Out of State Corporations Doing Business in California aka Foreign Corporation

If you or your business invest in or operate through an out-of-state limited liability company (LLC) or S-Corporation, you may be surprised to learn that you could be subject to filing obligations and tax liabilities in California due to the state's expansive rules and interpretations regarding when an LLC or S-Corporation is considered to be "doing business" in California.

California law requires all LLCs and S-Corps to file a California tax return annually and pay at least an $800 California franchise tax if they:

Engage in any transaction in California for financial gain or profit.

• Are incorporated or organized in California.
• Have qualified or registered to do business in California.
• Are "doing business" in California, regardless of whether they are incorporated, organized, qualified, or registered under California law.

The Franchise Tax Board (FTB) takes the position that even an LLC or S-Corporation organized outside of California is considered "doing business" in California if:

• It is a member of an LLC or S-Corporation that does business in California.
• It is a general partner in a partnership that does business in California.
• Any of the LLC's or S-Corporation members, managers, or agents conducts business in California on behalf of the LLC or S-Corporation.

Additionally, an out-of-state LLC or S-Corporation is considered "doing business" in California if:

• The LLC or S-Corporation is commercially domiciled in California (i.e., where realistic control of the LLC's or S-Corporation functions is

centered).
• Sales, including those made by the LLC or S-Corporation agents and independent contractors, in California exceed the lesser of

$500,000 or 25% of the LLC or S-Corporation’s total sales.
• Real or tangible property of the LLC or S-Corporation in California exceeds the lesser of $50,000 or 25% of the LLC or S-Corporation’s

total real and tangible property.
• The amount paid in California by the LLC or S-Corporation for compensation exceeds the lesser of $50,000 or 25% of the total

compensation paid by the LLC or S-Corporation.

It is important to note that for these calculations, the sales, property, and payroll of the LLC include the LLC or S-Corporation’s pro-rata or distributive share of any pass-through entities such as partnerships, LLCs, and S-corporations.

If an out-of-state LLC or S-Corporation is found to be "doing business" in California and fails to file a tax return or pay the taxes and fees due, the state can impose a penalty of $2,000 per taxable year.

Additionally, any contract made by an out-of-state LLC or S-Corporation in California that is neither qualified to do business nor has a corporate account number from the FTB is voidable by any other party to that contract for the period during which the out-of-state LLC or S-Corporation fails to file a tax return required by the FTB.

It is important to note that the FTB's determination of when an out-of-state LLC or S-Corporation must file tax returns is different from the California Corporations Code. Under the California Corporations Code, any entity that "actively engages in any transaction in California for the purpose of financial gain or profit" must register with the California Secretary of State. However, an out-of-state corporation is not considered to be transacting business in California merely because it is a member or manager of a domestic or out-of-state LLC or S-Corporation or a limited partner of a domestic or out-of-state limited partnership. Furthermore, the new California Revised Uniform Limited Liability Company Act, effective as of January 1, 2014, provides that an out-of-state LLC "may" register in California and does not impose penalties.