Incorporating your business in Delaware, Nevada, or Wyoming does not insulate you from California’s regulatory and tax reach. This is one of the most persistent misconceptions among founders and business owners: the belief that forming in a tax-friendly state somehow shields the business from California obligations. The reality is far more complex and expensive. California operates two distinct but overlapping compliance regimes—one administered by the Secretary of State regarding corporate qualification, the other by the Franchise Tax Board regarding tax nexus. Understanding both systems, their trigger points, and their consequences is essential for any business with California operations, customers, employees, or assets.

This guide provides a complete breakdown of when foreign corporations must register in California, what “doing business” actually means under California law, how the registration process works, and the compliance traps that catch business owners unaware.

Understanding California’s Two-Master System

Before examining the specific requirements, it’s crucial to understand that California imposes obligations through two separate legal frameworks that operate independently.

The first framework is administered by the California Secretary of State under the Corporations Code. This framework governs when a corporation formed outside California must formally qualify to do business in the state by filing a Statement and Designation by Foreign Corporation. The trigger for this requirement is whether the corporation is “transacting intrastate business” as defined in Corporations Code section 191.

The second framework is administered by the California Franchise Tax Board under the Revenue and Taxation Code. This framework governs when a corporation must file California tax returns and pay California franchise and income taxes. The trigger for this requirement is whether the corporation is “doing business” in California as defined in Revenue and Taxation Code section 23101.

These two standards are not identical. A corporation can meet the tax nexus threshold under section 23101 and owe California taxes without having registered with the Secretary of State. Conversely, a corporation can register with the Secretary of State but fail to file tax returns, leading to Franchise Tax Board suspension while the Secretary of State shows the entity as active. The two agencies do not automatically coordinate, and violations of one set of requirements can exist independently of the other.

This two-master system means that a Delaware corporation with California operations may face compliance obligations on multiple fronts, each with distinct penalties for non-compliance.

What “Doing Business” Means Under Revenue and Taxation Code Section 23101

Revenue and Taxation Code section 23101 establishes when a corporation is “doing business” in California for tax purposes. The statute uses two independent tests, and meeting either one triggers California tax obligations.

The Active Engagement Test

Under section 23101(a), a taxpayer is “doing business” in California if it is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” This is a broad standard. Any purposeful commercial activity in California, even if minimal or isolated, can constitute doing business under this test.

The Franchise Tax Board interprets this language expansively. Soliciting customers in California, providing services to California clients, delivering goods to California purchasers, or maintaining business relationships with California residents all potentially qualify as actively engaging in transactions for financial gain. There is no minimum threshold for the active engagement test—if the transaction occurs in California and is for profit, the test is satisfied.

The Economic Nexus Tests

Section 23101(b) provides alternative bright-line tests based on economic activity. Under these tests, a corporation is “doing business” in California if any of the following conditions is met:

The corporation’s California sales exceed a specified dollar threshold, or the corporation’s California sales represent more than 25 percent of its total sales everywhere.

The corporation’s California real and tangible personal property exceeds a specified dollar threshold, or the corporation’s California property represents more than 25 percent of its total property everywhere.

The corporation’s California compensation (payroll) exceeds a specified dollar threshold, or the corporation’s California compensation represents more than 25 percent of its total compensation everywhere.

The dollar thresholds are indexed annually for inflation and published by the Franchise Tax Board. For taxable years beginning on or after January 1, 2024, the thresholds are approximately $711,538 for sales, $71,154 for property, and $71,154 for compensation. These numbers adjust each year, so checking the current figures on the Franchise Tax Board’s “Doing business in California” page or in Publication 1060 is essential.

The important point is that meeting any single prong of the economic nexus test triggers California tax obligations. A Delaware corporation with zero physical presence in California but more than $711,538 in California sales is “doing business” in California and owes at minimum the $800 annual franchise tax.

Tax Consequences of “Doing Business”

Once a corporation is “doing business” in California under section 23101, it faces immediate tax obligations. Revenue and Taxation Code section 23153(a) imposes an annual minimum franchise tax of $800 on every corporation doing business in California, whether the corporation is domestic or foreign. This minimum tax is owed regardless of whether the corporation has net income. Even if the Delaware corporation loses money in California, the $800 minimum applies.

Beyond the minimum tax, the corporation must also pay tax on its net income apportioned to California. California uses a single-sales-factor apportionment formula for most businesses, meaning California taxable income is generally the corporation’s total income multiplied by the ratio of California sales to total sales. For C-corporations, California imposes an 8.84 percent tax on apportioned net income (10.84 percent for banks and financial corporations). For S-corporations, California imposes a 1.5 percent tax on apportioned net income, with the $800 minimum still applying.

The critical point is that Franchise Tax Board obligations arise independently of whether the corporation has registered with the Secretary of State. Tax nexus and corporate qualification are separate legal requirements. A corporation can owe California taxes without having filed any paperwork with the Secretary of State, and the Franchise Tax Board will pursue unpaid taxes regardless of the corporation’s registration status.

What “Transacting Intrastate Business” Means Under Corporations Code Section 191

The Secretary of State operates under a different statute with a different standard. Corporations Code section 191(a) defines “transacting intrastate business” as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.”

This definition has two key components. First, the transactions must be “repeated and successive,” meaning isolated or one-off transactions do not trigger the qualification requirement. Second, the transactions must be intrastate rather than interstate commerce, meaning purely interstate sales shipped into California from out of state may not trigger qualification even though they may trigger tax nexus under section 23101.

Safe Harbor Activities That Do Not Require Qualification

Corporations Code section 191(c) provides a list of activities that do not constitute transacting intrastate business. These safe harbors allow foreign corporations to conduct certain limited activities in California without formally qualifying. The safe harbor activities include:

Maintaining or defending any action or administrative proceeding in California or any arbitration in California. A corporation can sue or be sued in California courts without triggering qualification requirements based solely on the litigation.

Holding meetings of directors, shareholders, or committees in California. Board meetings or shareholder meetings held in California do not, by themselves, require the corporation to qualify.

Maintaining bank accounts in California. The corporation can bank in California without triggering qualification.

Maintaining offices or agencies solely for the transfer, exchange, or registration of the corporation’s own securities. Administrative functions related to the corporation’s own stock do not require qualification.

Soliciting or obtaining orders, whether by mail, electronic transmission, or through employees or agents or otherwise, if the orders require acceptance outside California before they become contracts. This is a significant safe harbor for e-commerce businesses—taking orders from California customers that are accepted at the corporation’s out-of-state headquarters may not trigger qualification.

Conducting an isolated transaction that is completed within 180 days and that is not one in the course of repeated transactions of a like nature. A single, non-repeated transaction can be conducted without qualification if it’s truly isolated.

Selling through independent contractors. Using California-based independent contractors to make sales on the corporation’s behalf may not trigger qualification if structured properly.

These safe harbors are narrowly construed. A corporation that exceeds them—for example, by entering into repeated customer contracts within California, maintaining a physical office for business operations, or employing California-based employees who provide services—likely crosses into transacting intrastate business and must qualify.

When Qualification Is Required

If a foreign corporation engages in repeated and successive transactions in California beyond the safe harbors, Corporations Code section 2105 requires the corporation to formally qualify with the Secretary of State. The corporation must file a Statement and Designation by Foreign Corporation to obtain a certificate of qualification.

The Statement and Designation requires disclosure of the corporation’s name as it appears in its home state, the jurisdiction of incorporation, the address of the principal executive office, and critically, the name and California street address of an agent for service of process. The corporation must appoint a California agent who can receive legal documents on behalf of the corporation and must consent to service of process on that agent.

Filing this document with the Secretary of State costs $100 for stock corporations (domestic or professional) and $30 for nonprofit corporations. Once qualified, the corporation must also file an annual Statement of Information with the Secretary of State, due within 90 days of initial qualification and annually thereafter, with a $25 filing fee.

The Disconnect Between Tax Nexus and Corporate Qualification

Here is where the two-master system creates confusion and compliance gaps. A Delaware corporation can trigger Franchise Tax Board obligations under Revenue and Taxation Code section 23101 without meeting the “transacting intrastate business” standard under Corporations Code section 191.

Consider a Delaware software company that sells its product nationally through its website. All orders are accepted at the company’s Delaware headquarters, all software is delivered electronically, and the company has no employees or offices in California. However, the company’s California sales exceed $1 million annually. Under the economic nexus test of section 23101(b), the company is “doing business” in California and owes the $800 minimum franchise tax plus tax on its California-apportioned income. But under the safe harbor in Corporations Code section 191(c) (orders accepted outside California), the company may not be “transacting intrastate business” and may not need to formally qualify with the Secretary of State.

This corporation would need to file California tax returns and pay California taxes, but would not need to file a Statement and Designation. Many business owners assume that if they don’t need to qualify with the Secretary of State, they don’t owe California taxes—this is incorrect and leads to significant tax exposure.

The reverse situation also occurs. A corporation that opens a California office, hires California employees, and enters into customer contracts within California is almost certainly transacting intrastate business and must qualify with the Secretary of State. But if that corporation’s California revenue is below the economic nexus threshold and its California operations don’t constitute “actively engaging in transactions for financial gain” (a rare scenario), it might qualify with the Secretary of State but not technically be “doing business” under section 23101. In practice, this scenario is unusual because having California employees or offices typically satisfies the “actively engaging” test even if the dollar thresholds aren’t met.

The takeaway is that business owners must analyze both regimes independently. Meeting one trigger does not automatically mean meeting the other, and compliance with one agency does not satisfy obligations to the other.

Consequences of Failing to Qualify with the Secretary of State

Corporations Code section 2203 imposes severe consequences on foreign corporations that transact intrastate business without qualifying. The most significant consequence is the loss of court access: an unqualified foreign corporation “shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state until it has obtained a certificate of qualification.”

This means the corporation cannot sue to enforce its California contracts, collect debts from California customers, protect its intellectual property rights in California courts, or pursue any other litigation until it qualifies and pays all back fees and penalties. Imagine a Delaware software company with substantial California accounts receivable discovering that a major California customer refuses to pay. If the company has been transacting intrastate business without qualification, it cannot sue to collect that debt until it first qualifies with the Secretary of State. The delay and expense of emergency qualification, combined with potential statute of limitations issues, can severely prejudice the company’s legal position.

The contracts themselves remain valid under Corporations Code section 2203(c), so customers cannot use the corporation’s unqualified status to escape their contractual obligations. But the corporation’s ability to enforce those contracts through litigation is blocked until qualification occurs.

Additionally, Corporations Code section 2258 provides criminal penalties. Officers, agents, or employees who knowingly transact intrastate business on behalf of an unqualified foreign corporation can be guilty of a misdemeanor. While prosecutions under this section are rare, the statutory exposure exists and provides leverage to regulators.

Consequences of Failing to Meet Franchise Tax Board Obligations

Failure to file California tax returns or pay California taxes when required triggers a different set of consequences administered by the Franchise Tax Board.

The most common sanction is administrative suspension. The Franchise Tax Board can suspend a corporation’s powers, rights, and privileges if the corporation fails to file returns or pay taxes. A suspended corporation cannot legally conduct business in California, enter into contracts, defend lawsuits, or perform virtually any corporate function. The suspension is public record and appears on the Secretary of State’s website, creating due diligence concerns for potential customers, vendors, and business partners who check the corporation’s status.

Lifting a suspension requires filing all delinquent returns, paying all back taxes plus penalties and interest, and paying a reinstatement fee. Penalties for late filing and late payment compound quickly, and interest accrues on unpaid balances. For corporations that have ignored California obligations for multiple years, the total liability can reach substantial amounts.

The Franchise Tax Board can also pursue collection actions including bank levies, liens on real and personal property, and wage garnishments. California is aggressive about collecting taxes owed, and the statute of limitations for tax collection is extended by the period of suspension, meaning tax debts do not simply expire.

Furthermore, responsible persons within the corporation—typically officers and directors—can face personal liability for unpaid California taxes in certain circumstances, though the standards for imposing personal liability are more developed in the payroll tax context than for franchise taxes.

The Registration Process: Step by Step for Delaware, Nevada, or Wyoming Corporations

For corporations that must qualify in California, the process is relatively straightforward but requires attention to detail and ongoing compliance.

Step One: Determine Qualification Necessity

Before filing anything, the corporation should confirm that qualification is actually required. This means analyzing the corporation’s California activities against both the section 191 definition and the section 23101 tax triggers. If the corporation’s only California connection is sales through its website with acceptance outside California and no physical presence, qualification may not be required even though tax filing may be. If the corporation has California employees, California office space, or enters into customer contracts within California, qualification is almost certainly required.

Step Two: Obtain Certificate of Good Standing

California requires proof that the corporation is in good standing in its home state. Delaware, Nevada, and Wyoming each have processes for issuing certificates of good standing or certificates of status. The corporation should request a current certificate dated within a reasonable timeframe (usually within 60-90 days of the California filing).

Step Three: Appoint a California Registered Agent

The corporation must designate a California agent for service of process with a California street address. This agent receives legal documents on the corporation’s behalf. The agent can be an individual who is a California resident or a corporation registered to provide registered agent services in California. Most corporations use commercial registered agent services, which charge annual fees ranging from $100 to $400 depending on the provider and service level.

If using a corporate registered agent, the corporation must also file a Certificate of Corporate Agent Resigning From Appointment as Agent (Form 1505) if the agent later resigns or changes. The fee for appointing a corporate agent is $30.

Step Four: File Statement and Designation by Foreign Corporation

The primary filing is the Statement and Designation by Foreign Corporation, which must be submitted through California’s BizFile online system (no paper filing is available for this form). The form requires the corporation’s exact legal name as it appears in its articles of incorporation, the state or country of incorporation, the date of incorporation, the principal executive office address (which can be outside California), and the California registered agent name and address.

The filing fee is $100 for stock corporations (including professional corporations) and $30 for nonprofit corporations. Upon acceptance, the Secretary of State issues a certificate of qualification, and the corporation is authorized to transact intrastate business in California.

Step Five: File Initial Statement of Information

Within 90 days of qualification, the corporation must file a Statement of Information with the Secretary of State. This annual filing (due yearly, not biennially like domestic California LLCs) provides current information about officers, directors, the agent for service of process, and the principal business activity. For foreign stock corporations, the filing fee is $25 and must be submitted through BizFile.

The Statement of Information is due annually on the anniversary of the original qualification date. Missing this filing can lead to suspension by the Secretary of State for failure to file required statements, separate from any Franchise Tax Board suspension for tax non-compliance.

Step Six: Register with the Franchise Tax Board

If the corporation is “doing business” in California under section 23101, it must register with the Franchise Tax Board and file California corporate tax returns. C-corporations file Form 100, and S-corporations file Form 100S. The minimum franchise tax of $800 is due even if the corporation has no California net income.

The first $800 payment is typically due on the 15th day of the 4th month after the corporation begins doing business in California. Subsequent years’ minimum taxes are due on the 15th day of the 4th month of the taxable year (April 15 for calendar-year corporations), with estimated payments required quarterly if the corporation expects to owe more than $800 in total tax.

Step Seven: Maintain Ongoing Compliance

Once qualified and registered, the corporation faces ongoing obligations in both California and its home state. In California, this means annual Statements of Information with the Secretary of State ($25), annual franchise tax returns with the Franchise Tax Board (minimum $800 plus income tax), and maintaining a current registered agent. In the home state (Delaware, Nevada, or Wyoming), the corporation still owes annual franchise taxes and reports. Delaware, for example, charges annual franchise taxes that vary based on the corporation’s authorized shares or assumed par value capital, plus a $50 annual report fee.

This dual compliance burden is the hidden cost of incorporating outside California while operating in California. The corporation pays fees and taxes to both states, maintains registered agents in both states, and files reports with both states’ regulatory agencies.

Quasi-California Corporations Under Corporations Code Section 2115

Even beyond the registration and tax requirements, California imposes an additional layer of regulation on certain foreign corporations through Corporations Code section 2115.

Under this statute, a foreign corporation (other than specifically exempt types) becomes subject to specified California corporate governance provisions if two conditions are met. First, more than 50 percent of the corporation’s business must be conducted in California. This is determined by averaging the property factor, payroll factor, and sales factor as defined in Revenue and Taxation Code sections 25129, 25132, and 25134—essentially the same apportionment factors used for tax purposes. Second, more than 50 percent of the corporation’s outstanding voting securities must be held of record by persons with California addresses.

If both conditions are satisfied, the corporation is treated as a quasi-California corporation for purposes of certain governance provisions, even though it is incorporated in Delaware, Nevada, or Wyoming. The specific California provisions that apply include rules on cumulative voting for directors, director liability standards, shareholder inspection rights, dividends and distributions, mergers and reorganizations, and indemnification of directors and officers.

This means that a Delaware corporation cannot fully escape California corporate law simply by incorporating in Delaware. If the corporation’s business is primarily conducted in California and its shareholders are primarily California residents, California imposes its own corporate governance rules regardless of what Delaware law provides. For early-stage startups with founders and employees who are California residents and who hold the majority of shares, section 2115 is a real consideration. The protective Delaware corporate law provisions that attracted the founders to Delaware incorporation may not apply to the extent they conflict with California’s mandatory provisions under section 2115.

The quasi-California corporation rules add another dimension to the compliance analysis. Not only must the corporation register with the Secretary of State and pay taxes to the Franchise Tax Board, but it may also need to comply with California corporate governance requirements that differ from its home state’s laws.

Common Compliance Traps and How to Avoid Them

Trap One: Believing Out-of-State Incorporation Avoids California Taxes

The most pervasive misconception is that incorporating in Delaware, Nevada, or Wyoming avoids California taxation. This is false. If the corporation meets any of the “doing business” tests under Revenue and Taxation Code section 23101—whether through active engagement in California transactions or through exceeding the economic nexus thresholds—the corporation owes California taxes regardless of where it is incorporated. The $800 minimum franchise tax applies to every foreign corporation doing business in California.

To avoid this trap, analyze the corporation’s California sales, property, and payroll against the current thresholds (which are indexed annually). If any threshold is exceeded or if California activity constitutes 25 percent or more of total activity, California tax obligations exist.

Trap Two: Assuming No Physical Presence Means No California Obligations

Economic nexus under section 23101(b) does not require physical presence. A corporation with no California office, no California employees, and no California assets can still be “doing business” in California if its California sales exceed the dollar threshold. The bright-line sales test is purely economic and geographic presence is irrelevant.

To avoid this trap, track California-destined sales as a percentage of total sales and as a dollar amount. If California sales approach or exceed the threshold, assume California tax obligations will follow.

Trap Three: Qualifying with Secretary of State but Ignoring Franchise Tax Board

Some corporations correctly file their Statement and Designation with the Secretary of State but fail to recognize the separate tax filing obligations. The two agencies do not automatically share information, and Secretary of State qualification does not trigger automatic tax registration. The corporation must independently register with the Franchise Tax Board and file returns.

To avoid this trap, treat Secretary of State qualification and Franchise Tax Board registration as two separate compliance tracks that must both be completed.

Trap Four: Paying Taxes but Not Qualifying When Required

The reverse trap also occurs. A corporation might file California tax returns and pay the $800 minimum, believing that satisfies all California obligations. But if the corporation is transacting intrastate business under section 191, it must also formally qualify with the Secretary of State. Failure to do so blocks access to California courts for contract enforcement.

To avoid this trap, analyze whether California activities go beyond the safe harbors in section 191(c). If employees work in California, if contracts are executed in California, or if repeated business transactions occur within California beyond mere interstate sales, qualification is likely required.

Trap Five: Ignoring Annual Statement of Information Filing

After initial qualification, corporations must file annual Statements of Information with the Secretary of State. This is separate from the annual tax return filed with the Franchise Tax Board. Missing the Statement of Information can lead to Secretary of State suspension for failure to file required statements, creating a situation where the corporation is suspended by one agency while remaining in good standing with another.

To avoid this trap, calendar the annual Statement of Information due date (anniversary of qualification) separately from tax return due dates, and treat it as a distinct compliance obligation.

Trap Six: Forgetting Home State Compliance

Corporations often focus so heavily on California compliance that they neglect ongoing obligations in Delaware, Nevada, or Wyoming. Delaware charges annual franchise taxes and requires annual reports. Failing to pay Delaware franchise taxes or file Delaware reports can result in administrative dissolution in the home state, which then triggers problems in California as well.

To avoid this trap, maintain compliance calendars for both the home state and California, tracking all filing deadlines and payment obligations in both jurisdictions.

Trap Seven: Underestimating Section 2115 Governance Impact

Corporations that qualify for quasi-California corporation status under section 2115 may find that their governance documents (drafted under Delaware law) conflict with mandatory California provisions. This can affect voting rights, dividend policies, merger approvals, and director liability standards.

To avoid this trap, analyze shareholder residency and business activity apportionment when the corporation has significant California connections. If both the 50 percent business test and the 50 percent shareholder test are met, consult with counsel regarding which California governance provisions override the home state’s law.

Withdrawing from California: The Surrender Process

When a foreign corporation ceases transacting intrastate business in California, it should formally withdraw by filing a Certificate of Surrender with the Secretary of State (Form SURC). This filing has no fee but requires the corporation to certify that it has ceased transacting intrastate business in California.

Filing the Certificate of Surrender does not automatically terminate Franchise Tax Board obligations. If the corporation had been doing business in California, it must file a final tax return and pay any outstanding taxes. The corporation must also ensure that any outstanding Statements of Information are filed and that it is not suspended by either the Secretary of State or the Franchise Tax Board before surrendering.

Failure to formally surrender leaves the corporation on the Secretary of State’s records as an active qualified foreign corporation, potentially subjecting it to continued filing obligations and fees even after California operations have ceased.

Practical Recommendations for Delaware, Nevada, or Wyoming Corporations

For corporations incorporated outside California that have or anticipate having California connections, several practical steps minimize compliance risk.

First, monitor California economic activity continuously. Track California-destined sales, California-based employees or contractors, California-located property, and any other California business activity. Compare these figures against the annually indexed thresholds published by the Franchise Tax Board.

Second, analyze the nature of California transactions. Determine whether activities fall within the safe harbors of Corporations Code section 191(c) or whether they constitute transacting intrastate business requiring qualification. If orders are accepted outside California and no California employees perform services within the state, qualification may not be required even though tax nexus exists.

Third, maintain registration compliance in both home state and California. If qualification is required, file the Statement and Designation promptly, appoint and maintain a reliable registered agent, and calendar annual Statements of Information. Separately, register with the Franchise Tax Board and file all required returns timely.

Fourth, budget for dual-state compliance costs. The hidden expense of out-of-state incorporation includes registered agent fees in both states, annual state fees in both states (Delaware franchise tax plus California minimum tax and filing fees), and potentially professional services to manage the increased complexity.

Fifth, review corporate governance documents through a section 2115 lens. If the corporation has majority California shareholders and majority California business activity, understand which California governance provisions apply and whether the corporation’s bylaws or operating procedures need modification.

Sixth, consult qualified professionals before assuming compliance positions. California’s aggressive nexus standards and the interplay between corporate qualification and tax nexus create traps that are expensive to remedy after the fact. Upfront professional guidance is far cheaper than back taxes, penalties, interest, and legal fees incurred from non-compliance.

Frequently Asked Questions

My Delaware corporation only sells to California customers through our website. We have no California employees or office. Do we need to qualify with the Secretary of State?

If orders are accepted at your Delaware headquarters and you have no California employees or physical presence, you may fall within the safe harbor of Corporations Code section 191(c) for orders accepted outside California. This could mean you do not need to file a Statement and Designation with the Secretary of State.

However, you almost certainly have Franchise Tax Board obligations. If your California sales exceed the annually indexed threshold (approximately $711,538 for 2024) or represent more than 25 percent of your total sales, you are “doing business” in California under Revenue and Taxation Code section 23101(b). You owe the $800 minimum franchise tax plus any tax on California-apportioned income, and you must file California corporate tax returns. The key point is that tax obligations can exist without Secretary of State qualification, and the two analyses are separate.

What happens if my corporation has been doing business in California for years without qualifying or paying taxes?

You face exposure on multiple fronts. For Secretary of State qualification, if you were transacting intrastate business, you cannot enforce California contracts through California courts until you qualify and pay back fees. For Franchise Tax Board obligations, you owe back taxes for every year you were doing business, plus penalties for failure to file returns, penalties for failure to pay, and interest compounding on the unpaid balances. The Franchise Tax Board can issue assessments going back multiple years, and California’s statutes of limitation are tolled during periods of non-compliance.

The practical approach is to voluntarily come into compliance by qualifying with the Secretary of State (if required), registering with the Franchise Tax Board, filing delinquent returns, and paying all taxes owed. Voluntary disclosure may allow negotiation of penalty abatement in some circumstances, though interest is rarely waived. The alternative—waiting until the Franchise Tax Board discovers the non-compliance through audit or information matching—typically results in higher penalties and less flexibility.

If we qualify in California, do we still have to maintain Delaware compliance?

Absolutely. Qualifying as a foreign corporation in California does not change your home state obligations. Delaware requires annual franchise taxes and annual reports. Nevada and Wyoming have their own annual requirements. You maintain compliance in both states simultaneously.

This dual-compliance burden is why many advisors question the value of Delaware incorporation for small businesses that primarily operate in California. You pay Delaware’s fees to maintain the corporation there, pay California’s fees and taxes because you do business here, and pay registered agent fees in both states. The marginal benefits of Delaware corporate law (well-developed case precedent, Court of Chancery expertise, business-friendly statutes) may not justify the cost and complexity for businesses that aren’t raising institutional capital or anticipating complex governance disputes.

Can the Secretary of State suspend my corporation for not filing Statements of Information even if I’m current on taxes?

Yes. The Secretary of State and the Franchise Tax Board operate independently. Secretary of State suspension occurs for failure to file required statements (including the annual Statement of Information for foreign corporations), while Franchise Tax Board suspension occurs for failure to file tax returns or pay taxes. You can be suspended by one agency, both agencies, or neither, depending on your compliance posture with each.

If suspended by the Secretary of State for failure to file the Statement of Information, you must file all delinquent statements and pay any associated penalties before the suspension lifts. This is separate from resolving any Franchise Tax Board issues.

Does section 2115 mean my Delaware corporation has to follow California law even though I incorporated in Delaware?

It means your Delaware corporation must follow certain California corporate governance provisions if you meet both the 50 percent business test and the 50 percent shareholder test. If more than half your business (measured by averaged property, payroll, and sales factors) is in California, and more than half your voting shares are held by California-address shareholders, California imposes specific governance rules.

The California provisions that apply under section 2115 include rules on cumulative voting, director liability and indemnification, distributions, and certain merger procedures. These can override Delaware law to the extent they conflict. This doesn’t mean Delaware law is entirely irrelevant—issues not covered by the section 2115 provisions still fall under Delaware law—but it does mean you cannot assume Delaware law governs all corporate governance matters when California connections are significant.

Is it better to just form a California corporation rather than a Delaware corporation that must qualify in California?

For many small businesses with primary California operations, yes. Forming a California corporation eliminates the dual-compliance burden, eliminates dual fees, and simplifies governance. You deal with one Secretary of State, one tax authority, and one set of corporate laws.

Delaware incorporation makes sense in specific scenarios: you’re raising venture capital from investors who expect Delaware entities, you anticipate complex governance disputes where Delaware’s sophisticated judiciary adds value, you’re planning for a major exit where Delaware’s predictable corporate law facilitates acquisition transactions, or you have substantial non-California operations where California represents only a portion of business activity. For the freelancer, consultant, small e-commerce business, or professional practice that operates primarily in California, Delaware incorporation often adds cost and complexity without corresponding benefit.

My corporation was suspended by the Franchise Tax Board. Can I still sign contracts or do business?

No. A suspended corporation loses its powers, rights, and privileges in California. It cannot legally conduct business, enter into contracts, defend lawsuits, or transact corporate business. Any contracts signed while suspended are voidable, creating significant risk for the corporation and potentially personal liability for officers who knowingly transact business on behalf of a suspended entity.

To resume business activities, you must lift the suspension by filing all delinquent tax returns, paying all back taxes plus penalties and interest, and paying the reinstatement fee. Until the Franchise Tax Board officially reinstates the corporation’s powers, the corporation remains unable to legally operate.

This guide provides general legal and tax information regarding foreign corporation qualification and tax obligations in California. Laws and regulations change, and specific situations require individualized analysis. This information should not be construed as legal or tax advice for your particular circumstances. Consult with a qualified California attorney and tax advisor regarding your specific foreign corporation compliance obligations.