Doing Business in Other States
If your company transacts business in states other than the business’s state of organization/incorporation, your business may be required to register or qualify with the relevant agencies in those states. Failure to register in states in which the company transacts business can result in legal liability, including fines and penalties.
When a corporation or other business entity, such as an LLC, that is incorporated or organized in one state (e.g., Wisconsin) does business in another state, it is considered a “foreign corporation” under the laws of that other state. Before conducting business in a state other than the business’s home state, it must first receive permission from the state to do so. In most states, the process involves obtaining a certificate of authority to do or “transact” business in the state.
While all states require foreign entities to register with the state before doing business in the state, no state provides an all-encompassing definition of what constitutes “doing business.” Further, few (if any) states have provided clear, bright-line standards for determining whether a foreign entity is transacting business in the particular state. Instead, most state statutes merely provide a non-exhaustive list of activities that do not constitute “doing business,” such as, for example, maintaining a corporate bank account within the state. Therefore, it is necessary to determine on a case-by-case basis whether an entity is required to register as a foreign corporation in a particular state. For example, many states would consider the hiring of a full-time employee or the appointment of a sales rep within its state to constitute “doing business,” but would not consider the company to be “doing business” in the state if it merely conducted an isolated transaction in the state that was completed in less than 30 days.
In order to lawfully transact business in another state, the entity typically needs to do all the following:
- Obtain a Certificate of Authority and pay a filing fee to transact business in the state.Appoint a registered agent within the state to receive certain legal and tax documents on behalf of the entity. The company could appoint an individual residing in the state as its agent or hire a private company to provide the service (fees typically range from $100 to $300 per year).
- Register for and pay the state’s corporate tax.
- File an annual report with the state.
If a foreign entity is “transacting business” in a state without having registered or otherwise qualified to do so, it is subject to certain sanctions by the state. The primary sanction typically is that the corporation cannot use the courts in the state to enforce its contracts or pursue other claims (unless and until it properly registers with the state). A corporation that has failed to register in a state may also be subject to monetary penalties and its directors and officers may have some personal liability.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.