Conducting Out of State Business as a Corporation or LLC
Starting a new business can be thrilling. When it comes to business structure, many entrepreneurs choose a limited liability company (LLC) or a corporation. There are many reasons to do this, including liability protection and tax benefits. But what happens when you want to conduct business in a different state?
A company that engages in business in a state other than the one where it was formed may have to qualify to do business in that state. An LLC or a corporation is "domestic" in the state of organization, or the state where it started. A company can engage in business in a domestic state without having to undergo qualification.
A "foreign" LLC or corporation may have to qualify to conduct business in another state. The term foreign describes an out-of-state business rather than a company that originates outside of the United States. This article will guide you through the process and considerations for operating your business entity out of state.
Transacting Business Out of State
If your business operates in multiple states, you must understand the rules for each state. Whether it's an LLC, corporation, or even a limited liability partnership (LLP), business owners must comply with local laws. This often includes registering as a foreign entity in that state. This usually involves filing a certificate of authority and possibly paying a filing fee. Using a registered agent service in the state is also a common requirement.
An out-of-state LLC or corporation conducting business in another state (intrastate business) must qualify to do business in that state. A company that has a physical presence in a state or repeatedly engages in business transactions in that state is conducting business within that state. Most states will consider the following transactions intrastate business when they occur within a state's borders:
- Sales of goods or services
- Providing services or labor
- Construction work
Most states will consider a company to have engaged in intrastate business when it has employees in another state, owns or rents real property, or uses a warehouse in another state to ship merchandise to customers in that state.
Most states exempt the following activities:
- Mail order and telephone sales when it is the only type of transaction the company engages in within that state
- A national advertising campaign targeted at customers in that state
- Sales conducted through an independent contractor in that state
- Appearances in court, mediation, or arbitration for the company in that state
- Holding bank accounts or collecting debts in that state
A company that conducts all its business across state lines, such as transporting goods from one state to another, is engaged in interstate business. Consequently, the company does not need to qualify to conduct business in a foreign state or pay state taxes.
Qualifying for Doing Business Out of State
To operate legally in a different state, your business must obtain foreign qualifications. This involves submitting documents like articles of organization or articles of incorporation to the secretary of state. You also need to pay any applicable fees. States like Delaware and Nevada are known for being business-friendly due to favorable laws and lower franchise taxes. Remember, each state's requirements can vary. It's important to research thoroughly to know what you are getting into.
Paying Income Taxes in Another State
Business taxes can get complicated when you're operating in more than one state. You may need to file tax returns in each state where your business has a presence. This includes federal tax to the Internal Revenue Service (IRS) and state taxes. Your home state may offer tax credits for taxes paid to other states. It's important to understand the tax implications in each state where your business operates.
A corporation must pay a state's corporate income tax, while LLC members can typically avoid double taxation by paying income tax on the profits earned in the state and receiving a tax credit from the resident state. A company must also pay sales tax on the sale of tangible property sold and shipped from a location in that state and must fulfill a state's employment tax requirements.
Consequences of Not Registering in Another State
A business that fails to undergo qualification with a state may be subject to:
- Late penalties: A state may charge a set fee amount plus a daily amount or a flat fee that will typically range from a few hundred dollars to a few thousand dollars.
- No legal recourse: Most states have closed-door statutes that will allow a court to delay or dismiss a legal action filed by an unqualified company. If a court delays an action, it may require the company to qualify and pay a late penalty before proceeding. If dismissed, a company may re-file after qualifying and paying the applicable late fee as long as the statute of limitations does not prohibit the lawsuit.
Failing to register your business in a state where you operate can lead to penalties and legal issues. It's vital to stay compliant to maintain your business's good standing and avoid these negative consequences.
Out-of-State Legal Actions
A company that qualifies to do business in another state is subject to the laws of that state. This is also sometimes the case when a court believes the company should have qualified but didn't. Even if a company does not qualify, a state may have jurisdiction if to the business' actions meet a state's long-arm statute requirements and the constitutional requirements for minimum contacts.
Courts will typically make this evaluation by determining whether the company has a physical presence in the state. They will also look at the amount in sales from residents or if the company regularly advertises in the state.
This means that the company can be sued in that state and may be forced to make a defense there. This could involve different laws and legal proceedings compared to your home state. It's important to be prepared for these possibilities and understand how they might affect your business.
An Attorney Can Help Answer Questions About Conducting Your Business Out of State
If you plan on conducting business outside of the state where your corporation or LLC was formed, you'll need to comply with the laws of other states laws as well. Failure to comply with these laws can expose you and your business to various liabilities, so it's important to contact an experienced business attorney to make sure you're complying with all laws and regulations that apply to your business.
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