In today’s economy, many businesses have activities that reach across state lines. Although it is likely your business has been properly organized in the state of its formation, how about qualifying as a “foreign” entity in other states in which you conduct business?
Whether satellite offices/facilities, employees working from home or delivery of products or sales of services in multiple states, there exist many opportunities for businesses to misunderstand the need to qualify as a foreign entity in other states. The risks of failure to properly qualify can be substantial.
All states have laws requiring companies to qualify to do business if the company is formed under the laws of another state. The crucial question is: What constitutes “doing business” in each state? No single law contains a comprehensive definition, and each state has adopted its own particular laws on this subject, but many of these laws have been based on model or uniform acts. Therefore, I will focus on these model acts.
All model acts provide a list of activities that will not, alone, be considered “doing business.” If your business qualifies for one of these “safe harbors,” then it may not need to qualify. If your business activity is outside any of these safe harbors, though, then your business should consult with legal counsel on whether qualification is warranted in your circumstance and the particular states at issue.
It is likely that if your business opens an office in another state and carries on all or most of its core business activities within that state, the company is doing business there and will be required to qualify. Similarly, a manufacturing company will be required to qualify in order to carry on its manufacturing activities in a foreign state. The ownership of real or personal property in a state together with just about any other activity associated with your business that is not isolated or tangential to the property itself may require the company to qualify in that state.
- Maintaining, defending or settling any proceeding
- Holding meetings of directors or shareholders, or other activities concerning internal affairs
- Maintaining bank accounts
- Maintaining offices for the transfer, exchange or registration of its securities
- Effecting sales through independent contractors
- Soliciting or obtaining orders by mail or through employees or agents, if the orders require acceptance outside the state before they become contracts
- Creating or acquiring indebtedness, mortgages and security interests in real or personal property
- Securing or collecting debts or enforcing mortgages or security interests
- Owning, without more, real or personal property
- Conducting an isolated transaction that is completed within 30 days and that is not done in the course of repeated transactions of a like nature
- Transacting business in interstate commerce
The foreign qualification process varies from state to state. In general, though, it usually requires the filing of a certificate with the foreign state, paying a nominal fee, appointing a resident agent in that state for service of process and providing certain certified formation/good standing documents from your business?s home state of formation.
Some states also have a publication requirement, depending on the type of business entity (partnership, limited liability company, etc.). After the initial filing, there is usually an annual reporting fee as well.
The risks of failure to properly qualify as a foreign entity are often not great and can be easily remedied, but they can be substantial in some instances. All states prohibit unqualified entities from maintaining actions in their courts (although some states allow businesses to rectify the deficiency as the proceeding continues). Moreover, some states impose significant fines, back payment of unpaid qualification fees and, potentially, officers or agents may be fined personally.
It should be noted that in many instances, your business may be required to file tax returns and pay taxes in a state in which foreign qualification is not required. The analyses are very different. On the other hand, if you are qualified to do business in a foreign state, it is advisable that you consider reporting and paying any applicable taxes of that jurisdiction.