Conducting Business as a Corporation or an LLC Out of State
A company that engages in business in a state other than the one where it was formed may have to qualify to do business in that state. An LLC or a corporation is "domestic" in the "state of organization," or the state where it started. A company of can engage in business in a domestic state without having to undergo qualification.
A foreign LLC or corporation may have to qualify to conduct business in another state if its business transactions meet certain requirements. The term "foreign" describes an out of state business rather than a company that originates outside of the U.S.
Transacting Business Out of State
An out of state LLC or corporation conducting business in another state (intrastate business) must qualify to do business in that state. A company that has a physical presence in a state or repeatedly engages in business transactions in that state is conducting business within that state. Most states will consider the following transactions intrastate business when they occur within a state's borders:
- sales of goods or services
- providing services or labor
- construction work
Most states will consider a company to have engaged in intrastate business when it has employees in another state, owns or rents real property, or uses a warehouse in another state to ship merchandise to customers in that state.
Most states exempt the following activities:
- Mail order and telephone sales when it is the only type of transaction the company engages in within that state
- A national advertising campaign targeted at customers in that state
- Sales conducted through independent contractors in that state
- Appearances in court, mediation, or arbitration for the company in that state
- Holding bank accounts or collecting debts in that state
A company that conducts all its business across state lines, such as transporting goods from one state to another, is engaged in interstate business. Consequently, the company does not need to qualify to conduct business in the foreign state or pay state taxes.
Qualifying for Doing Business Out of State
A company that engages in intrastate business that is not merely incidental to the business must qualify in that state. Every state has different guidelines, but qualification usually requires a company to complete the required paperwork, publish a notice in the newspaper, pay a fee, and designate a registered agent-- either an individual or a company residing in that state -- to accept documents related to legal actions or lawsuits against the company. State registration fees typically range from $100 to $300.
Paying Income Taxes in Another State
After a company registers in a state, it must pay state income taxes on the profits earned in that state. A corporation must pay a state's corporate income tax, while LLC members can typically avoid double taxation by paying income tax on the profits earned in the state and receiving a tax credit from the resident state. A company must also pay sales tax on the sale of tangible property sold and shipped from a location in that state and must fulfill a state's employment tax requirements.
Consequences of Not Registering in Another State
A business that fails to undergo qualification with a state may be subject to:
- Late penalties: A state may charge a set fee amount plus a daily amount or a flat fee that will typically range from a few hundred dollars to a few thousand dollars.
- No legal recourse: Most states have "closed-door statutes" that will allow a court to delay or dismiss a legal action filed by an unqualified company. If a court delays an action, it may require the company to qualify and pay a late penalty before proceeding. If dismissed, a company may re-file after qualifying and paying the applicable late fee as long as the statute of limitations does not prohibit the lawsuit.
Out of State Legal Actions
A company that qualifies to do business in another state is subject to the laws of that state. This is also sometimes the case when a court believes the company should have qualified, but didn't. This means that the company can be sued in that state and may be forced to make a defense there.
Even if a company does not qualify, a state may have jurisdiction if to the business' actions meet a state's "long-arm statute" requirements and the constitutional requirements for minimum contacts. Courts will typically make this evaluation by determining whether the company has a physical presence in the state, produces a certain amount in sales from residents, or regularly advertises in the state.