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Are You Doing Business In Another State?

Many corporations, limited partnerships and limited liability companies operate in two or more states. Some serve out of state customers by mail. Others have sales representatives living in different states to generate revenues. These entities are considered “foreign corporations" in all states except the state where they are incorporated (some states refer to "foreign limited liability companies" or "foreign limited partnerships," but for simplicity purposes most just use the term "foreign corporation" regardless of whether the entity is a corporation, limited liability company or limited partnership).

Many questions arise for a “foreign corporation” doing business in other states.  Must it specially “qualify” to do business in each state?  Where can it be sued? How many states’ taxes must it pay? The answers to these and other questions depend on each company’s own situation and usually only a lawyer can provide a full answer. But here are some general guidelines.

Qualifying

"Qualifying" is a legal term. It means a foreign corporation planning to do business in a state must file certain papers and take other required steps before it can legally transact business there. The purpose of the law is to promote fairness and protect the state's own corporations from unfair competition.

When foreign corporations must qualify.  A foreign corporation that is transacting interstate business (doing business solely across state lines) generally does not have to qualify in that state.  But if the foreign corporation is transacting intrastate business, it is required to qualify.  This generally means that part of your business has contacts with the state that are permanent, continuous and regular.  For example, if your business has an office in the state that serves local customers, qualification is likely required.

Although it can be hard to determine which business activities require qualifying, most states have laws listing business activities that do not require an out-of-state corporation to "qualify."  These laws vary from state to state, but examples of activities that usually don't require qualifying include soliciting orders that are accepted outside the state, maintaining a bank account, holding meetings of company owners and officers, selling through independent contractors and suing in the state to collect a debt. But when these are combined with other activities, like setting up a warehouse in the state, “qualifying” is often required.

Penalties for noncompliance.  Penalties can be harsh for not “qualifying” when required. The corporation may be denied the right to bring a lawsuit in that state, and it may be heavily fined. Some states also penalize the corporation’s officers, directors and agents.

Defending Lawsuits

Qualifying in a state exposes a corporation to being sued there. Even a corporation that is not required to “qualify” may still be sued in another state if it does business there.  This is because the requirement for being subject to a lawsuit in another state is less strict than the requirement for qualifying.

Generally, to be subject to a lawsuit in another state, the foreign corporation just needs to have certain minimum contacts with the state so that it would not be unfair to sue it there.  In one case, a tourist hurt at a Nevada hotel filed suit in California even though the hotel's owner was a Nevada corporation. The hotel claimed it could not be sued in California because it had no employees there and was not required to “qualify” as a foreign corporation.

The court said the hotel could be sued in California since it advertised and actively promoted its business there. Thus, a foreign corporation may be required to defend a lawsuit even in a state where it is not required to “qualify” to do business.

Taxation

A corporation can be taxed by a state only if it has a sufficient business connection there. This rule helps assure that taxes are charged only on entities using the state’s services.  What constitutes a sufficient business connection for purposes of taxation depends on many factors.   A business may have a sufficient connection if it has a permanent presence in the state, such as resident employees, a business location or property in the state.  Even if the business has only a temporary presence in the state it may still have a sufficient connection if it regularly conducts business activities in order to establish and maintain its economic market in the state.

A federal law limits state power by prohibiting taxing a foreign corporation when its only activity in the state is soliciting orders there. But a company can have enough of a business connection to be taxed by a state even though it does not have to “qualify” there.  On the other hand, if a foreign corporation has enough contacts with a state so that it must qualify there, it has enough contacts to also be taxed there.

Doing business outside one’s state of incorporation can help the business significantly increase revenues.  But it creates important legal responsibilities and consequences. If your company is doing business in a state other than where it's incorporated, call us.  Laws regarding whether a corporation must qualify and whether it can be taxed or sued in another state are technical and it can be difficult to make this assessment.   We will help make sure that all rules regarding qualifying and taxation are satisfied so that you are in compliance with the law and legally authorized to operate in all states where you conduct business.

Call Us For Help

Whether you are starting a business or have an existing business, we can help.  We offer a full range of legal services to businesses, including entity formation, contracts, employee matters, trade secret protection and asset protection.

(123) 555-1212

The information contained in this article and throughout this Information Center is of a general nature. Due to constant changes in the law, exceptions to general rules of law, and variations of state laws, seek professional legal assistance before acting on any matter.

© 2008 ANSI