As the web grows exponentially, it is easier than ever to do business across the country with the click of a mouse. For corporations, this can lead to all kinds of legal problems, particularly in California.
Corporate law is controlled for the most part by state law. As a result, states view a corporation formed in another state and doing business in theirs as “foreign corporations.” Many people mistakenly believe the foreign designation refers to overseas when it does not. If you are deemed to be a foreign corporation doing business in a state, you can be subject to legal and tax ramifications.
California is one state that is very aggressive in this regard because many businesses in the state try to get around taxes by forming in Nevada. A veritable horde of legal tests have been put together to determine whether such approaches will fly or not. At the end of the day, however, California usually gets its piece of the pie.
If you are determined to be a foreign corporation conducting business in California without properly filing notice with the state [and paying taxes], there are five basic penalties.
1. You can be assigned a per diem penalty. This is a daily penalty amount. A court determines it after an action is brought by the attorney general of the state. Issues argued in front of the judge will include the size of the corporation, the amount of business done in the state and the willingness of the entity to evade filing with the state.
2. Criminal Charges – Yes, the corporation can be pursued criminally. Fortunately, the charge is a misdemeanor and the penalty is usually a nominal fine.
3. Not Standing – The offending corporation can be barred from filing or defending lawsuits in the state.
4. Agents Liability – Agents who conduct business on behalf of the corporation in California can be fined or jailed for a year.
5. Void Contracts – All contracts can be voided by California courts.
Most corporations that are attacked in regard to the above are not randomly selected. Instead, the issue arises when a dispute with another party comes to the forefront. Still, it can be damaging. The only real remedy the corporation has is to pay all fines and penalties. It then must file all back taxes and tax returns to get into good standing.
If you run a business that is doing more and more business in California, it makes sense to take steps to determine if you should be registered as a foreign corporation in the state. Failure to do so can lead to administrative and financial difficulties that can severely tie down and damage a business.