In my practice, I frequently emphasize to startup clients that the choice of where to incorporate their business, such as California or another state, is a crucial decision. However, forming a business entity in California may not be the sole requirement. In addition to incorporation, companies must consider whether they need to register and qualify to do business in California if they intend to operate within its borders.
To navigate this complex landscape, it’s important to distinguish between three fundamental concepts: (1) when a company’s activities within California subject it to the personal jurisdiction of California courts (a jurisdictional doing business test); (2) when these activities trigger tax obligations in California (a taxation doing business test); and (3) when a company must apply for the authority to do business in California (a qualification doing business test).
In the context of the jurisdictional test, California courts examine a company’s activities within the state and activities directed at the state to determine whether they meet the criteria for personal jurisdiction (California Code of Civil Procedure Sections 410.10 and 410.30). When it comes to the taxation doing business test, California follows its own set of principles, which are outlined in Revenue and Taxation Code Section 23101, determining whether a company is subject to California’s franchise tax based on income earned within the state. It is important to note that meeting either the jurisdictional or taxation test does not automatically require a company to qualify to do business in California. However, qualifying to do business in California does subject a company to the jurisdiction of California courts and its taxation requirements.
Now, let’s delve into the qualification doing business test and explore what it means to be “doing business” in California according to California Corporations Code Section 191.
The California law, similar to New York, does not offer a precise definition of “doing business” but instead provides a non-exclusive list of activities that do not constitute doing business. These activities include maintaining bank accounts, maintaining an office solely for securities transfers, and conducting legal actions or proceedings in the state.
The bulk of what constitutes “doing business” in California is derived from court decisions and is highly dependent on specific facts. In summary, for a foreign entity to be considered “doing business” in California, its activities must meet certain criteria: (1) they must have a local, intrastate character; (2) they must be regular, permanent, continuous, and systematic; and (3) they must be vital and essential to the entity’s core operations rather than merely incidental. Let’s look at some examples:
- A foreign corporation engaged in manufacturing in California qualifies as “doing business” because manufacturing is a substantial part of a typical manufacturing corporation’s activities. On the other hand, conducting research or employee training in California may not meet the threshold unless the organization’s primary purpose is research and training.
- Occasional or casual corporate presence in California, without significant additional activity, does not amount to “doing business.”
- Maintaining a small California office with employees working primarily on requests from outside the U.S. can be deemed as “doing business” in California.
- Systematic and continuous solicitation and servicing of California accounts by a foreign sales agency through on-site representatives can constitute “doing business.”
- Entering into one or two contracts in California typically does not constitute “doing business.”
- Mere advertising of a foreign company’s business in California newspapers is generally insufficient to qualify as “doing business.” However, a combination of such advertising with the employment of an answering service can indicate an intent to do business in California.
- A correspondence school chartered in another state that primarily solicits students and handles materials and fees typically does not qualify as “doing business” in California. However, if the school maintains multiple in-state offices with staff offering instruction, it may cross the threshold.
- Owning and leasing real estate as an incidental part of another enterprise does not constitute “doing business.” However, if a foreign entity’s sole purpose is land leasing or acquisition, it may qualify as “doing business.”
- Occasional or sporadic sales activities do not usually amount to “doing business” in California. California courts do not typically consider factors like having customers in the state or making deliveries from an out-of-state factory as determinative. However, systematic merchandise sales may qualify as “doing business.”
In conclusion, the determination of what constitutes “doing business” in California depends on the specific facts of each case. Failing to qualify as a foreign entity while conducting business in California leaves a company without access to California courts until it secures the necessary authority and settles all fees, taxes, and penalties.