Registering Your Startup to Do Business in California
Forming your business entity in Delaware—specifically, a corporation—gives you a lot of flexibility, but you may still need to follow local laws depending on what state you operate in.
Specifically, if you do business in California, you need to register with the state. We’ll walk through the process and simplify it. But first, how can you tell whether you’re legally doing business in California?
When to register as doing business in California
Delaware C corps—and all other corporations formed outside of California—are referred to as “foreign” corporations by the State.
According to California’s Franchise Tax Board, a foreign corporation is considered to be doing business and must register with the State if the company:
- Engages in any transaction for the purpose of financial gain within California, or
- Is organized or commercially domiciled in California, or
- Pays sales, property or payroll exceeding amounts as specified by the Franchise Tax Board
When to register to collect sales tax in California
Every state has rules about when a company is required to pay sales tax. These are called sales tax nexus rules.
You can think of the nexus as a special version of that state’s border; if you perform certain business activities within that border, you fall into the state’s sales tax nexus, and you’re required to register for and collect state sales tax.
Typically, these actions take the form of buying and selling goods and services.
Until 2018, selling or buying non-physical goods—like subscriptions to streaming services, SaaS memberships, etc.—did not, generally speaking, qualify you for sales tax nexus. After an important court ruling in 2018, that changed. Now, if you buy or sell non-physical goods or services in a state, you may fall within its sales tax nexus.
California sales tax nexus (physical goods and property)
When it comes to physical items, you fall within California’s sales tax nexus if you exceed $500,000 in sales of physical goods or services.
Sam Brotman of Brotman Law offers an extensive rundown of physical sales tax nexus rules.
California sales tax nexus (non-physical goods and property)
The new state sales tax laws applying to non-physical (ie. internet) sales allow you to qualify for sales tax nexus even without physical presence or goods. In California, you need to cross a certain threshold to qualify.
The California sales tax nexus threshold is $500,000 of sales to California residents.
If you want to take a deep dive, you can check out the official notice from the State.
As usual, this isn’t legal advice—just a guide. If you’re not 100% clear on whether you fall within California’s sales tax nexus, it’s best to confer with your legal counsel and/or an accountant that has expertise in the California legal code and tax regulations.
How to register to do business in California
To become a “qualified foreign business” in California, you’ll need to do the following:
- Select a name under which to do business. This doesn’t have to be the name you registered when incorporating in Delaware, but it can be.
- Fill out an application. You’ll need to fill out a Statement and Designation by Foreign Corporation and include a Delaware Certificate of Good Standing.
- Pay the fee. Now you pay the California Secretary of State office a $100 filing fee.
- Submit your Statement and Designation by Foreign Corporation.
- Wait. Processing typically takes two to four weeks.
Once you’re approved to operate as a qualified foreign business in California, you’ll need to comply with certain requirements.
Compliance as a qualified foreign business in California
To stay in compliance and continue legally doing business in California, you need to meet two requirements: maintaining a registered agent, and filing annual reports. On top of that, you must pay a California franchise tax.
Registered agent in California
Your registered agent in California is your point of contact with local authorities. If you don’t have a physical address for your company in California, it may be advantageous to find a registered agent to receive state notices on your behalf.
Foreign corporations are required to have a registered office in California. The office cannot be a P.O. box, rather it must be a physical address of your registered agent or a licensed registered agent service.
Your registered agent will forward any important information, such as business mail, to you. There are a number of firms that contract out registered agents. They typically cost $50 – $100 per year.
Annual reporting in California
Every year, you must file a statement with the State, updating any changes to the company address or the composition of the Board and officers. You’ll include info like:
- The legal name of your business
- The name and address of your registered agent
- The names and addresses of board members, managers, and officers
This report is filed with your annual California tax return and costs $25 for the report alone.
Paying the California franchise tax
Finally, you are expected to pay California a franchise tax. Although newly registered companies are exempt their first year, the minimum payment is $800.
Meaning, if you registered your foreign corporation to do business in California in 2021, you will not need to pay franchise tax for the 2021 tax year. Starting in 2022, however, you will—at the minimum tax rate of $800.
For more information on paying your annual taxes, see the California Franchise Tax Board.
Written by Greg Miaskiewicz
Security expert, product designer & serial entrepreneur. Sold previous startup to Integral Ad Science in 2016, where he led a fraud R&D team leading up to a $850M+ purchase by Vista in 2018.
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