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2 • 2015

When Do I Need To Qualify My Company To Do Business In California?

A foreign corporation—that is, a corporation not formed under California law1—may not transact intrastate business in California without first obtaining from the California Secretary of State a certificate of qualification.2 To obtain a certificate of qualification, the foreign corporation must file, on a form prescribed by the Secretary of State, a statement and designation containing certain information, along with a certificate of good standing from the state where the corporation was formed.3 The foreign corporation must also pay a fee and consent to service of process upon the corporation’s agent in California.4 In fact, one of the main purposes of requiring qualification is to facilitate service of process on a foreign corporation.5 A foreign corporation that transacts intrastate business in California without obtaining a certificate of qualification is subject to various civil and criminal penalties.6 In addition, the foreign corporation cannot maintain an action in a California court upon any intrastate business so transacted until it has paid a $250 penalty and been qualified to do such business in California.7

So when does a foreign corporation need to be qualified to do business in California? A foreign corporation must be qualified in order to “transact intrastate business,” which means “entering into repeated and successive transactions of its business in [California], other than interstate or foreign commerce.”8 The Corporations Code provides a laundry list of activities that do not constitute transacting intrastate business in California solely because the company engages in the state in one or more of those activities, which include

  • maintaining or defending a legal, administrative, or arbitration proceeding;
  • holding meetings of the company’s shareholders or board of directors;
  • maintaining bank accounts;
  • maintaining offices or agencies for the transfer, exchange, and registration of its securities;
  • making sales through independent contractors;
  • soliciting or procuring orders that require acceptance outside of California to become binding contracts;
  • creating evidence of debt or mortgages, liens, or security interests on real or personal property; and
  • conducting an isolated transaction that is completed within a period of 180 days and is not in the course of a number of similar and repeated transactions.9

If a company engages in any activities in California beyond those, it becomes necessary to take a close look at the activities to try to determine if the company must be qualified to transact intrastate business in the state.10

For example, in Mills Music, Inc. v. Lampton,11 a music publishing company was formed in New York and had its principal place of business there. The company did not maintain a bank account and did not publish any music in California. However, the company did maintain a “professional office” in California, from which an agent solicited singers and bands to play and purchase the company’s copyrighted songs. Copies of the music, though printed in New York, were kept in, and distributed from, the California office. On those facts, the court concluded that the company was transacting intrastate business in California.

In Neogard Corp. v. Malott & Peterson-Grundy,12 the foreign corporation went even further in attempting to avoid “transacting intrastate business” in California while nevertheless developing a market there for its system for waterproofing construction projects. The company did not maintain inventory, an office, a bank account, a telephone number, or payrolled employees in California during the time in question. But the company flew its employees from Texas to California to inspect every project that its local waterproofing contractors carried out in California. In addition, the company, which guaranteed its product for 10 years, sometimes sent one of its agents to sign the guarantee at the completion of the project and always appeared at the site to assist a contractor in remedying the problem if called on to make good on the guarantee. Plainly, the company did not enter California over a nearly 10-year period to contribute to or conclude a “unitary interstate transaction.”13 As a result, even though no one of the company’s activities would necessarily have constituted intrastate business, the court concluded that, taken together, they did, “despite the fact that Neogard strategically maintained no payrolled office” in California.14 Because the company’s action arose out of intrastate business, the court held that the company could not maintain the action in California until the company qualified to do business in California.15

A good summary of the California cases was provided in Hurst v. Buczek Enterprises, LLC.16 In that case, the defendant/counter-plaintiff was a foreign property-maintenance company that entered into multiple yearly independent contractor agreements with the plaintiff and others and maintained California properties for numerous clients over a period of years. As such, the company could not maintain its counterclaims against the plaintiff arising out of their contract until it had qualified to do business in California.17

These cases demonstrate that if a foreign corporation carries on any activities in California beyond those specifically enumerated in section 191 of the California Corporations Code as not being considered as transacting intrastate business, then it is a detailed question of fact whether the corporation needs to be qualified to do business in the state. In general, however, if the foreign corporation is engaging in multiple intrastate transactions, qualification will probably be required, even if the intrastate transactions are geared toward the ultimate goal of increasing the company’s interstate sales.18 If it may be a close call in a particular case, and the foreign corporation prefers not to engage in a detailed analysis of whether qualification is required, a certificate of qualification can be obtained after the fact, so long as the company is prepared to pay any fees and penalties that may be required.19

1See Cal. Corp. Code §§ 167, 171.

2See id. § 2105(a); Capital Gold Group, Inc. v. Nortier, 176 Cal. App. 4th 1119, 1132, 98 Cal. Rptr. 3d 439, 448 (2009).

3See Cal. Corp. Code § 2105(a), (b).

4Id. §§ 2105(a)(6), 2106.

5Capital Gold Group, 176 Cal. App. 4th at 1132, 98 Cal. Rptr. 3d at 448. The other main purpose is to protect against state tax evasion. Id.; see also United Med. Mgmt. Ltd. v. Gatto, 49 Cal. App. 4th 1732, 1741, 57 Cal. Rptr. 2d 600, 604 (1996) (“The qualification statute assures responsible and fair dealing by foreign corporations and equalizes the regulation of foreign and domestic corporations.”), review denied (Jan. 28, 1997).

6See Cal. Corp. Code § 2203(a) (foreign corporation subject to penalty of $20 for each day that it transacts unauthorized intrastate business in California); id. § 2258 (foreign corporation transacting intrastate business without being qualified to do so is guilty of a misdemeanor punishable by a fine between $500 and $1,000); Capital Gold Group, 176 Cal. App. 4th at 1132, 98 Cal. Rptr. 3d at 448.

7See Cal. Corp. Code § 2203(c); United Med. Mgmt. Ltd., 49 Cal. App. 4th at 1740-41, 57 Cal. Rptr. 2d at 604. While a foreign corporation that is not properly qualified cannot maintain an action upon intrastate business, it can commence such an action, which may toll the statute of limitations for the action under California law. See Am. Retail Mgmt., Inc. v. Bakersfield Food City, Inc., 201 Cal. App. 3d 1312, 247 Cal. Rptr. 689, 697 (1988) (ordered not published); cf. Neogard Corp. v. Malott & Peterson-Grundy, 106 Cal. App. 3d 213, 218 n.5, 164 Cal. Rptr. 813, 816 n.5 (1980) (declining to address statute-of-limitations issue). If the defendant files a demurrer, the action is abated until the foreign corporation qualifies to do business in California. See United Med. Mgmt. Ltd., 49 Cal. App. 4th at 1740-41, 57 Cal. Rptr. 2d at 604.

8See Cal. Corp. Code § 191(a).

9Id. § 191(c).

10See Hurst v. Buczek Enters., LLC, 870 F. Supp. 2d 810, 819 (N.D. Cal. 2012) (“Whether a company transacts intrastate business is a question committed to the ‘peculiar facts’ of each case.” (quoting Le Vecke v. Griesedieck W. Brewery Co., 233 F.2d 772, 775 (9th Cir. 1956))).

1140 Cal. App. 2d 354, 104 P.2d 893 (1940).

12106 Cal. App. 3d 213, 164 Cal. Rptr. 813 (1980).

13Id. at 226, 164 Cal. Rptr. at 821-22 (internal quotation marks omitted).

14Id. at 226, 164 Cal. Rptr. at 822.

15Id. at 226-27, 164 Cal. Rptr. at 822.

16870 F. Supp. 2d 810 (N.D. Cal. 2012).

17Id. at 823. Typically, the correct course of action at that point would have been to stay the defendant’s counterclaims until the defendant had completed the qualification requirements under California law. Id. But because the company had represented that it would complete the qualification requirements within three weeks, the court “conditionally recognize[d]” the counterclaims. Id.

18See id. at 819 (citing Neogard Corp., 106 Cal. App. 3d at 224, 164 Cal. Rptr. at 820).

19See Cal. Corp. Code §§ 2106(a), 2203, 2258.