Do you own a limited liability company (LLC) created in a state other than California, but you want to expand your business to the The Golden State? If so, you’ll need to qualify your foreign LLC in order to transact business in California.
What is a foreign qualification and how do foreign LLCs function within the state of California? In this guide, we’ll answer these questions and more.
Rocket Tip: If you’d rather hire an online service to handle this process for you, many of the best LLC services can handle it for you.
What Is a Foreign Qualification?
A foreign qualification enables your limited liability company to do business in the state of California. It doesn’t matter which state you originally formed your business in ― or in other words, the state your domestic LLC is located in ― as the qualification process to register a foreign LLC in California is the same regardless of where your domestic LLC is based.
The confusion surrounding foreign qualification usually centers on what it means to “do business” in a state outside of your primary state. This gets especially problematic considering some states don’t strictly define what it means to transact business in that state. In California, “doing business” is defined by the Franchise Tax Board, though exceptions to this definition can apply based on the nature of your business.
What Qualifies as ‘Doing Business’ in California
The California Franchise Tax Board defines “doing business” as:
actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” A foreign entity is considered to be doing business if they meet at least one of the following criteria:
What Does NOT Qualify as ‘Doing Business’ in California
According to California Corporations Code, a foreign entity is NOT considered to be doing business in California if it holds status as:
California has also adopted some provisions of the Model Act to exclude certain businesses from qualifying.
How to Get Foreign Qualification in California
To register as a foreign LLC in California, you must file the Statement and Designation by Foreign Association form with the California Secretary of State. The following information is required:
Filing Fee: $100, plus a $15 processing fee for documents delivered in person. Checks must be made payable to “Secretary of State.”
What Is the Penalty for Not Getting Foreign Qualification in California?
California sets a few harsh penalties for unregistered foreign entities attempting to do business in the state. The following penalties may apply:
Should I Hire a Business Service Provider to File My California Foreign Qualification?
If you don’t want to handle your foreign qualification on your own, you have options. Some entrepreneurs choose to hire a lawyer to prepare and file their Certificate of Authority, which can be a good option if you’re concerned about getting the job done right. However, attorney’s fees can be quite expensive.
The other option is to hire a business service provider like Incfile or ZenBusiness to register your foreign LLC with the state of California.
These companies can typically get your foreign qualification done for a fraction of the price of an attorney. This is our preferred route if you don’t want to go with the DIY option.
The process for getting a foreign qualification in California is actually pretty simple. The paperwork and wait times are minimal, and it is also cheaper to do than in many other states. However, this is definitely a process that should be taken seriously, because the penalties for not qualifying a foreign LLC in California are severe ― especially if a third party wants to bring a lawsuit against your business and/or you have been doing business as an unregistered foreign entity for an extended period of time.
We hope this article managed to answer your questions about obtaining a California foreign qualification, and we wish you a prosperous business future!