First, let’s clarify what we mean by “foreign” – it doesn’t involve a flight across the pond or digging out your passport. Your entity is considered a foreign entity by a state other than the one in which it’s incorporated. As expected, your entity is considered a “domestic” entity by the state in which it’s incorporated.
Back to the question. The simple answer is that you must register in every state in which your entity transacts business. It gets tricky when we look at the definition of “transacting business.”
Each state has its own definition, but there are certain actions that constitute transacting business in almost every state (at least every state we’ve researched). These are, in no particular order:
- Opening an office. Regardless whether you have a physical office, virtual office, or PO box, establishing a business address in another state almost always triggers the need to register there.
- Having an employee. If you hire an employee in a state other than that in which you’re incorporated, chances are you’ll have to foreign register in that state. Now, don’t get cute and try to classify this person as an independent contractor just to avoid the registration requirement. As previously discussed, proper classification of employees and independent contractors involves careful analysis and the misclassification of your employees can lead to fines and even criminal charges*.
- Sale of goods or services. Some states have an exemption from registration for “occasional” transactions, and others have established a threshold dollar amount in sales you can earn without having to register. This particular factor is very state-specific, so you’ll want to do your homework or enlist the help of an attorney. Remember, if your level of activity triggers the need to register, chances are you’ll also have to pay attention to sales and use tax requirements in that state.
California appears to have some of the most sensitive triggers for foreign registration. Even if your (non-California) entity is part-owner of another (non-California) entity which does business in California, your entity would be subject to California taxes and the $800/year Franchise Tax.
To make things more difficult, many state laws err on the side of imposing a blanket requirement to foreign register if you’re transacting business in that state, and then set forth a list of activities not considered transacting business. Often, these include:
- Defending a lawsuit
- Holding a company meeting
- Maintaining bank accounts
- Selling through independent contractors
- Owning, “without more,” real property. (This one is tricky, as it’s unclear as written whether leasing real property – residential or commercial – would constitute transacting business. Again, this is a state-by-state analysis, so enlist the help of an attorney.)
This is also not an exhaustive list, as the exemptions vary from state to state.
What happens if you do business in a state without registering? Many states will fine companies for operating within their borders without having first registered to do business there. California, for example, can impose a penalty of $2,000 per year for failure to file. Incidentally, if you are expanding into California, you’ll first want to consult with a California-licensed lawyer and CPA. The rules there are pretty onerous, and the fines pretty steep, so it’s best to do your homework in advance.
As an added layer of complexity, once you determine that you do, in fact, need to foreign-register your entity in another state, you’ll then have to examine whether you’re also required to secure local business licenses. Here in Nevada, if you are a foreign (out-of-state) entity and open an office, you’ll likely have to obtain a business license from the jurisdiction in which the office is located. This is a municipality- and license category-specific analysis, so contact the local business license bureau for help.
Congratulations on expanding your business! Just make sure you’re doing it correctly.