January is a time when most of us take the opportunity to reflect on the status of our lives. Many of us are setting goals and searching for ways to improve ourselves and our situations going forward into the New Year. For many business owners, this process focuses on ways to grow their businesses. Often times, this can include expanding operations beyond the borders of our home state.
If you are thinking about operating in multiple states (or already conduct activities across state lines), you may be asking yourself: “Do I need to register my business entity (LLC, corporation, etc.) in another state?” Registering, or “qualifying to do business” outside of your company’s home state is the process of filing the proper documents in another state to be granted the privilege of doing business there. Typically, this involves submitting paperwork to the other state’s Secretary of State’s office, paying an initial filing fee (and then usually an annual renewal fee), and designating a registered agent for the service of process with a physical location (not just a PO Box) in that state.
The answer to whether or not you need to register your business in another state is very fact-specific, and is a bit more complicated than it may seem. To make matters worse, even when the facts are exactly the same, the answer can vary from state to state. Here are some examples of activities that will typically require you to register your business in another state:
- Having employees in another state. This makes sense because there are all kinds of state laws that apply to employing other people in your business (i.e. worker’s compensation, unemployment insurance, minimum wage and overtime requirements, and income tax withholding).
- Maintaining an Office in another state. Holding regular hours and renting an office for regular visits will certainly require you to register and you’ll want the protection as well.
- Owning or renting real estate in another state. These activities give you a “physical presence” in the other state, and also increase your chances of being subject to a lawsuit there. This is especially important in the context of owning rental properties, which is why we always suggest that a business entity that owns rental real estate either be established in the state where the rental is located or at least be registered to do business in that state.
The following are examples of activities conducted in another state that typically don’t require you to register your business there:
- Online, mail order and telephone sales. This is especially true when these are the only activities a business conducts within that particular state.
- Sales conducted through independent contractors. However, this one is tricky. If you control the activities of your independent contractors to the point that they should actually be considered employees, then your activities would generally require you to register in the other state. Whether a worker should be classified an independent contractor or an employee is a complex subject for another article and another day.
- Holding a meeting of the owners or management. Go ahead and hold your company’s annual meetings in Hawaii or Florida, or maybe near Disneyland in California. You don’t need to worry about registering your business there if you do.
- Maintaining a bank account.
- Collecting debts.
- Appearing in court, or at a mediation or arbitration.
The obvious question then becomes: “What are the consequences if I should have registered my business in another state and I fail to do so?” The answer varies from state to state, but the good news is that in most (but not all) states, the business owners will not have personal liability if the company is sued in the state where you failed to register. That being said, there can be some fairly harsh outcomes if you don’t register foreign when it is required:
- Your company may not be recognized in courts as being able to sue or bring legal action. This can be a big deal when your business is the victim of a breached contract, negligence, or even fraud. Without properly registering your business, you may lose the right to sue.
- Penalties and late fees for failure to register. Often times these fees and penalties are calculated on a “per day” basis, as in your company will have to pay, perhaps, $20 for every day it was transacting business in a given state while failing to register there. These fees can add up into the hundreds (or even thousands) of dollars relatively quickly.
- The state where you should have filed becomes your company’s registered agent. This means that the state is authorized to receive legal notices on behalf of your company. The problem with this is that it means your business can be sued in a particular state without the Plaintiff being required to serve notice directly on your company. The lawsuit can begin if the Plaintiff delivers notice to the state instead. The state is supposed to try and contact you if your company is served in this way, but the steps each state takes to give this notice (not to mention the time periods involved in receiving any such notice) are inconsistent at best. With only 20-30 days to respond to a Complaint, allowing the state to be your registered agent can put your business in imminent danger of being subject to a default judgment in any litigation in that state.
Beyond these statutory issues, you may run into problems trying to deed properties into the name of an unregistered business entity, as well as insurance and banking issues until you register your business in the state where the income generating property, employee, or storefront is located. Because these issues can be complex and state-specific, it often makes sense to retain legal counsel to look into the law based on your specific facts and the state(s) you are dealing with. Please contact our office if you would like help determining if registering your business in another state makes sense for you.
Jarom Bergeson is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Cedar City, Utah office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at [email protected] or by phone at (888) 801-0010.