When to Qualify an Out-of-State Holding Company to do Business in California

So you find yourself possessed of a “foreign” entity (“foreign” in this context does not mean from another country; rather, it means formed in another state, such as the two most common foreign states: Delaware and Nevada) but you want to do business here in California. What steps must you take to enable your foreign entity to legally transact business here? The answer lies in what the entity does (or, more precisely, what it doesn’t do).

Every foreign entity that regularly transacts business in California must qualify to do business here. The process is relatively simple, and involves completing a one-page form and submitting it, along with a fee, of course, to the California Secretary of State. The form must be accompanied by a Certificate of Good Standing (or analogous document from the state of formation) for the entity. Qualification legally empowers your foreign entity to do business here and allows the Secretary of State to keep tabs on who’s transacting business in this state. Further, and far more importantly to the business owner, failure to qualify your foreign entity here legally means that all those contracts you’ve entered into in this state are void, and your company can’t sue or defend itself in court.

Where the confusion arrives is in deciding whether you need to qualify your foreign entity in this state, and the question usually arises when the foreign entity is a holding company that merely engages in the ownership of real estate. Most lawyers might tell you that if the entity is solely engaged in the business of owning real estate (and not managing it), then the entity need not qualify; however that would be bad advice. The qualification statutes, California Corporations Code § 2100, et seq., speak in terms of foreign entities that are “transacting business” here, but what does that quoted term mean? The Code provides some non-exhaustive examples, but it doesn’t really answer the question for a holding company.

The answer is found in California’s Revenue & Taxation Code. Specifically, R&T Code §21301(b)(3) states that business is being transacted if the value of the entity’s California-located assets exceed the lesser of $50,000.00 or 25% of the entity’s total assets. Because of the very high likelihood of California real property being valued in excess of $50,000.00, the foreign entity that merely holds real estate is probably “transacting business” in California and therefore it must qualify to do business here.

Greg Borman is an attorney in San Diego, California, and he advises and represents businesses of all sizes and stages, as well as their owners. He can be reached at greg@bormanlaw.com or at (858) 232-7100.

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