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Does a Nevada Corporation have to file in California if it has one employee in California?

It is a very common situation wherein a corporation formed and headquartered in one state has employees in other states to further the corporation's business. If a Nevada corporation has a single employee in the state of California, what are the implications regarding registration and taxation? These issues will be discussed seriatim.

REGISTRATION REQUIREMENTS

Under California's Corporations Code, if a foreign corporation conducts business within the state, it must first obtain permission to do so. Code з 2105(a) reads, in pertinent part:

A foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification.

This law has been in place since 1899, and has been held not to violate the due process and equal protection clauses of the 14th Amendment of the United States Constitution. See Keystone Driller Co. v. Superior Court, 138 Cal. 738, 72 P. 398 (1903).

Cal. Corps. Code з 2100 makes з 2105 applicable "to foreign corporations transacting intrastate business." In general, a state has the power to admit foreign corporations upon reasonable conditions and limitations as it may prescribe. See, e.g., Western Grocer Co. v. New York Oversea Co., 296 F. 269 (D. Cal. 1924); Auslen v. Thompson, 38 Cal. App.2d 204, 101 P.2d 136 (1940). A registration requirement for foreign corporations transacting intrastate business is quite reasonable, since the foreign corporation is availing itself of the protection of the laws of the forum state. Cf. Carl F.W. Borgward T.M.B.H. v. Superior Court, 330 P.2d 789 (1958).

Both з 2100 and з 2105 place the requirement of obtaining a certificate of qualification only upon those "transacting intrastate business." Therefore, the definition of this phrase becomes quite important. The term is defined in Cal. Corps. Code з 191. This statute reads, in pertinent part:

For the purposes of Chapter 21 (commencing with Section 2100), "transact intrastate business" means entering into repeated and successive trans-actions of its business in this state, other than interstate or foreign commerce. A foreign corporation shall not be considered to be transacting intrastate business merely because its subsidiary transacts intrastate busi-ness.

The key phrase of з 191(a) is "repeated and successive transactions . . . in this state." The case law construing this phrase indicates that a party can do business in California yet not be deemed to be transacting intrastate business there.

For example, in Le Vecke v. Griesedieck Western Brewery Co., 233 F.2d 772 (9th Cir. 1956), a foreign brewery was deemed not to be transacting intrastate business in California despite shipping a considerable amount of its product to local distributors for distribution in California and had its officers make several sales promotion trips there. Despite these activities, the holding was based on the fact that the brewery did not maintain an office or place of business in California, did now own inventory or maintain a warehouse there, had no salesmen or employees there, and did not maintain a bank account, lend money, or ship on consignment to California.

Similarly, in Detsch & Co. v. Calbar, Inc., 228 Cal. App.2d 556, 39 Cal. Rptr. 626 (1964), a foreign corporation was found not to be doing business in California where it had its main office in another state, had no office, agents, servants, employees or officers in California, never maintained or had any property or inventory in California, and engaged in no activity there other than sales activity engaged in by an independent distributor.

In Thorner v. Selective Cam Transmission Co., 180 Cal. App.2d 89, 4 Cal. Rptr. 409 (1960), a foreign corporation was held not to be transacting business in California where it made loans outside the state to residents thereof, on applications obtained by agents of the corporation acting within the state, where the application was transmitted to the foreign corporation at a point outside the state for acceptance or rejection and the loan was made payable outside of California.

Lastly, in West Publishing Co. v. Superior Court, 20 Cal. 2d 720, 128 P.2d 777 (1942), the California Supreme Court held that isolated business transactions by a foreign corporation, such as mere solicitation of business, advertising or demonstrating products, the listing of the name of the corporation in the telephone book, or having the name of the corporation on an office door, did not amount to doing business in California.

Besides case law, з 191(c) itself provides a list of activities which can be undertaken by a foreign corporation without being deemed to be transacting intrastate business in California. з 191(c) reads:

Without excluding other activities which may not constitute transacting intrastate business, a foreign corporation shall not be considered to be transacting intrastate business within the mean-ing of subdivision (a) solely by reason of carry-ing on in this state any one or more of the follow-ing activities:

(1) Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settle-ment of claims or disputes.
(2) Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.
(3) Maintaining bank accounts.
(4) Maintaining offices or agencies for the transfer, exchange and registration of its securities or depositories with relation to its securities.
(5) Effecting sales through independent contractors.
(6) Soliciting or procuring orders, whether by mail or through employees or agent or otherwise, where such orders require acceptance without this state before becoming binding contracts.
(7) Creating evidences of debt or mortgages, liens or security interests on real or personal property.
(8) Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

The legislative comment following з 191(c) states that "[t]he purpose of this subdivision is to enumerate activities that are generally attributable to interstate activities of corporations that fall outside the commonly accepted notions of 'transacting intrastate business.'" (Emphasis added.)

Thus, if a foreign corporation limits its activities to items which are deemed interstate rather than intrastate activity, it is not "doing business" in California and does not need to register in California under з 2105(a). Cf. United Systems of Arkansas, Inc. v. Stamison, 63 Cal. App.4th 1001, 74 Cal. Rptr.2d 407 (1998). However, if the particular activity is deemed "intrastate business," registration pursuant to з 2105(a) must occur.

One activity that almost invariably leads to a finding of "transacting intrastate business" is the presence of employees or agents (as opposed to independent contractors) in California. See, e.g., La Vecke, supra; Mills Music v. Lampton, 40 Cal. App.2d 354, 104 P.2d 893 (1940); Milbank v. Standard Motor Constr. Co., 132 Cal. App. 67, 22 P.2d 271 (1933); Knapp v. Bullock Tractor Co., 242 F. 543 (D. Cal. 1917); Lawrence v. Ballau, 50 Cal. 258 (1875).

If a foreign corporation does transact intrastate business in California without the proper registration, there is a penalty provision, Cal. Corps. Code з 2203(a) subjects such a corporation to a fine of $20 per day for each day it transacts unauthorized intrastate business. The corporation and its agents may also be guilty of criminal misdemeanors. Cal. Corps. Code зз 2258, 2259. See United Med. Management v. Gatto, 49 Cal. App.4th 1732, 57 Cal. Rptr.2d 600 (1996). Further, such a corporation is deemed to consent to the jurisdiction of the California courts in any case in which it is named a party defendant, з 2203(a), and is prohibited from maintaining any action or proceeding in any California court, arising from the unauthorized intrastate business, until it pays all fines owed under з 2203(a), and pays an additional fine of $250. з 2203(c).

The penalty provisions have been strictly construed. Thus, while a foreign corporation engaged in unauthorized intrastate business cannot main-tain a court action, it can defend itself in court. See, e.g., Gatto, supra; Mediterranean Exports, Inc. v. Superior Court, 119 Cal. App.3d 605, 174 Cal. Rptr. 169 (1981); Raynolds v. Volkswagenwerk Aktiengesellschaft, 275 Cal. App.2d 997, 80 Cal. Rptr. 610 (1969). And, of course, if the corporation is engaged exclusively in interstate commerce, the penalty provisions do not apply. See W.W. Kimball Co. v. Read, 43 Cal. App. 342, 185 P. 192 (1919).

In conclusion, if a Nevada Corporation has an employee in California, it must register to do business in California. If it does not, it faces sanctions, both civil and criminal, however, if it structures its presence in California pursuant to з 191 so that it is deemed not to be "transacting intrastate business," then it is free from the registration requirements of з 2105(a).

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Last Updated April 2, 2010

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