I get asked all the time, “If I incorporate a business that will be located in California and will be strictly online with no principal office location, do I still have to register to do business in California?” This is an important question, most importantly for tax reasons.
Before you even make your first sale, the California franchise tax board says that all corporations and LLCs are required to pay at least an $800 franchise tax if they:
- Incorporated or organized in California.
- Qualified or registered to do business in California.
Under the rules of the Franchise Tax Board, you are doing business in California, whether or not they incorporated, organized, qualified, or registered under California law.
Furthermore, entities are required to pay the minimum franchise tax whether they are active, inactive, or operating at a loss.
Okay, but that still doesn’t define “doing business in California.” Through 2010, doing business in California was broadly defined as “actively engaging in any transaction for the purpose of financial gain or profit.” It was a pretty vague definition to say the least.
Since 2011, an entity is considered to be doing business in California if it meets one of the following criteria:
- The entity’s California compensation exceeds either $50,000 (annually adjusted for inflation) or 25 percent of the total compensation paid by the entity.
- The entity is actively engaging in any transaction for the purpose of financial gain or profit.
- The entity is organized or commercially domiciled in this state. To be commercially domiciled in this state generally means that this state is the principal place from which the trade or business of the entity is directed or managed.
- The entity’s California sales exceed either $500,000 (annually adjusted for inflation) or 25 percent of their total sales. “Sales” include sales made by an agent or independent contractor of the entity.
- The entity’s California real property and tangible personal property exceeds either $50,000 (annually adjusted for inflation) or 25 percent of their total real property and tangible personal property.
Though the new definition was written to include the original definition of doing business, I think the added tests make it clear that if you are a corporation or LLC generating income in California or maintaining tangible property in California, YOU ARE DOING BUSINESS IN CALIFORNIA, and should file a foreign qualification there.