Is My LLC Doing Business in California?

Even if a business’s physical presence is in another state, out-of-state LLCs that are classified as doing business in California may still have to pay the $800 California franchise tax and register their LLC with the state of California. 

Keep reading to understand what counts as “doing business in California,” as this can have additional tax, registration, and legal implications for your business.

What Counts as ‘Doing Business’ in California?

Each state has different criteria for determining what constitutes “doing business.” In California, it is important to take a look at the laws governing both California legal business entities as well as California taxation laws. 

For example, it could be possible that your LLC does not qualify as “doing business in California'' under the corporate code, but you could still qualify under California tax laws. In this case, you may not necessarily have to register your business again with the state of California, but you would still need to pay certain state tax obligations.

What Counts as Doing Business Under California’s Corporations Code?

In general, companies that do a “substantial part of ordinary business” in California are considered to be doing business and must file and register with the state. 

The California Corporations Code defines doing business as “entering into repeated and successive transactions of its business in [the] state, other than interstate or foreign commerce.” 

Essentially, this is open to interpretation, and while the law doesn’t specify what activities qualify as transacting business, it does specify some activities that do not count as transacting business. 

However, many LLCs may still question whether they technically do business in California. Let’s take a closer look at how to approach this question.

Example of Transacting Business in California

Jen forms her advertising LLC in Maine. She started her advertising agency years ago, and most of her clients reside in Maine. However, recently Jen began spending her summers in Maine and her winters living in Irvine, California. While a majority of her clients remain on the East Coast, she has begun to take on clients in California.

Even if only a handful of her clients are in California, if Jen works from home in California, uses her California office to store business information, and accepts legal documents in the state, it appears that Jen is doing a substantial amount of business in California. Not to mention in this scenario, Jen probably already pays California local and state taxes. 

Overall, under California’s Corporations Code, Jen likely qualifies as doing business in the state.

Remote Work

Jen may be working online with many customers across the country, but she continues to operate a substantial amount of her business from her residence in Irvine, California. 

It may be tempting to classify remote work as work that happens “elsewhere,” but the day-to-day evidence indicates that Jen repetitively transacts business from her California office. 

Out-of-State LLCs Doing Business in California

An out-of-state LLC that qualifies as doing business under California’s Corporation Code will need to register as a foreign LLC. A foreign LLC essentially acts as an extension of your current LLC and allows it to register and operate in a new state. 

Therefore, by registering your pre-existing LLC as a California foreign LLC, you will have the ability to continue operating your LLC and expand your business into the state of California.

After registering as a foreign LLC, you have 90 days to file an Initial Statement of Information with the California Secretary of State, and you will need to file a new Statement of Information every two years. 

What Counts as ‘Doing Business’ Under California’s Revenue and Taxation Code?

The above information pertains to doing business under California’s Corporations Code, but the laws governing taxation have different requirements. Therefore, your LLC may not qualify as doing business under the corporate code, but you could still be categorized as doing business under California’s tax code. 

The Revenue and Taxation Code considers you to be doing business in California if you meet any of the following criteria:

• Engage in any transaction for the purpose of financial gain within California
• Are organized or commercially domiciled in California
• Your California sales, property, or payroll exceed the state’s annual thresholds:
  • Sales — Your business’s California sales exceeded $637,252, or more than 25% of your business’s total sales were in California
  • Property — Your business's California real and tangible personal property exceeded $63,726 or more than 25% of your business’s total real and tangible property
  • Payroll — Your business's California payroll compensation exceeded $63,726 or more than 25% of your business’s total payroll compensation

If your LLC meets any of these criteria, you are considered to be doing business in California and are subject to California tax laws.

California Annual Franchise Tax and Tax Obligations

If you qualify as doing business under either California’s Corporations Code or California’s Taxation Code, you will need to file a California Annual Franchise Tax Return and pay an $800 California Franchise tax. This tax is for the “privilege of doing business in the state of California.”

The California annual franchise tax can be filed and paid online using the Franchise Tax Board website. 

California Revenue and Taxation Code Example

To help better understand how California's taxation law works, let’s use another example. 

Benny owns a florist business in New Mexico. While his main storefront is in the state of New Mexico, Benny sometimes sends a small team to California to open a pop-up shop promoting his business in San Diego. Benny’s business may not be based in California, and his business’s California sales may not qualify as a substantial part of his business revenue, but his team is going to San Diego to engage in transactions for financial gain. 

Under California’s Revenue and Taxation Code, Benny would likely be classified as Doing Business, and as a result, Benny would need to pay the California Annual Franchise Tax. If Benny continues to have transactions in California, he should also consider registering as a California foreign LLC, as he would likely also fall under the definition of “doing business in California” under their Corporation Code.

Risks and Penalties of Doing Business in California Without Registering

If California law considers you to be “doing business in California,” it is important you register your LLC and pay the necessary taxes. 

Some people may try to avoid paying the California Annual Franchise Tax by claiming that their LLC does not do business in the state. Rather than spend time trying to avoid this tax, it's recommended that you instead focus your efforts on growing your business. 

Furthermore, failure to properly register your LLC and pay taxes can result in the following:

• Fines and legal penalties
• The inability to use California courts (for example, you would be unable to sue if another company breaches a contract)
• The inability to bring about a counterclaim
• Personal liability — if you do not file as a Foreign LLC and are deemed to be doing business in California, you lack any liability protection offered by an LLC

Registering your business as a California foreign LLC and paying the necessary state taxes can feel cumbersome, but it is recommended that businesses air on the side of caution in order to avoid incurring penalties.