CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Where Should I Qualify as a Foreign Corporation or LLC?

By: Colleen DeVries, COGENCY GLOBAL INC. on Thu, Aug 25, 2016

Qualifying_as_a_Foreign_Corporation.jpgAs a service provider that helps law firms and companies form business entities in Delaware and across the U.S, the million dollar question clients ask us all the time is “Where should I qualify as a foreign corporation or LLC?”  Note that when talking about registered business entities, “a business entity is considered domestic only in its state of formation. In all other states, these entities are regarded as foreign and may require qualification to do business as a foreign corporation, LLC, LP or LLP in those states.”[1] As a service provider, we can offer practical guidance on how to accomplish qualification (also known as “registration to do business as a foreign entity”). Our role is to provide assistance with filings and navigate the varied statutory and administrative requirements on our client’s behalf. However, answering this seemingly simple question, “Should I qualify in a particular state?”, poses a real challenge and we are unable to provide a definitive answer. In this blog, we will discuss why that is.

Registration Requirements Vary by State

The decision whether to register your company and in which additional states (if any) needs to factor in the type of business you are conducting, the frequency of the business within any state and various statutory requirements. Seems simple, right? Well, not exactly. The Model Business Corporation Act  carves out exemptions stating that certain activities do not constitute doing business, such as maintaining bank accounts, holding board of directors’ meetings and engaging in litigation or interstate commerce. But, in spite of states adopting  the Act, each state has slight variation on what activities will not constitute doing business. For example, California does not list engaging in interstate commerce as an activity that does not constitute doing business, while Alabama, Ohio and Oklahoma do not list any activities that exempt a company from qualification. In any state, in addition to the statutes, prior court cases need to be reviewed to see how courts have ruled regarding specific activities and whether they triggered the need for the company to qualify.

No Rules Based on Established Cases

Questions involving what constitutes doing business both at the time of formation and by judges when deciding cases has a long history dating back to the 1800s. “One authority states that only the general statement that can be made with respect to the decisions defining ‘doing business’ . . .is that the cases are numerous, varied and inharmonious”. Based on the variety of factors that must be considered on a case by case basis when answering the question of where to qualify to do business, Judge Learned Hand stated that “it was impossible to establish any rule from established cases.”[2]

The PACE Method Can Help You Decide

We are not a law firm and cannot offer legal advice, however, we would like to offer some helpful tips and introduce the PACE method for you to consider as you determine where you need to register to conduct business as a “foreign” corporation.  

  • Pause to identify all states that you are conducting any type of business in and assess the type and frequency of the business.
  • Analyze the frequency of the business and determine if it qualifies as intrastate or interstate business activity.
  • Consult with legal counsel to determine what the statutory requirements are based on your assessment above, and whether you must file an application for authority in select states or whether the activities of your company are exempt. Also consult with your counsel to determine if there may be a business license requirement in addition to qualifying as a foreign company in any state, or in lieu of qualifying.
  • Execute your plan to qualify as a foreign company in certain states with confidence that you have done the necessary due diligence based on your company’s specific fact pattern. Working with a service company familiar with the jurisdictional requirements for registration can help here.

Seek Assistance from an Attorney

In short, what seems like it would be a simple question: “Do I have to register to do business in this state?” is anything but!  There is so much that comes into play when answering that question for a given state: the activities of a company, their frequency, the laws of the individual state and precedents set by earlier court decisions. Consultation with an attorney to determine the answer is usually a necessity.  The cost of such a consultation is likely to be much less than the costs of making an incorrect choice.  Registration generally means paying annual taxes and fees, not something a company wants to do needlessly. But, if a company does not register when it should, it can face a number of penalties, fees and problems that will be detailed in our next blog post that discusses penalties for not being properly registered. 

 

[1] Practical Law “Qualifying a Foreign Entity to do Business in New York Checklist

[2] Marquette Law Review, Fall, 1958, Changing Concepts of What Constitutes “Doing Business” by Foreign Corporations

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

 

Topics: Company Formation and Filing Considerations