The
Registration and Tax Implications
for A Nevada Corporation Having
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 § 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 § 2100 makes § 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 §
2100 and § 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 § 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 § 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, § 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. § 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 § 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 §
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
§ 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
§ 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 §§ 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, § 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 § 2203(a), and pays an additional fine of
$250. § 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 § 191 so that it is deemed
not to be "transacting intrastate business," then it is free
from the registration requirements of § 2105(a).
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