California Foreign Corporations

What is the legal consequence of forming a corporation in a state other than California which corporation then wishes to conduct business in California?

If the corporation intends  to ‘do business in California’, the corporation’s management and/or shareholders must determine whether or not the proposed business activities will require that the corporation “qualify” the corporation to do business in California.

A corporation formed in a jurisdiction other than California is called a “foreign” corporation under California law.

A foreign corporation may not transact intrastate business in California without first qualifying with the California Secretary of State. Qualification requires

  • completing and filing specific forms with the Secretary of State and
  • naming an agent for service of process within the state.

In  California, “transact intrastate business” is defined to mean entering into repeated and successive transactions of business in California, other than interstate or foreign commerce. Although certain activities are specifically excluded from what constitutes transacting intrastate business, there is no specific definition of what activities do constitute transacting intrastate business. As a result, each case must be decided on its own set of facts.

California penalties are imposed for failure to qualify in California if required. They include the following:

  • The corporation may be subject to a penalty of $20 for each day that unauthorized interstate business is transacted.
  • The corporation may not maintain any action or proceeding in any California court upon any intrastate business
  • transacted in California until it has complied with the qualification requirements and paid applicable penalties.
  • Any person who transacts intrastate business on behalf of the corporation, knowing that it is not authorized to do so, is guilty of a misdemeanor punishable by a fine.

Similar requirements apply to other entities which may wish to transact intrastate business in California. That included foreign LLCs.

When Certificate of Qualification Is Required

[a] Transacting Intrastate Business

A foreign corporation must obtain a certificate of qualification from the Secretary of State before it may transact intrastate business in California [Corp. Code § 2105(a); . A foreign corporation “transacts intrastate business” when it enters into repeated and successive transactions of its business in California, other than interstate or foreign commerce [Corp. Code § 191(a)].

The concept of “transacting intrastate business” for purposes of requiring qualification is narrower than the concept of “doing business” for purposes of service of summons [Thorner v. Selective Cam Transmission Co. (1960) 180 Cal. App. 2d 89, 91, 4 Cal. Rptr. 409]. One of the factors considered in determining whether a corporation is transacting intrastate business is the presence of agents and employees in California [see Mediterranean Exports, Inc. v. Superior Court (1981) 119 Cal. App. 3d 605, 616–618, 174 Cal. Rptr. 169; see also Eli Lilly & Co. v. Sav-On-Drugs (1961) 366 U.S. 276, 280–282, 81 S. Ct. 1316, 6 L. Ed. 2d 288].

Activities Not Requiring Certificate of Qualification

[i] In General

Foreign corporations are expressly permitted to conduct certain activities without having to obtain a certificate of qualification for transacting intrastate business. First, a foreign corporation is not considered to be transacting intrastate business merely because its subsidiary transacts intrastate business [Corp. Code § 191(b)]. For most purposes, such a foreign “parent” corporation would normally possess more than 50 percent of the voting power directly or indirectly through one or more of its subsidiaries [Corp. Code § 189(a); see Corp. Code §§ 189(b), 703]. Further, a foreign corporation is not considered to be transacting intrastate business merely because of its status as any one or more of the following [Corp. Code § 191(b)]:

•A shareholder of a domestic corporation.
•A shareholder of a foreign corporation transacting intrastate business.
•A limited partner of a domestic limited partnership.
•A limited partner of a foreign limited partnership transacting intrastate business.
•A member or manager of a domestic limited liability company.
•A member or manager of a foreign limited liability company transacting intrastate business.

A foreign corporation also is not considered to be transacting intrastate business solely because it carries on in California any one or more of the following activities, which are generally attributable to interstate corporate activities [Corp. Code § 191(c);:

•Maintaining, defending, or settling any action, suit, administrative or arbitration proceeding, or settling any other claim or dispute.
•Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.
•Maintaining bank accounts.
•Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.
•Effecting sales through independent contractors.
•Soliciting or procuring orders by mail, through employees or agents, or otherwise, if those orders require acceptance outside of California before becoming binding contracts.
•Creating evidences of debt, mortgages, liens, or security interests on real or personal property.
•Conducting an isolated transaction that is completed within a period of 180 days and is not in a course of repeated transactions of a like nature.

Activities other than those enumerated above may also be activities that do not constitute “transacting intrastate business” [see Corp. Code § 191(c); see e.g., United Systems of Arkansas, Inc. v. Stamison (1998) 63 Cal. App. 4th 1001, 1007, 74 Cal. Rptr. 2d 407 (simply submitting bid in response to request for quotation by DMV was not “transacting intrastate business”; out-of-state bidder could maintain its suit challenging award of contract to another bidder without obtaining certificate of qualification from Secretary of State)].