Every LLC and corporation has a home state—the state where it was formed. Even if you do business in only your home state, your compliance responsibilities can be hard to keep up with. But, contacts and transactions in another state can trigger the need for foreign qualification in that state, resulting in even more compliance responsibilities.
What is foreign qualification?
When a corporation or LLC does business outside its home state, it may be seen as a foreign entity that is required to “qualify” with the new state. This includes obtaining a Certificate of Authority and appointing a Registered Agent.
What is the definition of “doing business”?
The rule is simple and uniform: If you are doing business in a state, you must follow the business registration rules. What is not simple is the definition of doing business for several reasons:
- States vary on the amount and types of activity that triggers business registration.
- Doing business is defined differently for entity qualification purposes and other purposes, like whether the company is subject to the foreign state’s tax law or the personal jurisdiction of its courts, which makes things even more confusing.
- Most state laws list only those activities that don't constitute doing business—leaving courts to decide what does constitute doing business on a case-by-case basis, based on all the facts and circumstances.
How do I know if my corporation or LLC needs to foreign qualify?
So, in this murky realm of case law, are there any warning signs that you may have a significant connection to a state and a need to register (or foreign qualify)?
Yes, there are some indications that you've crossed the compliance border in another state.
Consider these five signs:
- Physical location. You have a physical location, such as a warehouse, office, store or restaurant, in the state. (But, simply owning real property, or holding mortgages on real property, generally isn’t considered doing business.)
- Employees. You have employees in the state. (Many states don’t consider using independent contractors in the state an activity that constitutes doing business.)
- Regular binding contracts. You regularly enter into binding contracts in the state. (Entering into contracts that must be approved by an office located outside of the state before becoming binding is often listed as an activity that is not considered "doing business.")
- Regular client or customer meetings. You regularly meet with clients or customers to conduct business with them in the state. (Phone meetings and email alone are less likely to rise to the level of doing business.)
- Significant revenue stream. You have a steady and significant revenue stream from activities in the state. (Isolated transactions generally are not considered doing business.)
Did you answer "yes" to any of these questions? It doesn’t necessarily mean your corporation or LLC is doing business but you may want to consult with an advisor regarding the need for foreign qualification.Why is foreign qualification important?
A corporation or LLC is subject to fines and penalties for failure to foreign qualify when required to do so. In addition, you could be putting your limited liability at risk. What’s more, your company will be barred from bringing a lawsuit, such as a breach of contract lawsuit or a suit for defective workmanship, until it is properly authorized to do business in the state.
Although the process of registering your business in every state where it is doing business may seem onerous, failure to do so can result in some very unpleasant consequences. If you are planning on doing business outside the state where your corporation or LLC was formed, you should consult with your lawyer to make sure that you remain in compliance.
For information on the foreign qualification process, read Expanding Your Business? Foreign Qualification Protects Your Rights in a New State.