“Doing Business” in Other States
Posted: 7/25/2007 11:47:6

“Doing Business” in Other States
by
William D. Harazin
Attorney at Law
Copyright, 2007
All Rights Reserved

At one time trade was local in nature. As a result, companies ordinarily would be regulated only by their Home State. That time has now passed and we are now trading in a global economy. Large companies are no longer the only companies which carry on trade among the states or for that matter in the international arena. Small companies increasingly are involved in interstate commerce.
A truly local one-state company would first obtain authority or permission from its Home State to do business within the geographic boundaries of the Home State. Typically this authority is obtained at the time the business is established through the incorporation process. Once it has authority it may then commence “doing business” throughout the Home State. In earlier times, that is all a business would need.
Once a Corporation, Limited Liability Company or other formal legal entity (“Entity”) begins trading or doing business across state lines it may face regulation by the Foreign States in which it comes in contact. Just as the Home State requires the entity to obtain permission to do business in the Home State, Foreign States may also require the entity to obtain permission to do business within the Foreign State’s boundaries. Typically regulation will be imposed upon an entity which is “doing business” within the boundaries of the Foreign State.
What is “doing business”? Three issues arise in the discussion of “doing business”. The first issue is the determination of “doing business”, the second issue is the steps to obtain Foreign State permission and the third issue is the sanction for “doing business” without permission.
“Doing business” in a Foreign State is a matter of degree based on the level of activity conducted in the Foreign State. The definition and determination of “doing business” varies from state to state. Most states have a “doing business” statute which either defines the activities constituting “doing business” or conversely defines the activities which do not constitute “doing business”. In either case the list is typically non-exclusive. Even though the statute may give guidance, the determination is generally done on a case by case basis based on the individual facts and circumstance.
Whether an entity is “doing business” in a Foreign State which would require it to qualify or otherwise obtain a Certificate of Authority varies from state to state and therefore the determination often lies within the “doing business” statutes of each particular state. The variance among such statutes can be considerable ranging from establishing a physical presence within the Foreign State to breathing in the direction of the Foreign State. Nonetheless, most states will exclude the following activities from their definition of “doing business”:
1. Isolated transaction;
2. Activities incidental or secondary to the primary activities of the entity;
3. Mere ownership interest in a subsidiary doing business within the Foreign State; and
4. Sales exclusively in interstate commerce.
In addition, most states view mere solicitation of business without other additional activities as insufficient to satisfy the “doing business” requirement which would trigger the necessity to obtain permission to “do business” within the state. In reviewing “doing business” statutes, a common theme for “doing business” is business activity which is relatively continuous with some degree of permanence. Moreover, the Courts will look to the totality of the activities being conducted in the Foreign State and not just individual single separate acts.
The term “doing business” for the purpose of qualification for doing business in the Foreign State is different than the term “doing business” for the purpose of Foreign State taxation or jurisdiction. It should not be confused with whether a Foreign State can tax the business or whether a state can exercise jurisdiction by bringing the Entity before its Court System. An Entity may not be “doing business” for permission purposes but could still be sued in the Foreign State or taxed by the Foreign State.
The threshold is relatively low for a Foreign State to exercise its taxing authority over a foreign entity or to exercise its jurisdictional authority to bring entities into its court system. On the other hand, if the issue is qualifying to do business, the threshold is generally much higher. In the event the higher standard is met, it stands to reason that such a determination will also satisfy the lesser threshold allowing the Foreign State to tax or otherwise exercise its jurisdiction over the entity. Nonetheless, the fact that an entity is not “doing business” to the extent permission is required, does not mean that the Foreign State cannot exercise its jurisdictional or tax powers over the entity.
Looking at the second issue, if it is determined that an entity is “doing business” within the boundaries of the Foreign State or intends to do so, the Foreign State will generally require the entity to obtain permission to “do business” within the Foreign State. An entity ordinarily obtains permission to “do business” within the Foreign State through the process of filing an application for a Certificate of Authority.
Obtaining the Certificate of Authority is not a significant hurdle in terms of time, money and effort. However, obtaining the Certificate of Authority necessarily subjects an entity to the jurisdiction of the Foreign State. The Certificate of Authority typically requires the filing of a document similar to the Articles of Incorporation, which includes information about the entity, its structure and officials. It also invariably requires the designation of a Registered Agent who acts as the Liaison between the entity and the public including the Foreign State. The Certificate of Authority also requires the entity to attach its own incorporation documents and pay the applicable fee, which is similar to that of the incorporation fee in that particular state.
Since, in many cases, it is not clear cut as to whether an entity is “doing business” in the Foreign State which would require obtaining permission to “do business”, the third issue is to determine the sanction for non-compliance. Much like the determination of “doing business”, the sanctions for noncompliance vary from state to state and the particular sanction is most often found in the “doing business” statute of each particular state.
The sanctions generally range from a slap on the wrist to a more significant criminal sanction. The typical sanctions, which may also be imposed include:
1. Denial of access to the Court System
2. Monetary Penalties against the Entity
3. Monetary Penalties against individuals acting on behalf of the Entity
4. Penalties/Fines per day
5. Penalties/Fines per transaction
6. Penalties/Fines equal to amount of unpaid fees and taxes
7. Criminal Misdemeanor
8. Criminal Fines against the Entity and its Officers and Directors
The most common sanction for “doing business” without permission is the denial of access to the Foreign State’s court system. Without access, the unqualified Entity will not have the ability to enforce the Entity’s contracts and other rights or to defend against claims of others. This could have a serious effect on the entity’s financial wellbeing. Notwithstanding the foregoing, many of the states will allow access to the Courts if you subsequently obtain your Certificate of Authority.
The monetary fines may range from nominal amount up to $10,000 and often will include the payment of any unpaid fees and taxes. The monetary penalties and fines can be imposed against the entity as well as possibly against the Officers and Directors. In addition, criminal and civil liability for failure to obtain permission may fall not only on the entity but also on the individual acting on behalf of the entity within the Foreign State.
The penalties whether they be denial of access to the Courts, fines or civil or criminal liability, vary from state to state with some states basing penalties on a set amount, or a per diem amount, or based on the number of transactions occurring while not qualified to do business within the state.
In conclusion, once an entity begins trading beyond the boundaries of its Home State, it may be regulated by the Foreign State if its activities qualify as “doing business” within the Foreign State. If the Entity is “doing business” within the state it must either obtain a Certificate of Authority or face being penalized for “doing business” without permission.