Legal Question in Business Law in California

Re: Can I transact business in CA through an out-of-state LLC?

To be blunt, you are a prime example of why people need an attorney instead of representing themselves. There are so many things wrong with what you are proposing.

First of all, you need some good tax advice. An S-corporation is often better than an LLC when it comes to income tax treatment.

Second, an out-of-state corporation still has to register and qualify to do business in California. You end up paying the $800 whether you form the business in California or not.

Third, you will have to pay income tax on all income generated in California anyway, so there really is not point in incurring the extra expense of registering out of state.

Fourth, it you'll will mostly get caught some day and the penalties may exceed the $800.

Fifth and finally, it is only $800. If you are worried so much about that fee, should you even really be in business for yourself?

Please reconsider your course of action and seek competent legal and tax advice.

Re: Can I transact business in CA through an out-of-state LLC?

The short answer is that if your LLC does business in California, it must either register as a California LLC, or qualify to do business in California as an out-of-state entity. Either way, there is an $800 annual minimum tax. So you save nothing in California by registering out of state.

Re: Can I transact business in CA through an out-of-state LLC?

Well, to start off, whether your industry is regulated has nothing to do with liability for the franchise tax.

Out-of-state corporations and LLCs that do business in CA must pay the $800 a year franchise tax, and if you are an LLC, there is in addition a component of the tax that is based on gross receipts, so as Mr. Starrett points out, an S-Corp. may be better in some circumstances, but not all, than an LLC.

Nevada also charges an annual franchise tax, so if you form your business vehicle there and use it here, you'll end up paying taxes to both states, as well as having to figure out and file two tax returns.

As to what constitutes "doing business" in California so as to trigger the duty to register as a foreign LLC or corporation and pay the franchise tax, I can say that the issue has been litigated dozens of times, and there are a bunch of appellate decisions that have found that certain types or levels of business activity do constitute "doing business" here, while others do not. It would be impossible to delineate the decisions within the scope of a LawGuru response, but a couple examples might help. If you lived in Nevada and your NV LLC bought real estate in CA, that alone is clearly NOT doing business in the state. Then, if you make a trip to California to interview tenants and property managers for your new real estate, that is PROBABLY not doing business in California. But when you hire a property manager and the property manager finds tenants for your LLC's property, that probably IS doing business in California. Similarly, if XYZ Corp., out of Delaware, sells widgets by e-mail to someone in California, that's probably NOT doing business in California, but if XYZ advertises its widgets in the L.A. Times, or opens a sales office, it steps over the line and needs to register and pay.

Failure to register and pay the tax when required to do so causes the LLC or corporation to lose its civil rights in California, such as the right to sue or defend in court (but it can still be sued). Willful failure to register and pay the tax is also a misdemeanor, but I doubt that it is often prosecuted as such.

Finally, running an LLC or corporation out of your home in California would 98% or more of the time involve a sufficient level of California activity to subject it to the duty to register and pay, whether or not your handling of any of those other factors you mention (licensing, registering a fictitious business name in the county, avoiding violation of the zoning laws, etc.) was also a violation or not.

My advice to anyone doing business primarily or exclusively in California is to form your business entity here. Then when your business has to take a non-paying customer to small claims court, it'll be able to sue and collect without paying a fine first. See, e.g., Corporations Code sections 2258, 2259 and 17456. The fine for an LLC is $20 a day, maximum $10,000, plus the unpaid taxes, penalties and interest.