
You will still need to register your business, even if you don't have a physical location.
What if my company is an international franchise?
If your revenues from doing business in California account for at least 25 percent of your total income, or are above $500,000, you will need to register your business in the state.
If you need help with doing business in California, 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