Penalties for foreign corporations transacting business without authority – Frequently asked questions

First, because most corporations conduct some business, have some contacts, or conduct some activities in foreign states.  Examples of common activities or contacts with foreign states include:

• Having remote workers
• Selling their goods or services to the state’s consumers – in stores or online
• Marketing their products
• Soliciting business
• Entering into contracts with suppliers, vendors, or other parties located in foreign states
• Manufacturing their products
• Having a warehouse to keep their merchandise
• Holding meetings of directors or shareholders

Second, it’s hard to figure out if qualification is required because not every activity a corporation engages in is considered “transacting business” for the purposes of the qualification requirement. Sometimes it’s fairly obvious – like if the corporation has a manufacturing facility in the state. Other times not so much – like having remote workers living in and working from the state.

And what makes this even more confusing is that very few corporation laws list the activities that constitute transacting business so that qualification is required. Instead, most laws list activities that don’t constitute transacting business, such as:

• Maintaining or defending a lawsuit
• Maintaining bank accounts
• Owning property
• Conducting an isolated transaction
• Securing or collecting debts

Also, a corporation can transact business in interstate commerce without being required to qualify. (A state law requiring otherwise would violate the U.S. Constitution’s Commerce Clause). So, if a corporation’s in-state activity is just a part of an otherwise interstate transaction, qualification may not be required. But that can be a cloudy issue too. For example, selling a widget to a foreign state’s consumers may be an activity in interstate commerce.  But what if the corporation also sends its employees into the state to install and repair the widgets?  Does that turn an interstate activity into an intrastate activity?

Yes, that’s the general rule. In fact, every state has a statute denying unqualified foreign corporations transacting business in the state the right to maintain an action or proceeding in the state’s courts until they qualify. 

Yes.  A defendant being sued by an unqualified foreign corporation can seek dismissal on the grounds the corporation is transacting business in the state without authority. This is basically a defense saying that the corporation lacks the capacity – or authority - to sue because there is a state law that denies them access to the state courts. (Note, the defendant has to raise this defense in a timely manner or it will be considered waived).

In general, the following happens:

• The court stays the action and holds a separate proceeding to determine if the foreign corporation was required to qualify.
• If the court finds that the foreign corporation was not required to qualify, the action won’t be dismissed on that basis.
• If the court finds that the corporation was indeed transacting business without authority, it will generally give it a chance to qualify.
• If the foreign corporation does qualify – which will require it to pay required fees and penalties, and apply for and obtain a certificate of authority - its action can continue. If it doesn’t qualify or can’t qualify, the court can dismiss its action.

Yes. Most state business corporation laws specifically provide that the failure of a foreign corporation to qualify to do business will not prevent it from defending any act, suit, or proceeding in the state’s courts. 

In general, yes. Most state business corporation laws have a provision stating that the failure of a foreign corporation to qualify to do business in the state does not impair the validity of a contract or act of the foreign corporation. There can be exceptions, however.  Montana’s corporation law, for example, says that a contract between a foreign corporation that failed to qualify, and the state, a state agency, or a political subdivision of the state is voidable by the state, agency, or political subdivision.

Yes, most states impose monetary penalties.  The penalties can vary widely by state and can be based on the following:

• The number of years, months, or even days during which the foreign corporation was doing business in the state without authority
• The number of transactions entered into in the state
• A fixed dollar amount
• A minimum and maximum dollar amount

Below is a small sampling of the monetary penalties the states may impose:

• Alaska - up to $10,000
• California - $20 per day and the corporation is guilty of a misdemeanor, which is punishable by a fine of not less than $500 or more than $1,000
• Connecticut – $300 per month
• Delaware - $200 to $500 per offense
• Florida - $500 to $1,000 per year
• Georgia - $500
• Michigan - $100 to $1,000 per month, with a maximum of $10,000
• Nevada - not less than $1,000 or more than $10,000
• Wisconsin – the lesser of 50% of all fees and charges that would have been imposed, or $5,000
• Wyoming - $5,000

Yes, there are several states that impose monetary penalties on individuals who act on behalf of a foreign corporation transacting business without authority. The individuals who can be penalized, and the amount of the penalty, varies depending upon the state. Some examples:

• California - Any person who transacts business in the state on behalf of an unqualified foreign corporation, knowing that it is not qualified, is guilty of a misdemeanor punishable by a fine of not less than $50 or more than $600.
• Delaware - Any agent of a foreign corporation doing business before it qualified can be fined not less than $100 or more than $500 for each offense.
• Maryland - Each officer of a foreign corporation doing business without qualifying and each agent transacting business for it can be found guilty of a misdemeanor and on conviction is subject to a fine not exceeding $1,000.
• North Dakota - Each director and each officer or agent who authorizes, directs, or participates in the transaction of business for the unqualified foreign corporation is subject to a civil penalty not to exceed $1,000.
• Ohio - An officer who transacts business on behalf a foreign corporation doing business without authority may be guilty of a misdemeanor of the fourth degree.
• Oklahoma - Any agent of a foreign corporation doing business before it qualified can be fined not less than $100 or more than $500 for each offense.
• Utah - Each officer who authorizes, directs, or participates in the corporation’s transaction of business without authority and each agent doing business on its behalf is subject to a civil penalty of up to $1,000.
• Virginia - Each officer, director, and employee who does business in Virginia knowing that qualification was required is liable for a penalty of not less than $500 or more than $5,000.
• Washington - An officer, agent, or employee who transacts business for a corporation before it qualifies is guilty of a gross misdemeanor.

That’s for the corporation’s decision makers to determine.It’s always a good idea to get legal advice for a question like this.