When you begin to engage in business activities outside your formation state, you’re likely to hear the term “doing business”.
“Doing business” refers to the process of carrying on the normal activities of a business in another state on a regular basis or with substantial contacts — not just an occasional shipment.
If this is the case for your company, then you may need to “foreign qualify” within that state. Read on to understand what constitutes doing business in a state and how to determine if your business needs to foreign qualify.
What is foreign qualification?
Foreign qualification is the process by which your business entity receives the authority to do business in a state other than its formation state. (It is also sometimes referred to as “registration”.)
What types of businesses are affected?
If your business is an LLC, corporation, LP, or LLP “doing business” in another state, then you may need to foreign qualify. Sole proprietorships are typically excluded since they are not formed under state laws.
Don’t confuse “doing business” with “doing business as” (DBA)
It can be easy to confuse “doing business” with another common term — “doing business as” or DBA.
A DBA is something quite different. It refers to the legal, true, or trade name of a business, whether it’s a sole proprietor, corporation, or LLC. If your company does business under a name other than the legal name — that is a DBA name. For example, you may have filed paperwork with the state for “Bob’s Baked Goods LLC”, but you are conducting and marketing your business as “Bob’s Bagels”.
DBAs are also known as an assumed name or fictitious business name. A DBA registration request is filed with your local or county clerk’s office, a state agency, or both.
Why it’s important to know when you’re “doing business”
If you operate an LLC, corporation, LP, or LLP you can’t legally transact business in a state other than the one in which your business was formed — you must have permission to transact business there or “foreign qualify.”
A failure to do so may mean your business is prevented from bringing or maintaining an action in the courts of the state in which you do interstate business, such as suing a client or partner for a breach of contract. Another costly consequence to failing to qualify if your business entity meets the state’s registration criteria is that the state will assess fines, penalties, and back taxes for the time the company was transacting business without obtaining a certificate of authority to do so. In some states, individual officers or agents may be fined as well.
What are some examples of “doing business"?
It can be hard to determine when you’re “doing business” since the rules vary from state to state. To complicate matters, each state will provide a list of activities that don’t constitute “doing business,” but don’t provide comprehensive guidance on what is considered “doing business.”
As a rule, you can assume you’re doing business if you meet any of the following criteria:
- Your company has a physical presence (like a factory or stores) in the state
- Your company has employees in the state
- Your company accepts orders in the state, or has liability to collect sales tax
This is not a complete list and state statutes and courts have different criteria for what constitutes transaction business. Decisions are typically made on a case-by-case basis, considering all relevant facts.
To determine if your business needs to foreign qualify in a particular state, it is best to get the advice of an attorney.
What steps do you need to take when “doing business” in other states?
There are four basic steps for foreign qualification that you should take before doing business in a state other than your home state:
- Determine if the business name is available.
- Appoint a Registered Agent in that state.
- Order a certificate of existence or certificate of good standing from your home state.
- File qualification documents.
Once qualified, your company will be subject to other compliance requirements such as maintaining a registered agent and filing an annual report.
For more information, read Doing Business in Another State (Foreign Qualification).