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Doing business in another state

Asked by: George - 19 December, 2010 When do you need to form a foreign entity?
Answered by: Alec Green - 24 December, 2010

When a business entity wants to operate in another state, it generally must obtain a certificate of authority to do business from that state's Secretary of State.

Its important to determine if registering to do business within a state is necessary. It's not a decision to make lightly because it will likely trigger inquiries by the states tax agency as to whether the corporation should be subject to tax there. On the other hand, doing business in a state without registering can result in penalties or corrective action by the state authorities. Many states bar unregistered business entities from maintaining a lawsuit in their courts until the business entity registers to do business and pays all outstanding taxes. In New York, for example, the attorney general has the authority to restrain an unregistered business entity from transacting business within its borders.

What constitutes doing business in a state? Unfortunately, the answer varies from state to state and is sometimes unclear. Most states maintain a list of safe harbor activities that do NOT constitute doing business. A type of activity that is often included on these lists is maintaining a bank account within a state's borders. Many state statutes don't specifically define what they consider to be doing business in their jurisdiction. It usually depends on the facts of each case.

Opening a store in a state would constitute doing business in any state. But its harder to find definitive answers to questions such as whether hiring an employee who telecommutes from a state would be considered to be transacting business there.


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