Penalties for Not Foreign Qualifying

You did it!  You have finally formed your new LLC in the State of Delaware.  You’ve made the leap and have taken the first step.  And you are ready to kick things off.  Now what?

The new company is established in the State of Delaware, but the headquarters are based out of the State of California.  Typically, you may need to bridge that gap.  Ideally, any company that is planning to succeed both short and long-term will want to take care of any and all compliance matters.  You may be planning to rent a storefront or need warehouse space, open a bank account, hire employees, etc.  Do you really need to foreign qualify the Delaware LLC as a foreign entity in California?  What if the business is 100% online?  What happens if you do not qualify?

Traditionally, the next step after incorporating your new Delaware LLC is registering the company to do business in the state where you physically operate (yes, even online).

In California, if a Delaware LLC (or any out-of-state LLC) is physically operating in the state without filing a Certificate of Authority, it can face several penalties:

• Monetary Penalties: The LLC can be subject to a fine of $20 for each day it transacts intrastate business without being registered, up to a maximum of $10,000.
• Tax Consequences: The LLC will still be responsible for paying California state taxes, including the minimum franchise tax of $800 per year, even if it has not registered.
• Legal Consequences: The LLC may not be able to maintain a lawsuit in California court. This means that if the LLC needs to enforce a contract or defend itself in court, it may be barred from doing so until it becomes compliant.
• Personal Liability: The members or managers of the LLC might face personal liability for the company's obligations if the company is operating without proper registration.

To avoid these penalties, it is important for any LLC conducting business in California to file the necessary paperwork and comply with the state's registration requirements.  This will also include annual compliance, paying the California Franchise Tax and filing the California Statement of Information. You can learn more about the Foreign Qualification requirements for each of the other U.S. states on our website.

Let the experts at Harvard Business Services, Inc. take care of this for you.  We have trained specialists who can complete the California foreign qualification for you in a timely manner and ensure that it is done right the first time.  If you would like to get started, please reach out to us today at 800-345-2677 ext. 6133 or shoot me an email at andrew@delawareinc.com.