Many business owners form new business entities in states like Delaware or Nevada thinking that they will save taxes or fees by incorporating those states, even though they are doing business in California. The reality is that if a business is “doing business” in California, such as, earning income in California, operating a physical location in California, hiring employees, independent contractors, or other workers in California, purchasing or using vehicles in California, entering into contractual relationships in California, or engaging in other business activities, it is necessary to obtain a license to do business in California. The process of registering to do business in California, for business that is formed in Delaware, Nevada, or other states, is called “foreign qualification.”
When a out-of-state company obtains foreign qualification in California, companies that have been formed outside of California doing business in California become subject to new regulations under California Law. If your business wants to, say, sell eye glasses in California and, say, bring a lawsuit against another a competitor for unfair business practices such as trademark infringement, it cannot do so without first obtaining what is called “foreign qualification” from the Secretary of State.
Requirements for Doing Business in California
California law requires an out-of-state corporation first to have a certification of qualification. The name given to this process varies, and it can be called a variety of phrases, including:
- Certificate of Authority to do business
- Foreign Corporation Registration
- Foreign Qualification Authorization
- Authorization to do Business in California
- Foreign Qualification California
or other terms. Regardless of the phrase that is used, the concept is all the same: your foreign entity that is incorporated originally in a different state is becoming authorized to do business in California. Generally, this is achieved by filing a statement that designates a corporate officer, if applicable, and states basic facts about the corporation, including:
- The name and state of incorporation.
- The street address of the corporate executive office in and outside of the state, and the mailing address if different.
- The registered agent for purposes of serving the corporation within the state, and creates a default agent of service the Secretary of State.
The forms that you need are located on the Secretary of State’s website, as well as an FAQ. In addition to the foregoing, it is generally necessary to obtain a Certificate of Good Standing from the state of the businesses original incorporation. This certifies to the California Secretary of State that the business is not in delinquent status, not suspended, not in another type of defunct status.
Once the applicable forms are completed, and the fees paid, the Secretary of State will process the form qualifications, and approve the business to operating California.
What Happens if Your Company Does Not Obtain Foreign Qualification in California?
If your company does not obtain foreign qualification to do business in California, it may face certain disadvantages in California that will make it difficult Not only to do business, but operate.
- Your company will be operating unlawfully in the state of California, meaning that back-taxes will accrue; if the Department of Business Oversight or Office of Finance becomes aware that you are unlawfully operating a business, it will assess taxes for you, and if you are unable to pay them within the timeframe they permit, they will begin enforcement proceedings and are authorized to seize and attach assets. This would be a disaster scenario.
- By failing to operate lawfully in California, you are also exposing your business to penalties by the California Economic Development Department, which issues severe penalties for failing to comply with California’s labor laws and making timely deposits of payroll taxes. For example, to give you a sense of the severity of the penalties, failing to properly deposit payroll taxes for single worker on a single occasion can be a penalty of several hundred dollars, depending on the employee’s wages. Multiply this by all of the weeks and months you may have been operating unlawfully in California, and your business may not survive the amount of penalties that could be assessed against it.
- If your company has a lawsuit filed against it, you will not necessarily know, because you have not designated a registered agent lawfully authorized to accept service of process for your Company. This could result in a scenario where a default judgment is entered against your business, and you are not able to defend yourself or your business.
- Your company may not file a lawsuit against any other company or entity in California.
- The Secretary of State becomes the agent for service of process for any lawsuit arising out of corporate actions in California.
What are Some of the Benefits of Obtaining Foreign Qualification in California?
In California, there is an incentive for out-of-state companies to do business because, even if they do not obtain foreign qualification, they could at least enforce contracts and conduct business in the state. However, the risk of doing such behavior without obtaining foreign qualification is too great, since your company could only be sued and the Secretary of State becomes the default agent of service of process.
- Foreign qualification authorizes your business to be lawfully operating in California, selling services, operating a physical location, hiring workers coming and engaging in all the other usual practices.
- Obtaining foreign qualification in California will authorize you to begin using a bank account in California, making banking accounting functions dramatically easier.Foreign qualification allows an out-of-state company to conduct business with the assurance that it can take advantage of California laws that promote fair competition
- Foreign qualification promotes due process as it allows an out-of-state corporation to sue and be sued in California.
Getting Legal Help
If you need assistance obtaining foreign qualification for your Company in California, contact Axis Legal Counsel. AXIS Legal Counsel’s Business Practice provides legal advice to numerous small businesses with a variety of legal matters, including business formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management / insurance, labor/employment matters, intellectual property, healthcare, crisis management, directors/officers, private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents businesses, corporations, LLCs, LLPS, partnerships, and startups in need of a corporate lawyer, for business legal matters as well as business litigation, such as disagreements, non-solicit agreements, non-competes, trade secrets, and other disputes with businesses. We are also experienced in providing assistance to business clients concerning business contracts, corporate formation matters, contracts and transactions, business litigation, business legal advice for Corporations, LLPs, LLCs, Partnerships, Small Business, Startups, and others involving corporate law.
If you are seeking a business lawyer, or for information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact [email protected] or call (213) 403-0130 for a confidential consultation.
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