Doing Business in California With an Out of State LLC

An out-of-state Limited Liability Company (LLC) that expands its operations into California is designated as a “foreign LLC.” This term refers to a business legally formed under the laws of a different U.S. state, not another country. California has specific requirements for these entities to operate legally, and non-compliance can lead to significant penalties. The process involves determining if your activities meet the state’s threshold for “doing business,” registering with the appropriate state agency, and fulfilling ongoing tax and reporting obligations.

Determining if Your LLC is “Doing Business” in California

The initial step for an out-of-state LLC is to determine if its activities in California meet the legal standard of “transacting intrastate business.” Crossing this threshold triggers the requirement to register with the California Secretary of State. The state provides clear numerical thresholds to define this activity, which are adjusted annually for inflation. An LLC is considered to be doing business in California if its sales in the state exceed $735,019.

Beyond sales figures, property and payroll are also factors. An LLC meets the standard if the value of its real and tangible personal property in California is more than $73,502. Similarly, if the amount of compensation paid by the LLC in California surpasses $73,502, it is deemed to be transacting business. Having a physical presence, such as an office, warehouse, or employees located in California, also constitutes doing business.

Conversely, California law outlines “safe harbor” activities that do not, by themselves, constitute transacting intrastate business. These exceptions allow for contact with the state without triggering registration. Such activities include maintaining or defending a lawsuit, holding meetings of its members or managers, or maintaining bank accounts. An LLC can also collect debts or enforce mortgages on property within California through third parties. Conducting an isolated transaction that is completed within 180 days and is not part of a repeated course of similar transactions is also exempt.

Information and Documents Needed for Registration

Before an out-of-state LLC can register, it must gather specific information and documents for the “Application to Register a Foreign Limited Liability Company” (Form LLC-5). Accuracy is necessary to ensure a smooth filing process.

To complete Form LLC-5, you will need the exact legal name of the LLC as registered in its home state, the jurisdiction where it was formed, and its formation date. A requirement is the designation of an Agent for Service of Process, who must have a physical street address in California. This agent accepts legal documents on behalf of the LLC, and P.O. boxes are not permissible. The street address of the LLC’s principal office must also be provided.

A supporting document that must accompany Form LLC-5 is a Certificate of Good Standing from the LLC’s home state. This certificate serves as official proof that the LLC is legally formed and compliant. California requires this certificate to have been issued within the last six months to ensure the information is current.

The Registration Process

With a completed Form LLC-5 and a current Certificate of Good Standing, the next step is to submit the registration package to the California Secretary of State.

The most common submission method is by mail to the Secretary of State in Sacramento. For faster processing, in-person submission is available at the Sacramento office. The package must include the required filing fee.

The filing fee for Form LLC-5 is $70, payable by check or money order to the California Secretary of State. It is advisable to verify the current fee on the Secretary of State’s website before submission. Processing times vary; mail-in filings can take several weeks, while in-person submissions are often processed more quickly. Upon successful registration, the Secretary of State returns a filed-endorsed copy of the application, which is the official proof of registration.

Ongoing California Compliance for Foreign LLCs

After registering, a foreign LLC must adhere to ongoing compliance requirements to maintain its good standing. These obligations involve both the Franchise Tax Board (FTB) and the Secretary of State. Every LLC registered in California must pay an $800 minimum franchise tax to the FTB each year, regardless of its revenue or business activity.

In addition to the franchise tax, California imposes an annual LLC fee based on the total income from sources within the state. This fee is paid to the FTB with the LLC’s annual tax return, California Form 568. The fee is tiered:

• $900 for income between $250,000 and $499,999.
• $2,500 for income between $500,000 and $999,999.
• $6,000 for income between $1,000,000 and $4,999,999.
• $11,790 for income of $5,000,000 or more.

Foreign LLCs also have a recurring reporting duty to the Secretary of State. Within 90 days of registration, the LLC must file a Statement of Information (Form LLC-12). This form confirms details like its principal address, CEO, and agent for service of process. After the initial filing, this statement must be filed biennially (every two years) with a $20 filing fee.

Consequences of Failing to Register

Operating a foreign LLC in California without proper registration carries significant financial and legal consequences. The state imposes penalties on any entity found to be transacting intrastate business without having registered, including a fine for each day of non-compliance.

A severe consequence is the loss of legal standing within the state’s judicial system. An unregistered foreign LLC is barred from initiating or maintaining a lawsuit in any California court. While the LLC cannot use the courts to pursue its own claims, it can still be sued in California.

Failure to register can also impact contractual agreements, as contracts entered into by a non-compliant LLC may be considered voidable by the other party. Furthermore, failing to register does not absolve the LLC of its tax duties. The California Franchise Tax Board can assess back taxes, along with penalties and interest, for the entire period the LLC was operating in the state without authorization.