By: Maks Ewendt
It can be, admittedly, confusing that your business (LLC or corporation) is referred to (in other states) as a foreign entity.
One of the first questions a company’s founders have to answer is which state’s law will be used to form the entity. There are several fun factors to consider when making this determination since different states can offer a variety of perks depending on the business, but it’s typical that the company will form either in Delaware or in its home state. At that point, the entity is only considered “domestic” within the state of its formation.
That designation as a “domestic” entity permits the company to do business in that state, however, it doesn’t necessarily give the company carte blanche to conduct business in the other 49 states. How do you know if you need to register as foreign entity in another state because the company is doing business there? Well, the worst lawyer answer of all time – it depends.
Every state has their own way of defining what “doing business” means through legislation and/or case law. North Carolina, for example, casts a wide net that any entity “transacting business” needs to register as a foreign entity, although it then provides a list of exceptions that do not qualify as doing business – such as participating in litigation or opening a bank account. The State of Alaska casts a similarly wide net, but includes additional exceptions such as “conducting an isolated transaction completed within a period of 30 days not in the course of a number of repeated transactions of like nature.” California’s time exemption allows for 180 days to complete a single transaction. New York ended up establishing a more subjective, even if less helpful, time requirement via case law that a company “must be engaged in a regular and continuous course of conduct in New York,” to be required to file as a foreign entity.
There are a few shoe-ins across all states that your entity is doing business within its borders. If your company has an office, store, warehouse, or an employee in another state, your company is likely doing business in that state and should register as a foreign entity there.
Unfortunately, most states refuse to provide assistance in determining whether or not an entity qualifies for an exemption or is required to file as a foreign entity, often times deferring to “speak to an attorney.” Reading between the lines, that probably means it’s too complicated or convoluted for even the state to know.
The good news is that there’s not a huge downside to erring on the side of caution and registering as a foreign entity if you think there’s a chance you’re doing business there and are having a hard time confirming. Filing as a foreign entity in a state will require submitting a few forms and a couple hundred bucks, usually accompanied by an additional annual tax (please contact a tax professional for tax advice). In exchange, you’re provided legal protections in the states you’ve registered in, and won’t have to worry about the state filing an injunction preventing the company from conducting any further business, or an untimely tax or penalty fee if you’re found out.
Keep your head on a swivel if you may be “doing business” in a state other than the one you’re registered in as domestic, and let us know if we can provide any assistance when it comes to foreign qualifications.
Picture on the top is by Pixabay and is in the public domain.
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