Business Formation Legal Tips for Entrepreneurs
July 7th, 2015
Operating Your Business in Multiple States
Do I have to register my business in multiple states? What does this entail?
It can be difficult for small businesses and entrepreneurs to sort out all of the legal and tax requirements of operating a business. One frequent question involves what requirements apply in order to conduct business in different states.
Your business was first created in the state in which you started your business or created your entity – typically formation documents are issued to you by your Secretary of State or Corporations Office, along with a uniform business identifier or some other identification number creating and registering your business with the state. You may also have registered one or multiple d/b/a’s (“dong business as” names) as part of the process – d/b/a’s are essentially fictitious (non-legal) names under which you are also doing business.
Additionally, you may have also been required to register your business and obtain a business license with your state, county or city as applicable. (Different states have different rules. Here in Washington, for example, one obtains a master business license through the state after formation of the business entity, and then must also apply for additional city licenses).
If you plan to do business in another state, you are generally required by law to register your business there – this is called obtaining a foreign qualification. Thus, if “doing business” in another state, you may be subject to additional requirements outside of your home state.
What is foreign qualification?
Foreign qualification is simply the process of registering your business so that you can conduct business in another state. The term “foreign” applies only because it is a state other than your original state of formation.
Generally to foreign qualify, you must register a Certificate of Authority in the state or states where your business will be conducting business and pay the requisite fees. You will then be subject to ongoing reporting requirements, fees, taxes and documentation both in your state of formation and your state or states of qualification. So this is a decision that should be made carefully and strategically.
What is Considered “Doing Business”?
You may be doing business in another state if you:
- have or maintain a physical presence there;
- have employees in the state;
- accept orders or create revenue in the state;
- meet with clients in the state;
- have obtained a business license there; or
- maintain a bank account, a post office box, or real estate there.
Simply selling to customers in that state is not usually sufficient to require foreign qualification, though it may be sufficient to gain some level of jurisdiction over you.
What else is required to foreign qualify?
You may be required to obtain a certificate of good standing in the original state of formation for your company (requiring that you be current on all filing fees, filing requirements, and tax obligations).
Additionally, you will have to conduct a search for your business name in each state in which you plan to foreign qualify. This allows you to ensure that the name is not already in use by another business entity and that your chosen name is not deceptively similar either, so as to cause confusion for your customers or clients.
If your desired name is already taken, you may have to create an alternate or assumed name for your business in that state.
Like you are required to do in your state of formation, you will also have to elect a registered agent who will act as your representative in the foreign state for service of process for all legal documents and other important information including notices from the state.
Finally, you will file for a certificate of authority in that state. This requires paying fees and preparing documents that are likely similar to those you created during your company’s initial formation, though the information required can vary from state to state.
In summary, depending on your business and your unique growth strategy, it may be important to structure your business to avoid having to obtain multiple foreign qualifications simply because of the added cost and management issues briefly summarized above. However, if you are conducting business in a foreign state, the consequences of avoiding foreign qualification can be much more significant, and could include the loss of certain legal rights, like the right to sue or enforce your business rights in the state, or may take the form of penalties, fees, and back-taxes in the event a regulatory agency gets involved.
For more information on Business Formation, see these articles….
DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.