Your business is growing, and you’re planning an expansion to other states. It’s a good problem to have!
But it’s not quite as simple as choosing another location. Because each state has different rules and requirements for business operations, you may need a “foreign qualification” in each state you plan to do business.
It’s a common misconception that foreign qualification is only for businesses operating outside the U.S. But in this case, “foreign” refers to any business operating in a state that isn’t the state where the LLC was originally formed.
For example, if your LLC is registered in Washington and you are looking to open a second location in California, you may need to complete a foreign qualification in California before you can expand there.
Important Note: If you’d like to save time and have the foreign qualification paperwork taken care of for you, look into a reliable online service like Northwest Registered Agent.
What happens if I fail to foreign qualify before doing business in California?
Foreign qualifying is essentially asking permission to do business in the state of California. And the notion that “it’s easier to ask forgiveness than permission” doesn’t apply here. Failing to foreign qualify before starting business in California yields consequences that are far costlier than registering in the first place. If you fail to foreign qualify, your business:
- Will be denied access to maintain any action or proceeding in a California court.
- May be subject to any fees and taxes it would have owed had it been registered. The California Franchise Tax, for example, is $800 per year, and the penalty for failing to file a tax return can be as much as $2,000. The penalty for not filing a biennial Statement of Information is $250.
You can see how these fines add up quickly. In short, it’s simply not worth the risk. While the total fines you rack up would vary depending on the circumstances, it certainly won’t be cheap. A couple years of $800 franchise taxes, along with late fees and other penalties makes the $70 foreign qualification fee look like nothing at all.
Plus, in California you can be held personally liable if acting on behalf of an unauthorized foreign business entity, potentially resulting in a misdemeanor or additional fines.
You can read more about possible penalties on the California Corporate Law Statutes.
What is considered “doing business” in California?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in California? State law doesn’t get into specifics, but does say that transacting business means “entering into repeated and successive transactions of business in this state, other than in interstate or foreign commerce.” Additionally, according to the California Franchise Tax Board, you are considered to be “doing business” and required to foreign qualify if:
- Your sales in California exceed the lesser of 25% of your total profits or $500,000.
- Your LLC owns real or tangible property in California exceeding the lesser of 25% of your total property or $50,000
- The amount of compensation your LLC pays in California is the lesser of 25% of total compensation paid or $50,000
- Your LLC has representatives or salespersons transacting business in California on its behalf
They say nothing is certain except death and taxes. But in this case, we’re just talking about taxes. As mentioned above, every LLC operating in California must pay an $800 annual franchise tax. When you foreign qualify, it notifies the state that you will be paying this tax. Otherwise, you could be subject to additional fees and penalties.
If you’re unsure whether or not you need to file for foreign qualification in California, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in California?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in California. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Maintaining or defending an action or suit in California court
- Holding meetings, or other internal affairs dealings, in state
- Maintaining a bank account
- Selling products or services through independent contractors.
- Creating, acquiring, or managing debts
- Soliciting or procuring orders accepted outside the state before they become contracts
- Facilitating an isolated transaction, not part of a series, within a period of 180 days
- Transacting business in interstate commerce
For a deeper dive into these exceptions, see Article 8 of the California Corporations Code. Scan the list, and if you find your LLC’s only business actions within California, you likely aren’t required to foreign qualify. But again, the penalties are steep, so if you’re unsure, it’s best to seek legal advice.
How to Foreign Qualify your LLC in California
Foreign qualification in California is simple if you know where to find and send your forms. If you or your legal counsel has decided to foreign qualify your LLC in California, head straight to the Secretary of State Forms, Samples, and Fees webpage. There, under the Foreign LLC dropbox, you’ll find form LLC-5: Application to Register. The form itself has detailed instructions for its completion.
In addition to your complete LLC-5, California requires you to attach a Certificate of Good Standing from the state where your LLC originated. So, if you launched your LLC in Washington, you will need to request a certificate from the Washington state government. This means that you need to be up to date on all filings and taxes in that state.
Unfortunately, there is no online option to submit the LLC-5, so you’ll have to deliver it by mail or in person. For postal mail, send your form to:
Secretary of State
Business Entities Filings Unit
P.O. Box 944228
Sacramento, CA 94244-2280
Or, if you live near Sacramento and want to get out for some fresh air, you can hand deliver it to:
1500 11th Street, 3rd Floor
Sacramento, CA 95814
To file your application successfully, you’ll also need to pay a $70 fee. Acceptable payment methods include check or money order by mail and check, money order, or credit card in person. There is an additional $15 counter drop off fee for in-person submissions.
By now you’re probably itching to get your business off the ground. If you want to know how long the process will take, the California Secretary of State website updates its processing times daily. You can find them here. But if you’re really in a hurry, they also offer three tiers of expedited processing for additional fees:
- 4-hour: $500 (you must be precleared and approved for this option)
- Same Day : $750
- 24-Hour: $350
After your form is in and your fee is paid, sit back, take a deep breath, and pat yourself on the back. Your LLC is foreign qualified and you’re embarking on another chapter in the life of your business.
Name Requirements to Remember
One final reminder: make sure that you review California’s business entity naming restrictions to ensure that you don’t run into any issues. Your LLC name must:
- End with “Limited Liability Company,” which may be abbreviated to L.L.C. or LLC.
- Not contain the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” “corp.,” “insurer,” “insurance company,” or suggest that it’s an insurance or banking company.
- Be distinguishable from all other business entity names in the California Secretary of State record.
- Not be misleading to the public. For example, if you run a dry cleaners, your business name shouldn’t be “New Company Construction.”
Need to save time?
Let’s face it, there’s never enough time in the day, especially when you’re running a company. And properly registering your LLC in California involves research and time, time that you could be using to continue growing your business.
If the thought of paperwork, fees and state correspondence makes your head spin, consider using a service like Northwest Registered Agent to foreign qualify your business. Services like Northwest ensure that your forms are filed correctly and on-time, potentially saving you thousands of dollars in penalties, not to mention a bunch of time and stress.
And as a bonus, they include a free registered agent service for one year to keep your business compliant and in good standing with the state of California. For a $100 service fee, they’ll handle that paperwork so you don’t have to.