Consequences of "Doing Business" Out of State

An often overlooked aspect of corporate law is the concept of “doing business” in a particular jurisdiction. This determination comes into play when the corporation’s activities go beyond the borders of its home state or “domicile.” The reason for registration requirements is that states want to know who is doing what within their borders.

Determining Whether Corporation is Doing Business in Foreign Jurisdiction. First, examine the corporation’s contacts with and activities within a foreign jurisdiction. There are generally two threshold questions at this stage:

  • what activities trigger a duty to register under state law; and
  • what activities is the corporation conducting in the state?

There are a number of activities that are likely to trigger a duty to register in a foreign jurisdiction. These activities generally include, but aren’t limited to, the following:

  • Opening an office in a foreign state
  • Hiring employees
  • Owning or renting property
  • Soliciting contributions (though soliciting contributions in another state may require a separate registration)

On the other hand, most states outline certain activities that do not require registration. Along with over half of all states, Arizona and Arkansas have adopted the Revised Model Business Corporation Act of 1984. Some states follow the Model Business Corporation Act instead, and still more states have their own definition of “doing business”. Some common activities that don’t rise to the level of “doing business” are:

  • Having a bank account in a foreign state.
  • Holding a director’s or shareholder’s meeting in a foreign state.
  • Maintaining, defending or settling a suit in a foreign state.
  • Creating evidences of debt, mortgages or liens in personal or real property.
  • Conducting an isolated transaction that is completed within 30 days and not one in the course of repeated similar transactions.

Registration Process. The registration process typically mirrors the annual reporting process for local entities. For example, states often require information such as the identity of the registered agent, the corporation’s contact information, and assorted financial information.

Consequences of Failing to Register. Virtually all states deny court access to unregistered foreign corporations doing business within their borders. Some states even make it difficult to enforce contracts entered into within the state if the foreign corporation fails to register with the state. Other states impose monetary penalties and a few even impose fines on the individuals acting on behalf of the unregistered corporation.

Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide. If you are seeking advice regarding multi-state compliance and registrations, contact info@cartitaslawgroup.com.

 

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