What’s Required to Operate My Business in Another State?

Operating your business out of state can be an enormous step forward in growth potential. There are some tricks and traps, however, to shifting over to another state.

Step One: Determine What Constitutes “Doing Business” in Another Jurisdiction

Generally, conducting business involves:

• Having a physical presence like an office, store or warehouse whether owning or leasing;

• Having employees who work in the new jurisdiction; and or

• Selling or providing services within the state.

 To a greater or lesser extent, these can vary according to state law so it would be important to check if your presence is triggering a requirement to register.

Check the fine print!

Example: Ted provides trenching for utility companies. He has been working with a regional electric utility, and they want him to work on an expansion project in a neighboring state. He loads up his ditch witch and drives over state lines to get to work. Problems? Oh, yes.

Step Two: Registering Your Business as a Foreign Entity

When a business is first formed, it becomes a "domestic" entity. When that same business seeks to do business in another state, it becomes a “foreign” entity. To operate legally, an out of state business must register with the new jurisdiction's secretary of state or corporations type agency. This registration process is called foreign qualification.

Registration:

·         Obtain a Certificate of Good Standing - Before you can register in a new state, you must prove that your LLC is compliant and in good legal standing in its domestic state. This is done by obtaining a Certificate of Good Standing (sometimes called a Certificate of Existence or Certificate of Status) from your home state's secretary of state.

·         Appoint a Registered Agent - A registered agent is the local person or entity that can be served with legal documents and official state correspondence on behalf of a business. The agent must have a physical street address in the state and PO Box addresses are not allowed.

·         File a Statement of Foreign Registration – This form is typically available online through the applicable secretary of state or corporations division website. The application will require key information about your business, including:

·         The official name of the business;

·         The name your business will use in the new state (if the original is unavailable);

·         The time and place of your business’ original formation;

·         The name and address of the registered agent; and

·         The address of the principal office.

Typically, this form must be submitted along with the Certificate of Good Standing from your domestic state and the required filing fee.

Failure to comply could put you under water!

Step Three: Compliance, Business Licensing, Permits and Tax Accounts

Foreign registration is not complete until the business has complied with applicable laws, has the proper authority and permits and has registered with taxing authorities.

• Annual Reports: Most states require foreign entities to file regular reports to update their information on record, such as the registered agent and principal office address.

• Business Licensing: Many states and local governments require a business license before an entity can begin operating.

• Permits: Certain types of business require a permit for things like professional licenses, zoning, sign permits, health or food service permits, occupancy permits, etc.

• Taxes: Some states impose a franchise tax on businesses for the privilege of operating there. Most require registration with sales taxing authorities and others.

Example: Ted registers his construction company in the state where he will be working. He forgets to get a business license or a permit to operate heavy machinery as required by state law. Two weeks into the project, he cuts through a gas main. Will Ted have some problems? Yep.

Step Four: Avoid the Consequences of Non-Compliance

Failing to foreign-qualify your LLC before conducting business in a new state can result in significant penalties. These consequences vary by jurisdiction but often include:

• Financial Penalties: States may impose daily, monthly, or annual fines for the period of non-compliance. In some cases, these can amount to thousands of dollars.

• Inability to Sue: An unregistered foreign business may be barred from bringing a lawsuit in that state's courts. This can leave your company unable to enforce contracts or protect its legal rights.

• Personal Liability: In some instances, the corporate veil that protects business owners from personal liability could be compromised, exposing them to personal responsibility for the company's debts and legal obligations in that state.

• Back Taxes: The state may require the business (or its owners) to pay all back taxes and fees that would have been due had it been properly qualified with added interest and penalties.

In Conclusion, expansion into a new market area is a healthy business goal. Be careful to accomplish this by taking the necessary steps to register properly and operate in compliance with your new jurisdiction’s regulations.

Curry Andrews, Attorney