Property Ownership: Doing Business In California?

California's definition of doing business is highly nuanced and dependent on specific facts, with different agencies holding varying views. The Franchise Tax Board (FTB) outlines three general criteria: engaging in any transaction for financial gain, being organised or commercially domiciled in California, and meeting certain thresholds for sales, property holdings, or payroll. The California Corporations Code, on the other hand, defines it as transact [ing] intrastate business, referring to repeated and successive transactions within the state. This complexity raises questions about the implications of owning property in the state, which may be a factor in determining tax liabilities and filing obligations.

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Property ownership and charitable purposes

There is no clear definition of what it means to "Do Business" in California, and different Californian agencies hold different views on what constitutes "Doing Business". However, there are specific regulations and requirements for property ownership and charitable purposes in the state.

Firstly, according to the Franchise Tax Board, doing business in California involves "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." This definition is essential for understanding tax liabilities and filing obligations. An out-of-state entity is considered "doing business" in California if it meets certain criteria, including having real or tangible property in California exceeding specific value thresholds.

Now, specifically regarding property ownership and charitable purposes, the Attorney General's Office in California oversees charities and regulates charitable assets to ensure they are used for their intended purpose. The Attorney General's regulatory program includes investigating and taking legal action against charities and fundraisers that misuse charitable assets or engage in fraudulent practices. All charitable trustees and fundraising professionals are required to register and submit annual financial disclosure reports.

Additionally, the Nonprofit Integrity Act of 2004 mandates registration and annual reporting by all charitable entities, including corporations, unincorporated associations, trustees, and other entities holding property for charitable purposes. This law applies to all foreign charitable corporations doing business or holding property in California for charitable reasons. It's important to note that merely owning property, without additional business activities, might not constitute "doing business" under certain circumstances. For example, if a foreign charity's sole connection to California is granting funds to California-based organizations or maintaining financial accounts in the state, it may not be considered "doing business" for specific compliance purposes.

In conclusion, while the definition of "doing business" in California is somewhat ambiguous, the state has clear regulations regarding property ownership for charitable purposes. Charities and fundraising entities are subject to oversight, registration requirements, and reporting obligations to ensure the proper use of charitable assets and compliance with applicable laws.

Taxation and liabilities

The concept of taxation in California is complex, and the definition of “doing business” in the state is not clear-cut. The Franchise Tax Board (FTB) outlines three general criteria that constitute "doing business":

• Engaging in any transaction for financial gain within California;
• Being organised or commercially domiciled in California;
• Having California sales, property holdings, or payroll exceeding specified amounts or constituting at least 25% of the total business.

The California Corporations Code defines "doing business" as "transact [ing] intrastate business," which refers to entering into repeated and successive transactions within California, excluding interstate or foreign commerce. It's important to note that simply owning property may not necessarily constitute "doing business" in California. However, if the sole purpose of a foreign entity is land leasing or acquisition, it may qualify as "doing business."

The Franchise Tax is a unique aspect of California's tax law, where a business must pay an annual fee of $800 for the privilege of being registered to "Do Business" in California. This tax is payable even if the business incurs a loss. Additionally, Public Law 86-272 applies to out-of-state businesses whose only activity in California is the sale of tangible personal property or products to California customers. While these businesses are exempt from state taxes based on net income, they may still be considered "doing business" in California and may have filing and payment obligations.

To determine tax liabilities and filing obligations, it is advisable to consult with a business attorney or refer to specific scenarios outlined by the FTB. For example, in one scenario, an out-of-state partnership with employees working from home in California and selling to California customers is considered "doing business" in California, even if their property, payroll, and sales fall below the threshold amounts. In another scenario, an out-of-state corporation with California sales constituting 40% of its total sales is "doing business" in California, triggering the requirement to file a California return and pay the minimum tax.

Franchise Tax Board criteria

California's Franchise Tax Board (FTB) lists three general criteria that constitute "doing business":

• You are engaged in any transaction for the purpose of financial or pecuniary gain or profit within California. This includes actively engaging in any transaction for financial gain, such as through employees who sell and provide warranty work to California customers.
• You are organized or commercially domiciled in California (meaning the entity is controlled in California, like a headquarters).
• Your California sales, property holdings, or payroll exceed the specified amounts or are at least 25% of your total business. The threshold amounts are adjusted annually for inflation.

The Franchise Tax Board criteria are just one of two definitions for doing business in California. The other is established by the California Corporations Code, which determines what corporate filing obligations an out-of-state business will have with the California Secretary of State. This definition refers to "doing business" as "transact [ing] intrastate business," which is defined as "entering into repeated and successive transactions of its business in [California], other than interstate or foreign commerce."

It is important to note that the concept of doing business in California is not limited to physical presence in the state. Even if a business is not physically based in California, it may still be considered to be "doing business" in the state and subject to California's Franchise Tax and filing obligations if it meets the legal definition of "doing business."

The determination of whether an entity is "doing business" in California is a complex issue that depends on various factors, including the nature and extent of the entity's activities in the state, as well as the specific facts of each case.

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Corporations Code definition

The California Corporations Code does not list what activities constitute "doing business" in California. However, it does provide a "non-exclusive" list of activities that do not constitute "doing business" in the state. These include:

• Maintaining, defending, or settling any legal action or arbitration proceeding.
• Effecting sales through independent contractors.
• Transacting any business in interstate commerce, i.e., between or across states.
• Conducting an isolated transaction completed within 30 days and not in the course of repeated transactions of a similar nature.

The California Corporations Code also states that merely being a shareholder, member, manager, or limited partner of a California corporation, limited liability company, or limited partnership does not constitute "doing business" in California. Similarly, owning and leasing real estate as an incidental part of another enterprise does not constitute "doing business." However, if a foreign entity's sole purpose is land leasing or acquisition, it may qualify as "doing business."

Under the California Corporations Code, "doing business" is referred to as transacting intrastate business, which is defined as "entering into repeated and successive transactions of its business in California, other than interstate or foreign commerce." This definition varies depending on the entity, and it is recommended to consult with a business attorney to determine precise tax liabilities and filing obligations.

The bulk of what constitutes "doing business" in California is derived from court decisions and is highly dependent on specific facts. For a foreign entity to be considered "doing business" in California, its activities must generally meet the following criteria:

• They must have a local, intrastate character.
• They must be regular, permanent, continuous, and systematic.
• They must be vital and essential to the entity's core operations rather than merely incidental.

Foreign entities and local character

California's definition of "doing business" in the state includes "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." This means that even if a business is not physically located in California, it may still be considered to be "doing business" in the state and thus subject to certain filing obligations and tax liabilities.

Foreign entities, or businesses formed in states outside of California, must register as a foreign entity if they want to do business in the state. This includes registering with the Secretary of State and the California Department of Tax and Fee Administration. A "foreign entity" in California is defined as any business or corporation created in another state or country.

To register as a foreign entity in California, businesses must show that they are in good standing in their home state or country. This applies to corporations, limited liability corporations (LLCs), partnerships, trusts, and non-profits. Foreign entity registration in California is required if the business engages in financial transactions from a physical location inside the state.

It is important to note that merely attending trade shows or having a mailbox and local phone number in California does not require a business to register as a foreign entity. Additionally, collecting debts from California businesses or residents does not make a company a foreign entity unless the money owed is for sales made from a physical location inside the state. Hiring a California attorney or opening a bank account with a California bank also does not classify a company as a foreign entity.

In summary, foreign entities doing business in California must register with the state, file tax returns, and pay taxes to California. The definition of "doing business" is broad and includes any financial transactions made for the purpose of financial or pecuniary gain or profit. However, there are specific scenarios in which a business may not need to register as a foreign entity, such as attending trade shows or collecting debts.

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