What Constitutes Doing Business in California?

A company is doing business in California, in the eyes of the Franchise Tax Board, whenever it actively engages in any transaction for financial gain in the state or crosses one of California’s annual thresholds for in-state sales, property, or payroll. What constitutes doing business in California is defined broadly on purpose: no storefront is required, no employee is required, and no visit is required. Cross a single line and the company owes at least $800 a year in franchise tax, must register with the Secretary of State, and must file California returns.

The Statutory Definition and the Bright-Line Thresholds

Revenue and Taxation Code Section 23101 sets the rule. Subdivision (a) defines doing business as actively engaging in any transaction for the purpose of financial gain or profit in California.¹ That language is deliberately wide. If a company profits from activity connected to California, it may qualify, regardless of where it is headquartered.

Subdivision (b) adds economic tests that are simpler to apply. A company is presumed to be doing business in California if any one of these figures is exceeded in a tax year. The Franchise Tax Board adjusts the dollar amounts for inflation each year; the 2025 numbers are:

California sales exceeding $757,070, or 25 percent of the company’s total sales, whichever is less.
Real and tangible personal property in California exceeding $75,707, or 25 percent of total property, whichever is less.
Compensation paid in California exceeding $75,707, or 25 percent of total payroll, whichever is less.

One threshold is enough. A company with no office, no employees, and no property in California is still doing business if its California sales cross the line, and sales made by agents and independent contractors count toward the total.²

Physical Presence and Remote Workers

The most straightforward trigger is a physical location. An office, store, warehouse, or other facility in California establishes a presence whether the space is owned, leased, or temporarily used. The FTB looks beyond the paperwork and examines whether a company has functional use of space in the state.

Remote workers create the harder cases. A single employee working from a California home office can create nexus for an out-of-state employer. That employee’s pay counts toward the payroll threshold, and the work itself may qualify as engaging in a transaction for financial gain. The FTB does not publish a minimum number of remote workers or hours; it evaluates whether the worker performs substantial business functions such as negotiating contracts, managing clients, or generating revenue.² If you employ anyone in California, track that person’s compensation against the annual payroll number.

Employees, Contractors, and Agents

Having employees, independent contractors, or sales agents in California is a strong indicator of doing business. Section 23101 explicitly counts sales made by a company’s agents and independent contractors when applying the sales threshold.¹

The reach goes beyond traditional salespeople. California courts have held that sales representatives operating in the state establish a taxable presence, and the principle extends to customer service representatives, account managers, and technical staff who negotiate deals, manage relationships, or provide revenue-generating services.³

Online Sales and Digital Services

California applies the same economic nexus framework to digital transactions. An e-commerce retailer, subscription platform, or SaaS provider with no physical presence in the state is still doing business if its California sales exceed the annual threshold. Physical goods, downloaded software, streaming content, and cloud-based services all get the same treatment.²

This is where out-of-state companies get caught off guard. A software company headquartered in Texas with no employees or servers in California owes franchise tax once its California customer revenue crosses the sales threshold. California appellate courts have also found that licensing intellectual property to California businesses is enough activity to warrant taxation, a principle that reaches digital licensing arrangements.⁴

When Federal Law Shields You, and When It Doesn’t

Federal law offers a narrow escape. Under Public Law 86-272 (15 U.S.C. § 381), a state cannot impose a net income tax on a company whose only in-state activity is soliciting orders for tangible personal property, provided the orders are sent outside the state for approval and filled from outside the state.⁵ California’s franchise tax counts as a net income tax for this purpose.

The shield is far more limited than it sounds. It covers only solicitation of physical goods. It does not cover services, software licenses, streaming content, or consulting. The FTB has taken an aggressive position in Publication 1050 that streaming video, selling downloaded software, and licensing intangibles all fall outside the protection.⁶

Even for companies that do sell physical goods, the shield disappears the moment an in-state employee does anything beyond pure solicitation. Providing post-sale technical support, handling complaints, approving orders, maintaining a sample room for more than 14 days, or storing inventory in the state each destroy the protection.

And there is a further wrinkle. Even where P.L. 86-272 blocks California from imposing income-based tax, the FTB’s position is that the company may still be considered doing business and remain liable for the $800 minimum franchise tax.²

Sales Tax Is a Separate Question

The franchise tax analysis above does not answer your sales tax question. California’s Marketplace Facilitator Act shifts sales tax collection onto platforms that facilitate retail sales to California buyers, so sellers on Amazon, eBay, or Etsy typically have the platform handling California sales tax for them.⁷ Sellers who run their own e-commerce sites and sell directly to California consumers evaluate their own sales tax collection obligations separately. The sales tax economic nexus threshold is $500,000 in annual California sales, which is a different number from the franchise tax threshold.

The $800 Minimum Franchise Tax

Every corporation, LLC, and limited partnership doing business in California owes a minimum franchise tax of $800 per year, whether or not the business earns a profit.⁸ It is a floor. Businesses with taxable income above the minimum pay the greater of $800 or their calculated tax. The prior first-year exemption for LLCs, limited partnerships, and LLPs applied only to entities formed between January 1, 2021 and December 31, 2023 and is not available for businesses formed in 2025 or later.⁹

Penalties for Getting It Wrong

A foreign corporation that conducts business in California without registering with the Secretary of State is subject to a penalty of $20 per day of unauthorized operation, plus a $250 fee when it eventually registers.¹⁰

The more damaging consequence is the lawsuit bar. Under the same statute, a foreign corporation transacting business in California without proper registration cannot maintain any legal action in California courts related to that business until it registers and pays the penalty. The company cannot enforce a contract, pursue a collection, or protect its intellectual property in state court until it fixes the problem.¹⁰ Many companies discover the rule only when they need the courthouse and find the door closed.

On the tax side, the FTB can assess back taxes for every year the company should have been filing, plus interest and late-filing penalties. If the company ignores those assessments, the FTB can suspend or forfeit its corporate powers entirely. A suspended business cannot enter contracts, collect payments, or defend itself in court.¹¹

Getting Back to Good Standing

A suspended or forfeited business can return to good standing, but every outstanding obligation has to be cleared first. The FTB requires the business to file all past-due returns, pay all outstanding balances (back taxes, penalties, and interest), and submit a revivor application — Form FTB 3557 BC for corporations or FTB 3557 LLC for limited liability companies. The business also has to be in good standing with the Secretary of State before the FTB will process the revivor. In urgent situations such as pending litigation, an escrow closing, a loan approval, or a federal grant deadline, a walk-through revivor at an FTB field office can be processed the same day.¹¹

The real cost of a suspension is rarely the back taxes alone. It is the deal that falls apart, the lawsuit that cannot be defended, and the contract that cannot be enforced while the company’s powers are frozen. Cleaning up a suspension that has run for several years routinely costs tens of thousands of dollars once penalties and interest are added in. If any of the doing-business triggers apply to your company, register, file, and pay the $800 before the FTB or a courthouse clerk forces the issue.

1
California Legislative Information. California Revenue and Taxation Code 23101
2
Franchise Tax Board. Doing Business in California
3
Justia. General Motors Corp. v. Franchise Tax Board
4
Justia. Harley-Davidson Inc. v. Franchise Tax Board
5
Office of the Law Revision Counsel. 15 U.S. Code 381 – Imposition of Net Income Tax
6
Franchise Tax Board. FTB Publication 1050
7
California Department of Tax and Fee Administration. Tax Guide for Marketplace Facilitator Act
8
Justia. California Revenue and Taxation Code 23151-23155
9
Franchise Tax Board. Limited Liability Company
10
California Legislative Information. California Corporations Code 2203
11
Franchise Tax Board. My Business Is Suspended