Small Business Questions & Answers

 

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Ask About Doing Business in Other States

by Curious Concerning Qualification | August 8, 2012

Subject :Foreign Qualification - Doing Business in Other States

Dear Toolkit,

Our limited liability company started small, with employees in only one state. But we've been growing! Now we have employees in several other states. We also have contracts with customers in other states.  What is the best way to know if we are required to qualify to do business in those states?

Thank you!

Curious Concerning Qualification

Dear Curious,

Thank you for your question regarding whether your LLC needs to qualify to do business in other states where you have employees and contracts.  Complying with foreign qualification rules may be a nuisance, but failing to do so can create problems, ranging from having to pay penalties to being barred from bringing a lawsuit in the state courts.

As is often the case in legal matters, there is no easy, clear-cut answer, but I hope the following information will be of use. To determine if you need to qualify as a foreign entity, you must evaluate your company’s activities in, and contacts with, each state. You need to consider whether these activities constitute “transacting business” under the laws of that state and whether these activities took place in “intrastate” commerce.

Unfortunately, few states define these terms.  Instead, they provide a list of activities that do not constitute transacting business within the state.  Although there are significant differences from state to state, most provide that any entity isn’t required to qualify if its presence in the state is limited to such minimal activities as:

  • soliciting orders for goods provided that the contract requires acceptance outside the state,
  • making sales through independent contractors,
  • maintaining bank accounts, or
  • creating and securing debts and mortgages.

BizFilings Business Owner’s Toolkit has created a chart that summarizes the activities that do not trigger a new for foreign qualification for each state. You should also consult the website for the Secretary of State for each state where you have employees or contracts.

In general, having a traditional employee in a state is an indication that you are doing business in the state, unless that employee’s function is solely soliciting orders that require acceptance outside state before becoming binding contracts. So, in many cases, having employees will trigger the need for foreign qualification.

Whether your contracts in other states create a need for foreign qualification is a very murky area.  This often turns on whether your contacts are regular, repeated and continuous—and those terms can be defined different by courts in the various states. 

Although your question was about foreign qualification, we’d be remiss if we didn't alert you to possible tax consequences as well. “Doing business” for purposes of foreign qualification may not be the same as “doing business” for purposes of tax law. Often state taxing authorities take a far more aggressive stance to what acts rise to the level of doing business, which in turns creates nexus (or authority) for taxation.  For example, many states have long-standing policies of finding nexus if a company’s employees performed marketing or customer-facing activities within a state.  Recently, New Jersey determined that having a single telecommuting employee within the state meant that the employer was subject to New Jersey’s corporate business tax.  At this point, no other state has clearly addressed the issue of telecommuters creating nexus, but it is certainly something to be consider when expanding your operations.

Once again, thank you for your question. We hope this information helps.