By Justin Banford and Alice Cade
A corporation or limited liability company, serving customers and fulfilling contracts in the Washington metropolitan area may find it advantageous to register as a “foreign” entity in a neighboring jurisdiction. Qualification to do business is legally necessary when a corporation’s activities are o longer confined to sporadic or occasional transactions in a state outside its home state.
there is no hard and fast rule as to what activities constitute “doing business” in a state, but generally it is when a company is transacting a substantial part of its ordinary business within that state, even if it does not maintain a physical presence there. When subjected to scrutiny by state courts, the general activities of a business, the amount of revenue generated and the duration of the activity factor into the court’s interpretation of “doing business.” Most states follow the Revised Model Corporation Act Chapter 15.2 and distinguished between business activities as being either interstate or intrastate. Interstate activities require foreign registration. Title 7 of the Corporation and Associations Article of the Annotated Code of Maryland considers ownership of income-producing real or tangible property in the state as “doing business.” District of Columbia Code Chapter 29 defines a “business” as “Any trade, profession, or activity which provided, of holds itself out to provide goods or services to the general public or to any portion of the general public, for hire or compensation…” Virginia interestingly, under Code § 13.1-757 (B), provides a non-exhaustive list of activities which do not constitute “doing business” in Virginia; but, Virginia does not define “doing business”
Think of doing business in a foreign state as a continuum with, on one end, having a physical office location open to the public, and, on the other end, traveling to customers in a foreign state on rare, isolated events. Generally, foreign entities do not have to register if engaging in a single or isolated transaction; but, maintaining an office in a foreign state clearly constitutes doing business. When a company’s activities fall between these two poles of the spectrum, several factors should be considered:
- Does the company have employees working in a foreign state?
- What amount of total revenue is derived from the foreign state?
- Does the company advertise or hold itself out to the public in the foreign state?
- Is the company’s work in the foreign state primary or incidental to the company’s operations in its state of incorporation?
Bear in mind that this list of factors is just sampling. No single attribute–other than maintaining a physical presence–is dispositive of the question whether a company is doing business in a state.
If the company is found to have been required to register as a foreign company failure to register ay restrict that company from bringing suit in court in the foreign jurisdiction. In addition Maryland and the District of Columbia impose fines on the company. Maryland may initiate misdemeanor criminal charges against corporate officers or managers, with fines up to $1,000. Most states require foreign entities that commenced doing business prior to filing for qualification to file back reports and pay back fees.
While stated differ in their statutory requirements for qualification, consistent requirements are to submit an application for the required certification, provide proof of good standing in the formation state, nominate an in-state registered agent, apply for use of a fictitious name of the entity name is unavailable and pay the required filing fee. Qualification in a state subjects a foreign entity to service of process, and annual or biennial reporting requirement and, of course, related fees and taxes. Most foreign qualification filings can be accomplished in an expedient manner, and many can be handled electronically. Most filing fees range from $50-$200 with extra charges for expedited service.
All states require a principal office address in the formation state and some request an optional office address in the foreign state where the entity intends to do business. the Maryland and District of Columbia applications require a start-up date. The Maryland applications for corporations and limited liability companies require that the applicant indicate whether any previous business has been transacted in Maryland. If business has been conducted prior to obtaining a certificate to do business, the applicant is directed to include a $200 penalty payment with the application.
Once certificate to transact business in a foreign jurisdiction is granted, the applicant company is expected to meet all statutory requirements regarding notification to the office of the secretary of the state regarding changes in status, name, registered agent and principal office address. Virginia and Maryland require that annual report reports be filed and annual assessments be paid. The District of Columbia requires biennial filing with one important difference – newly admitted companies must submit their first biennial payment in the April following the granting of the certificate and then file and pay every two years thereafter. Therefore, companies registered in multiple states will be subject to multiple reporting requirements and bear the burden of processing fees and taxes in every state.
Please contact us if you have any questions regarding registration of you company in a foreign state.