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Five Signs You Might Be Crossing the (State) Line

Every LCC and corporation has a home state—the state where is was formed. As long as you do business in only your home state, your compliance responsibilities are simple. But, contacts and transactions in another state can trigger the need for foreign qualification in that state.

The rule is simple and uniform: if you are doing business in a state, you must follow the business registration rules. What is not simple is the definition of doing business for several reasons: 

  • States vary on the amount and types of activity that triggers business registration.
  • Doing business is defined differently for tax law purposes and entity compliance purposes, so figuring out one set of rules isn't enough. (Be warned: the connection with a state for tax liability is much less than that which triggers business registration.)
  • State laws list only those activities that don't constitute doing business—leaving courts to decide what does constitute doing business case-by-case basis, based on all the facts and circumstances.

So, in this murky realm of case law, are there any warning signs that you may have a significant connection to a state and a need to register?

Yes, there are some indications that you've crossed the compliance border in another state. Consider these five tip-offs:

  • Physical location. You have a physical location, such as a warehouse, office, store or restaurant, in the state. (But, simply owning real property, or holding mortgages on real property, generally doesn't trigger qualification.)
  • Employees. You have employees in the state. (Many states allow for independent contractors in the state without needing to file foreign qualification paperwork.)
  • Regular binding contracts. You regularly enter into binding contracts in the state. (Provisional contracts that must be approved by an office located in the home state before becoming biding are often listed as actions that aren't considered "doing business.")
  • Regular client or customer meetings. You regularly meet with clients or customers to transaction business with them. (Phone meetings and email alone are unlikely to rise to the level of doing business.)
  • Significant revenue stream. You have a steady and significant revenue stream from activities in the state. (Isolated transactions generally are not considered doing business.)

Do you answer "yes" to any of these questions? If so, then should consult with an advisor regarding the need for foreign qualification. And, if you do need to register in a new state, CT Corporation can assist you with each step of the process.

What happens if you don't register with a state where you are doing business? We'll explore this in a future post.

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