Key Takeaways

  • A Delaware LLC operating in California must register as a foreign entity with the California Secretary of State.
  • The company must file a Statement and Designation by Foreign Corporation, provide a Certificate of Good Standing, and appoint a registered agent in California.
  • California imposes a minimum $800 annual franchise tax, plus other compliance fees and requirements.
  • California has stricter regulations on LLC types, as Professional LLCs (PLLCs) are not allowed in the state.
  • Businesses in California must also comply with sales tax, employment laws, and corporate reporting obligations.
  • Despite the extra costs, Delaware remains one of the best states for LLC formation due to its business-friendly laws.
  • A Delaware LLC can be legally dissolved or withdrawn from California if it no longer operates in the state.
  • Failure to register in California may result in penalties, legal restrictions, and tax liabilities.

Conducting Business as a Delaware LLC in the State of California

In Delaware, your LLC is known as a domestic entity. However, when operating in another state, including California, your LLC is considered a foreign business.

You will need to register in California if you fall under the following conditions:

  • You are physically operating in California as a business.
  • You are hiring employees in the state of California.
  • You are banking or own a California-based asset.

In order to legally conduct business outside of Delaware, you will need to complete what is referred to as foreign qualification. If you do not complete this process, your company may be at risk.

When you first formed your LLC, the owners should have agreed whether or not the company would do business outside of Delaware. This is typically discussed at an LLC meeting, though written consent is also acceptable.

Most often, California banks will not let you open an account at a California address if you do not have entity number from the Secretary of State. The same is true in terms of employees. If you have not yet registered as a foreign corporation, then you cannot yet hire employees or conduct business operations.

Once you are registered, you will be subject to California income and franchise tax.

When is Registration Required?

A Delaware LLC must register in California if it meets the state's definition of “doing business.” The California Franchise Tax Board (FTB) considers an LLC to be "doing business" in California if any of the following conditions apply:

  • The LLC has employees, contractors, or an office in California.
  • The company earns more than $500,000 in annual gross receipts from California sources or if 25% of total sales come from California.
  • The business owns property in California valued over $50,000 or if 25% of total assets are in the state.
  • The LLC pays more than $50,000 annually in wages to California-based employees.

Even if your LLC does not have a physical presence in California, engaging in substantial business transactions with California customers can still trigger a requirement to register.

Register a Delaware LLC as a Foreign Entity in California

Before any business can conduct and transact interstate or intrastate business in the state, the company must register and qualify with the California Secretary of State. This is achieved by filing a Statement and Designation by Foreign Corporation. This means that if you plan to do business in California, your business must be registered.

In order to register in the state of California, you must include your Certificate of Incorporation and Certificate of Good Standing from the state of Delaware. It is important to note that your Certificate of Good Standing must have been issued within the last six months.

You will also need to select a California-based registered agent. This agent will sign on your behalf regarding matters of law within California. Please know that you will need to provide the agent's address and name on the application. It's important to note that all information provided during your California application will be made public, although there is no requirement for publication unless it is specifically required in the county where your registered agent is located.

Once your company is registered as a foreign entity, you will also need to file an initial report within 90 days of filing your application. You will also need to complete biennial reports, which are due on the last day of the month from your filing date.

How to Register as a Foreign LLC in California

To legally register your Delaware LLC as a foreign entity in California, follow these steps:

  1. File a Statement and Designation by Foreign Corporation with the California Secretary of State.
  2. Obtain a Certificate of Good Standing from Delaware, issued within the last six months.
  3. Appoint a Registered Agent in California who will receive legal notices on behalf of the company.
  4. Pay the filing fee (typically around $100).
  5. Submit an Initial Statement of Information (Form LLC-12) within 90 days of registration.
  6. Obtain any required business licenses and permits for your industry and location.

Once registered, your LLC must remain in good standing by filing biennial reports and paying California taxes.

What is the Purpose of a Registered Agent in California?

Your registered agent will be the go-between with the state and will provide you with a physical address within California. This is the address where you will receive service of process from the state or any legal documents that need to be delivered. Some business owners opt to serve as their own registered agent while others prefer to enlist support from their registered agent in Delaware. In some instances, the Delaware registered agent will also offer services in California as well. If you are a Delaware corporation, you are still required to have a registered agent in Delaware. Your California agent will not be required to sign the filing.

Can You Serve as Your Own Registered Agent?

While you can serve as your own registered agent, California requires the agent to:

  • Have a physical street address in California (P.O. boxes are not allowed).
  • Be available during normal business hours to receive legal documents.
  • Accept legal service of process on behalf of the LLC.

Many business owners choose a professional registered agent service to ensure compliance and maintain privacy.

California Costs and Fees

As a Delaware LLC doing business in California, you can expect to pay some additional fees. These may include the following:

  • To file your report, you will need to pay a fee of $20 (the same fee applies to your biennial report).
  • If you do not file on time, you may be subject to a $250 late fee.
  • A franchise tax, with a minimum of $800 per year. This applies whether a business is active, inactive, or currently operating at a loss.
  • A $100 fee to file the Statement of Designation.
  • A $50 fee to obtain a Certificate of Good Standing from Delaware.

The California Franchise Tax Board has clarified that the $800 franchise tax applies to all LLCs and corporations who meet certain requirements:

  • They have incorporated or are organized in the state of California.
  • They are a foreign qualified corporation or registered to do business in the state.
  • They are doing business in California, no matter whether they are incorporated, organized, qualified, or registered in the state.

By registering a corporation as a foreign business in the state, the $800 a year minimum franchise tax will be triggered at the start of the year following the close of the first fiscal year. Regular franchise taxes may still apply even if there is no minimum franchise tax imposed. Essentially, anyone who lives and operates a business in California will be subject to California taxes regardless of whether you incorporate in Delaware or not.

Ongoing Compliance & Tax Obligations

Beyond initial registration fees, a Delaware LLC operating in California must comply with annual tax and reporting obligations, including:

  • Franchise Tax: A minimum $800 franchise tax due annually, regardless of profit.
  • LLC Fee: Additional LLC gross receipts tax applies to businesses earning over $250,000 in California.
  • Biennial Report: A $20 Statement of Information filing fee due every two years.
  • Sales Tax & Employment Taxes: If your LLC sells goods or hires employees, you must register for sales tax and withhold payroll taxes.

Failure to meet tax deadlines can result in penalties, interest, and potential suspension of your LLC by the Franchise Tax Board.

What Kind of LLCs are Allowed in California?

California differs from other states in that an LLC cannot operate as a professional LLC within the state itself. The state will typically advise that you get in touch with your business licensing authority prior to application. This will ensure that your business has been fully licensed, certified, and registered.

Since 2011, you are operating as a business in the state of California if your LLC meets any of the criteria below:

  • Engaging in transactions for the purpose of financial profit.
  • Conducting trade or managing your business from the state of California.
  • Operating a business in California with sales that exceed either $500,000 annually or 25 percent of total sales.
  • In ownership of real property that is either more than $50,000 or 25 percent of the LLC's total property.
  • Exceeding either $50,000 annually in compensation or 25 percent of the total compensation that is paid by the LLC.

Professional LLCs and Industry Restrictions

California does not allow Professional LLCs (PLLCs) to operate within the state. This means licensed professionals (such as doctors, lawyers, and accountants) must form a Professional Corporation (PC) instead of an LLC.

Additionally, some industries require specific business licenses at the state or local level. Before operating, check with the California Secretary of State, Department of Consumer Affairs, and local city/county offices for required permits.

Forming an LLC in Delaware is Better for Business

Delaware has been ranked #1 by the United States Chamber of Commerce for the past 10 years. This is in regard to the state's litigation system and incorporation climate. Delaware also has no sales tax. With Delaware being the "gold standard," it is recommended that you incorporate in that state. Since Delaware has some of the most desirable business laws of any state, it is important to understand how California laws differ. Some of the advantages of incorporating in Delaware include:

  • There is no sales tax in Delaware.
  • Referred to as the “Delaware loophole,” Delaware does not have an intangible personal property tax, which differs from most other states.
  • There is no requirement to file and/or pay income tax or to have a business license if the Delaware LLC does no business in the state. However, you are still required to pay taxes when you conduct business.
  • The state has a chancery court system, and there are laws in place that limit liability for boards of directors and shareholders.

Withdrawing a Delaware LLC from California

If a Delaware LLC no longer conducts business in California, it must formally withdraw to avoid ongoing tax obligations.

To cancel foreign qualification, an LLC must:

  1. File a Certificate of Surrender with the California Secretary of State.
  2. Pay any outstanding franchise taxes and fees.
  3. File a final California tax return with the Franchise Tax Board.
  4. Notify employees, landlords, and service providers if applicable.

Until officially withdrawn, a Delaware LLC remains liable for California’s $800 franchise tax, even if it stops operations.

Frequently Asked Questions

  1. Do I need a business license for my Delaware LLC in California?
    Yes, in addition to registering as a foreign LLC, you may need state and local business licenses depending on your industry and location.
  2. How much does it cost to register a Delaware LLC in California?
    The initial filing fee is around $100, plus a $50 Certificate of Good Standing fee from Delaware. Additionally, an $800 annual franchise tax applies.
  3. Can I use my Delaware registered agent in California?
    No, California requires an in-state registered agent with a physical address to receive legal documents.
  4. What happens if I don’t register my Delaware LLC in California?
    Failure to register can lead to penalties, legal restrictions, and back taxes. Your LLC may be unable to enforce contracts or operate legally.
  5. Can I dissolve my Delaware LLC instead of withdrawing from California?
    Yes, but you must dissolve your Delaware LLC separately and file a final tax return in California to avoid future tax liabilities.
     

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