What Exactly Does “Doing Business” in Another State Mean?
At Northwest, our Corporate Guides® receive tough questions every day. Here we have a client that wonders exactly what constitutes “doing business,” and whether they have to to hire a registered agent for every state where they’re sort of doing business. They ask:
“Are we required to have registered agents in every state in which we have a USA employee or USA contractor working in? If so, is there a threshold in terms of the amount of hours they work in order for us to need to establish a registered agent there?”
The short answer is that you need a registered agent in any state in which you are officially “doing business. However, whether or not having employees and contractors in a state “counts” as doing business is a little murkier, so we break it all down below.
What is the Definition of Doing Business?
The first question we need to ask is, what is the definition of “doing business?” The reason that this is a difficult question to answer is that there are no uniform standards with regards to how individual states approach what constitutes doing business. As a general rule, companies that have a physical presence in the state (employees, property, bank accounts, etc…) or participate in interstate commerce will most likely need to qualify.
For example, California’s Franchise Board defines it as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” If you want that in English, “doing business” is essentially a legal term that means your company has established a sufficient financial foothold in a state’s business market, either through owning or leasing property, having employees in state, or having a regular physical presence in that state in the form of a storefront, office, or warehouse.
In Tiller Const. Corp. v. Nadler, Maryland’s Court of Appeals laid out four factors that it said constitute “doing business” in a state:
- Does the foreign entity pay state taxes?
This includes contracts with local suppliers where sales taxes are paid, or where other inventory is bought, and local taxes levied.
- Does the foreign entity maintain a physical presence in state?
This includes property, an office, telephone listings, employees, agents, inventory, research facilities, and bank accounts.
- Does the foreign entity have contracts in the state?
A few occasional contracts do not sufficiently indicate that a corporation is regularly “doing business” in that state.
- Are its management functions in the state widespread?
If a few of a corporation’s decisions are made in Maryland, the in-state interactions may be more transactional than they are proof of “doing business.”
All states offer some form of “safe harbor” with regards to business transactions that don’t merit foreign qualification, kind of like a gray area for what constitutes doing business. For example, New York, Kansas, Florida, and Nebraska all allow for an out-of-state businesses to settle lawsuits or have an in-state bank account.
Just because you’re providing services or products to customers in a state other than the one your business is registered in doesn’t necessarily mean you’ll need to file for foreign qualification. Consider a trucking company based in one state, that transports goods across state lines, from one state to another. The trucking company is engaged in interstate business, and therefore it does not need to foreign qualify in each state it passes through or makes deliveries to (although trucking companies may still need registered agent service, such as our BOC-3 blanket registered agent service). The same laws would also apply to a consulting firm that does work for clients in multiple states. Just because the consulting firm is making money from clients in other states doesn’t mean that it is transacting business there. Both the trucking company and the consulting firm make money from customers in other states, but until they set up satellite locations in other states, they are typically exempt from having to foreign qualify.
What this all means is that to avoid potential fines and unexpected taxes, it is a good idea for business owners to investigate a state’s policies with regards to exempt business activities that do not require foreign qualification. At the end of the day, if you are conducting business across state lines for months on end, paying taxes, and setting up financial connections, you’ll probably need to file paperwork and have your entity qualified.
When Foreign Qualification is Required
States generally require foreign qualification when an out-of-state company conducts business in the foreign state’s boundaries. The legal definition of conducting business varies by state and often covers a broad spectrum of activities. Common reasons why businesses foreign qualify include:
- Hiring an employee who is a resident of a state other than the state of incorporation.
- Purchasing property.
- Opening a new office, store, or other facility.
- Offering services, selling products, or bidding for a contract.
- Applying for a professional license, since licensing agencies generally require foreign qualification.
When Foreign Qualification is Not Required
Each state has specific and varying requirements for foreign qualification. These are just a few scenarios that generally do not require foreign qualification:
- Isolated transactions and activities, which are usually less than 30 days.
- Secondary corporate activities, which include conducting internal affairs, maintaining corporate books or records, or evaluating business prospects in a state.
- Opening or maintaining a bank account.
- Engagement in a partnership or joint venture.
Threshold for Registered Agent Requirements
If foreign qualification is required, a registered agent is required. Foreign qualification is necessary if you’re doing business in the state.
So what have we learned? We’ve learned that if you have an employee in another state explicitly for the purpose of conducting business in that state for a period of longer than 30 days, you’ll need to qualify as a foreign entity in that state. This means you would need to also have a registered agent in the new state.
Things get murky when business owners have to decide what constitutes “doing business,” so it is important that business owners understand the risks of playing fast and loose with foreign qualification. If you think that your company is by definition, “doing business” in another state, it behooves you to check with the state, and speak with someone who can better define the state’s policies.
When you’re ready to expand your business’s footprint and move into other states, Northwest can help your business through the process of foreign qualification. Our Corporate Guides® will be with you every step of the way, making sure that all the i’s are dotted and all the t’s crossed.