Doing Business in Multiple States
Things to consider
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What happens when a business wants to do business in more than one state?
A business must choose its state of formation or organization. The home state may be the location where the business is headquartered or it may be any other state where the business organizes and establishes a registered agent. If a business chooses Delaware as its state of formation, for example, it may still carry on business in another state. If the business wishes to carry on business outside of its home state, it must qualify to do business and register as a foreign entity doing business in the other state.
I am required to do business in the state where I am registered?
No. A business may carry on the majority or all of its business in a state or states where it is registered as a foreign entity.
Example: Vince forms a business in New York. He follows all of the applicable procedures required by the New York Secretary of State's Office. The business grows quickly and he looks to expand into Massachusetts. In order to carry on business in Massachusetts, Vince has to register his business in that state. He goes to the Massachusetts Secretary of State's website and fills out the paperwork to register as a foreign entity doing business in the state. He can then proceed to get a business license in Massachusetts. Now Vince's business may carry on activities in both New York and Massachusetts.
What are my considerations when registering a business in multiple states?
There are several important points to consider when deciding whether to incorporate in one state and file as a foreign entity in another state.
First, you will have to pay annual fees in every state in which you are organized or registered.
Second, carrying on business in multiple states adds complexity in calculating the business tax liability.
Third, and perhaps most importantly, the business entity may be sued (i.e., is subject to the court's jurisdiction) in any state in which it is organized or registered.
What constitutes doing business within a state?
Each state has its own interpretation of what constitutes doing business within the state. Common types of activity that qualify are: Selling goods, Providing services, Negotiating or consummating transactions, and Building or constructing things. The physical presence of the business within the state (such as having an office or owning property) influences the determination of whether an activity constitutes doing business. Most states determine that the following conduct does not constitute carrying on business: Making shipments in or though a state; Accepting mail, telephone, or internet order in state; Selling through retailers in a state; or Holding property ancillary to transactions, such as bank accounts or hiring professional legal services in a state.
What happens if the laws of a state in which you wish to do business are different from the laws of the home state?
This is a common occurrence with specialty entity types. For example, some states recognize business entities that do not exist in other states, such as professional corporations, statutory close corporations, limited liability limited partnerships, etc. In general, if the foreign state does not have a commensurate business entity, the foreign business may still conduct business in that state under its home-state organizational structure. The home states substantive laws governing the organization and maintenance of the business entity will continue to apply to the operations of the business in the foreign state. The foreign states procedural laws regarding the registration of foreign entities within the state will also apply. Note: If the business is a defendant in a lawsuit in the foreign state, the laws of the foreign state apply to the cause of action. There is an exception, however, when the dispute involves a contract governed by the laws of another state. Commonly, businesses organize in Delaware and construct all of their contracts pursuant to the laws of that state. If sued on the contract in a foreign state, the laws of the state of Delaware are applied to the business litigation. This can also be accomplished through a choice of law clause in a contract.
How similar are each state's business laws?
While each state adopts its own business entity laws, most state business codes and the common law developed in that state are relatively similar.
This is due in large part to model laws passed by the National Conference of Commissioners on Uniform State Laws or the American Bar Association.
These model laws are not binding on any state, but serve as recommendations, guides, and best practices in the formation of business entity law.
Examples of these model acts includes the: Model Business Corporations Act, Uniform Partnership Act, Uniform Limited Partnership Act, Uniform Limited Liability Company Act, Model Entity Transactions Act, Uniform Franchise and Business Opportunities Act, Uniform Limited Cooperative Association Act, Model Nonprofit Corporation Act, Model Real Estate Cooperative Act, Uniform Trusts Act, Uniform Statutory Trust Entity Act, Model Multi-state Trust Institutions Act, Uniform Commercial Code. Entrepreneurs or business managers should review a state's law to determine whether it has adopted the model acts.
How are multi-state businesses taxed?
In general, a business is subject to state income taxation in the state in which it earns the income. For example, a business is taxed on the income received from consummating a sale or carrying out a service in a state.
The business must also pay sales tax on any sales consummated in the state if the business has a significant presence in that state.
This is a hot topic for internet retailers, such as Amazon. Each state has its own rules with regard to what constitutes a significant presence.
Note: Amazon has been very successful in negotiating with state governments to exempt Amazon sales from state sales tax, even if the business has a substantial presence in the state (such as a distribution facility).
How are multi-state businesses exposed to increased potential liability?
A business that carries on activity in multiple states may be subject to the jurisdiction of courts in each state.
The standard for whether a business is subject to jurisdiction in a state is whether the state has sufficient minimum contacts to not offend notions of fair play and substantial justice?
Minimum contacts is a floating standard and subject to determination by the individual court. If the business is subject to jurisdiction in multiple states, it increases the pool of potential plaintiffs.
Further, it increases the burden on the business to defend itself in a variety of states. Example: Flow manufactures and sells shoes in Georgia.
She is a Georgia LLC and is registered to do business in the state.
She decides to expand her sales to all 50 states through the internet.
A customer in California buys a pair of her shoes over the internet.
She ships the shoes to California. The customer claims to suffer a foot injury after wearing the shoes. The customer attempts to sue flow in California.
The court will determine whether Flow has sufficient contact with the state to allow the customer to sue her in California.
If the court determines that Flow has sufficient minimum contacts with California, she will have to defend the lawsuit in California.
Unless the contract of sale states otherwise, the court will apply California law.
If the court determines that she does not have minimum contacts with California, the customer will have to sue her in Georgia.
In this way, Flow could be subject to increased potential liability by having to defend a lawsuit in the states where she does business.
Note: Some states impose penalties on businesses that fail to file and register in a state before doing business.
One such penalty is delaying or not allowing that business to enforce its rights in that state's court until it has registered and paid a substantial fine.