What types of business activity triggers the obligation to register as a foreign entity?
There is no easy test for determining whether your corporation or LLC is doing business in another state. Each state will consider a variety of facts and circumstances in order to make that determination. This is an area where careful prospective analysis by an attorney could be very valuable. Remember that states are going to generally define doing business broadly because they have an inherent incentive to capture as much revenue as possible and protect their constituents, such as consumers who may be purchasing from you to the greatest extent feasible under the law.
Here are some general factors to consider:
- Does your entity have a physical presence in another state? This could be an office, a warehouse facility, showroom or other. You do not need to own the property; a lease could satisfy this factor.
- Do you actively solicit customers in another state? This factor is complicated in light of the many modern realities of commerce, such as virtual, border-free, work from home, and non-brick and mortar interactions with customers and potential customers.
- Do you have any employees working in another state? Just as with the factor above, there may not be a straightforward answer to this question. There are some ways to help better position your entity as far as employees. Keep reading below for some tips.
- Do you send individuals to meet with clients (actual or potential) in another state? Are you providing services in that other state?
- What are your financial ties to the other state? Where does your business hold bank deposits? How much revenue does your business generate from customers or transactions in that state?
If, after weighing these factors, you conclude that your corporation or LLC is doing business in a foreign state, then you will need to follow the required steps to qualify and register your business in that state. Your attorney can help guide you through this process. A word of caution, if you are searching for information online, note whether the website you are reviewing is in fact owned by and maintained by that state. For example, this is the official website of the State of Delaware, Division of Corporations: https://corp.delaware.gov/ Other websites with similar looking names are not the governmental website.
If any of the above analysis leads you to determine that your corporation or LLC is doing business in the State of California, we strongly urge you to consult with California legal counsel. California has enacted many protective laws, such as Propositions 24 (https://oag.ca.gov/privacy/ccpa) and 65 (https://oehha.ca.gov/proposition-65 ) to name just two of many. The consequences of failing to comply with those California laws can be drastic, therefore, considered, prospective legal counsel is very important if your business is covered by those laws. For reference, here is a link to the State of California’s FAQ on registering as a foreign entity doing business in California:
https://www.sos.ca.gov/business-programs/business-entities/faqs#form-question8
Selecting a Registered Agent for the Service of Process in the foreign state.
If you are required to qualify and register as a foreign entity in a state, you will need to designate an agent to serve as your registered agent. While the selection of a registered agent may seem perfunctory, in fact, it should be a choice that you make after careful consideration and consultation with your attorney. If a claim, lawsuit, notice or demand is brought in a state other than your principal business location, it is likely that sending a copy to the registered agent will constitute effective notice to you. Note that state laws may vary on this and you may be able to protect yourself through contractual language requiring copies of notice to be served at your local, principal place of business. In many cases, however, the foreign registered agent will be the first and possibly only entity receiving a copy of the notice. For this reason, selecting a local attorney or a reliable, professional registered agent service is preferrable. The local attorney or professional registered agent service should have processes in place to comply with its obligation to promptly forward any and all items received. Your outside general counsel will likely establish a relationship and lines of communication to ensure that notices are promptly evaluated and processed.
A note on employees working virtually.
Please see our other blog posts for a wealth of information relating to employment law topics. With regard to doing business in another state where you have employees working virtually from that state, there are some policies that you could put in place to help strengthen your position. Remember that working virtually does not only mean working from “home”. You should review your employment agreements and your employee handbook to determine whether you have included language addressing virtual work generally as well as specifically with regard to where that work will be deemed to be occurring. An attorney can help you update your handbook and employment agreements to capture concepts such as an acknowledgement that the employee will be deemed to be performing the essential duties of their employment from the employer office at which the employee is based regardless of whether the employee is accessing employer resources from another location. There are myriad legal considerations under the general heading of working virtually and no single policy or handbook entry will protect the employer under all circumstances; however, an employer which sets forth a well-crafted policy in writing is likely to be in a stronger position than an employer who fails to address the issue in advance.
Illinois also requires foreign entities to qualify and register if they are doing business in our state.
You should also note, if you are reading this and your business is formed in another state, Illinois requires foreign entities doing business here to qualify and register to do business in our state. Here is the Illinois Secretary of State guide: https://www.ilsos.gov/publications/pdf_publications/c216.pdf. If you are a foreign entity seeking to do business in Illinois, we’d be happy to speak with you.
If you have questions about this blog or another business matter, contact Navigant Law Group, LLC at (847) 253-8800 or email us at hello@navigantlaw.com.
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