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
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" 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
that part of your business has contacts with the state that are permanent, continuous
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
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.
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.
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.