An out-of-state business entity is a corporation or limited liability company formed under the law of another state (say, Delaware or Nevada). An out-of-state entity is often referred to as a “foreign” corporation or as a “foreign” LLC. An out-of-state business entity is permitted to conduct business in California, but it must first register with the California Secretary of State as a foreign business entity and obtain a certificate of registration to transact intrastate business.
There are penalties for an out-of-state business that does business in California without registering, which include inability to sue on contracts and monetary penalties.
Let’s say that an out-of-state business entity entered into a contract with a party in California, which the other party has breached. The entity wishes to sue in California, but the other party objects on the ground that the out-of-state entity has not registered to do business in California (also referred to as “qualifying to do business”). At that point, the out-of-state entity has a choice to register with the California Secretary of State or drop the lawsuit. But even if the lawsuit is dropped, the out-of-state entity will still be subject to taxes, penalties, and interest that will continue to accrue until it registers.
Once the out-of-state entity registers with the California Secretary of State, it will need to file tax returns and pay tax to California just as it would if it were a California entity. If the foreign business entity has already done business in California for number of years, it will have incurred penalties and accrued interest for failure to file tax returns and pay taxes in California. Before picking a state to incorporate in (or to set up an LLC) based on cocktail-party chatter, a founder or entrepreneur would be well-served to make that choice based on competent legal advice. As part of the service of organizing a corporation or forming an LLC, I provide clients with advice on the choice of jurisdiction in which to form the business entity.
If you need assistance with arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Serving San Jose, CA and all of the San Francisco Bay area, Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.
