Is your business operating in a state other than the state of formation? If so, it may need to qualify in that state.
You had a business idea and took the initiative to form an LLC or corporation in your home state so that you can run the business with limited liability protections. Congratulations! You’re off to a great start. But now you may be asking yourself: Do I need to register my business in other states?
The answer to this question invokes every lawyer’s favorite phrase: “It depends.” Whether you need to register your company to do business in another state, also known as “foreign qualification,” depends on the activities that the business conducts in that particular state. This fact-specific inquiry is often a source of confusion because many states do not define precisely what “doing business” within the state means.[1] This issue is compounded many times over because each state may have different definitions and contours to the rule.
In New York, the test focuses on whether the activities are (1) of a local or intrastate character, (2) permanent, continuous, and regular, and (3) relate to the ordinary and regular business of the organization. Notwithstanding the lack of statutory guidance, a pretty good starting place is to ask yourself the following questions about the business your company conducts in a particular state:
Will the business hire and maintain W-2 employees within the state?
Will the business have a physical presence in the state, such as a branch office or a brick-and-mortar store?
Will the business be shipping products from within the state?
Is the business required to obtain any special licensing within the state for its business?
Does the business often conduct in person meetings with clients in the state?
Does a significant portion of the business’s revenue come from the state?
If you answer “yes” to any of the preceding questions, you may need to file for foreign qualification in the state.
Some business conduct, however, tends to not rise to the level requiring foreign qualification. Examples include activities such as holding a meeting of the company’s directors or shareholders in the state, selling a product or service from out of state into a state, and defending a lawsuit.
Let’s look at a few examples:
You formed a fashion LLC in New Jersey. Things are going well, and now you want to open a boutique in SoHo. You’ll need to register in New York.
You incorporated your business in Delaware, but you run the company from your home in California, where you manufacture and ship products. You’ll need to register in California.
You live in Texas and your business partner lives in Illinois. The company is incorporated in Texas, but your partner brings in the bulk of your company’s clients, and meets with them in Illinois. You’ll need to register in Illinois.
You are a freelancer who formed an LLC in Wyoming. You conduct all of your work online for clients across the country. You may not need to register, as you’re not frequently meeting in any specific state.
If you determine that you need to register in another state, you’ll need to submit an application with that state’s Secretary of State. The application may be called a “Certificate of Authority,” or something similar depending on the state, and it’s relatively straightforward. Some states may also require a certificate of good standing from the state of formation, which means you’ll need to be up to date on all filings and fees.
Failure to register has various consequences. You may end up paying fines and/or back taxes for the period when you should have been registered. Importantly, you also lose the ability to bring a lawsuit in the state where you are not properly registered.
In the end, you should not overlook this legal requirement. If you think you need to register your business, you should make sure to apply for foreign qualification, or consult an attorney to evaluate the situation. Considering the ease of registration, and relatively low cost, it is not a legal responsibility you want to ignore. It may end up costing you much more in the long run if you do.
If you’re not sure if your company needs to register in another state, or have questions about business entity formation, don’t hesitate give us a call, or reach out to info@springer-law.com.
[1] An added layer of confusion stems from the fact that the term “doing business in the state” is used in other contexts but subject to a lower threshold. These contexts – determining personal jurisdiction and whether a business’s presence requires it to pay state taxes – are beyond the scope of this post. But it is sufficient to note that if an organization is not subject to jurisdiction or taxation in a state, then it does not need to register to do business in the state; conversely, if foreign qualification is required, then it is also subject to jurisdiction and taxation.
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