When you start to engage in business activities outside your formation state, you might hear the term "doing business”.
If your operations there qualify as "doing business", you can become subject to the laws and requirements in that state. This often means having to register with that state and following its reporting and tax rules. Each state defines "doing business" a little differently, so the exact rules vary.
Read on to learn what is considered doing business in a state, and what steps you may need to take.
“Doing business” is not the same as “doing business as”
“Doing business” appears almost the same as “doing business as”, but these terms refer to entirely different concepts.
"Doing business" describes an activity or legal status. It's the standard states use to determine whether your company's operations are significant enough to trigger requirements like taxes or registration.
“Doing business as” (or DBA) refers to a business name. It’s not a type of license or business structure. It’s the name your business operates under when it is different from the legal name on file with the state.
For example, you filed Articles of Organization to form “Quality Baked Goods LLC”, but you wish to run and advertise your business as “Riverside Bagels”. That means that you would be operating under the DBA of “Riverside Bagels”.
A DBA is also known as an assumed name, trade name, or fictitious business name. Depending on where your business is located, you would need to register your DBA with your local or county clerk's office, a state agency, or both.
In short, "doing business" is about what your company does and where, while a DBA is about what your company is called.
What activities count as “doing business"?
Determining when you're "doing business" in a state can be tricky, since the rules vary from state to state. To complicate matters further, most states provide a list of activities that don't count as "doing business", but stop short of giving a complete, definitive list of what does.
That said, as a general rule, you're likely doing business in a state if your company:
- Has a physical presence there, such as an office, store, warehouse, or factory
- Has employees who live or work in the state
- Owns or leases property there for ongoing business use
Here are some examples of what that can look like:
- A bakery based in Ohio opens a location in Michigan (physical presence).
- A construction company based in Georgia sends a crew to work on a project in Florida for six months (employees working in another state).
- An online retailer based in Texas leases a warehouse in Nevada to store and ship inventory (property used for ongoing business).
These are only a few scenarios that could be considered as “doing business”. States and courts weigh different factors depending on the context (whether the question is about registration, taxes, or being sued there), and most decisions are made case-by-case, based on all the facts involved.
What is foreign qualification?
If your company is "doing business" in a state other than the one where it was originally formed, you'll need to go through a process called foreign qualification.
In this context, "foreign" doesn't mean international. It refers to a state other than your domestic state (where your business was originally established). For example, if your LLC was formed in Colorado and expands into Texas, Texas is considered a "foreign" state for your business.
Foreign qualification is how you register your business to legally operate in that additional state. Once registered, your business is authorized to conduct business there. It also becomes subject to that state's requirements, such as obtaining any required licenses or permits, filing annual reports, paying franchise taxes, and maintaining a registered agent.
Foreign qualification applies to LLCs and corporations that are "doing business" in a state other than their domestic state. (This requirement also extends to other statutory entities such as LPs and LLPs.) Sole proprietorships are typically excluded, since they aren't formed under state law in the first place. However, if a sole proprietorship expands into another state, it would still be subject to that state's tax and licensing laws.
What is economic nexus?
Historically, a state could only require your company to collect and remit sales tax if you had a physical footprint there. But online sales have changed that. Today, a state can require your company to collect sales tax based on how much you sell there, even if you've never set foot in the state.
This is called economic nexus, and it's a relatively new addition to how states determine sales tax obligations. Economic nexus is triggered when a remote seller's sales activity in a state crosses a certain threshold. This can be:
- A specific dollar amount of annual sales in the state
- A set number of transactions in the state
- Both, depending on the state
Once your sales cross that threshold, you're required to register with the state's department of revenue and obtain a sales tax permit. From there, you must collect sales tax from customers in that state and remit it to the department.
Thresholds vary widely from state to state. A remote seller might trigger economic nexus in one state but not another, depending on where its customers are and how much it sells to them.
What happens if you don’t comply?
Failing to foreign qualify when required comes with serious consequences. Your business may be barred from bringing or maintaining a lawsuit in that state's courts, such as suing a client or partner for breach of contract. The state may also assess fines, penalties, and back taxes for the period your business was operating there without a Certificate of Authority. In some states, individual officers or agents can be held personally liable for fines as well.
Even if your business has no physical presence in a state, it's still your responsibility to determine where you've triggered economic nexus and to collect and remit sales tax accordingly.
If you have nexus in a state and fail to collect and remit sales tax as required, your business can be held liable for the uncollected tax, plus applicable penalties and interest charges. Unlike foreign qualification, this liability isn't tied to a lawsuit or registration status. It accrues automatically based on your sales activity, whether or not you were aware you'd crossed a state's threshold.
Steps to take when “doing business” in other states
The exact requirements vary by state, but there are two general paths to follow, depending on whether your business is registering to operate in a state or registering to collect sales tax there.
Foreign qualification
If your business is an LLC or corporation doing business in another state, there are five basic steps to follow before you begin operating there:
- 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 domestic state.
- File qualification documents.
- Obtain required registrations, licenses, and permits.
Once you're foreign qualified, your business remains subject to that state's ongoing compliance requirements, such as annual reports, franchise taxes, and maintaining a registered agent.
Remote sellers with economic nexus
If your business has economic nexus with a state, meaning you've crossed that state's sales or transaction threshold, you'll generally need to:
- Register with the state's department of revenue
- Obtain a sales tax permit
- Charge sales tax on applicable sales
- File sales tax returns on the state's required schedule
- Remit the sales tax collected to the state
Since requirements and thresholds vary by state, and can change over time, it's a good idea to consult your state's department of revenue or a qualified tax professional to make sure you're meeting your specific obligations.
Additional resources:
Doing business in another state (foreign qualification)
What is sales tax?