What Counts as “Doing Business” in a Foreign State?
If a business is operating in states other than its home state, a question will arise regarding when a business needs to register in other states in order to be qualified to do business in those foreign states. While the requirements for what constitutes “doing business” differs from state to state, this article will give some specific examples in various industries that might require a business to obtain foreign qualification if the business is engaging in these activities outside of its home state.
Construction. Many states have mandatory qualification by foreign entities conducting construction or remodeling activities in their state. Since most states require licensing for all contractors, this requirement generally applies to foreign corporations as well. However, absent a specific licensing requirement, courts will often consider the following factors when determining if qualification is necessary, including: length of time to complete the construction; the foreign corporation’s use of local workers; and the specialized nature of the services. Typically, if the construction will take a long time to complete or if local workers are utilized, then it is more likely that a foreign corporation will need to qualify to do business in that particular state. On the other hand, if the foreign corporation offers a specialized service that is not available locally, then it may be less likely that the foreign corporation needs to qualify in the foreign state.
Manufacturing. A foreign manufacturing corporation may have to qualify if their contracts are entered into out of state, or their principal facility is in another state.
Leasing. A foreign corporation leasing real property to or from others generally is not required to qualify, particularly if the transaction is isolated or is incidental to their business. However, qualification may be required if the foreign corporation’s primary business is real estate.
Entertainment. Corporations are typically required to qualify when their productions in foreign states represent a substantial portion of their business. However, some of these activities may be excluded if the filming is on a one-time basis and lasts for less than 30 days.
Transportation. Foreign corporations can generally transport people or goods, maintain offices and solicit orders, without qualifying, as long as their business is interstate in nature.
Sales. Most states have laws which provide that soliciting orders that require acceptance out of state before becoming binding contracts does not require foreign qualification. Factors that a court may consider in determining whether or not a foreign corporation would need to be qualified to do business based on its internet sales would include the following: number of sales; percentage of sales; location of contract approval; and other similar characteristics. If a court determines that a foreign corporation is engaged in a substantial part of its ordinary business in the state, the corporation would likely need to qualify as a foreign corporation. A single contract is generally not considered to trigger a requirement for a business to register as a foreign corporation. However, repeated transactions, even if limited in number, that occur over a long duration are more likely to require a company to qualify to do business in a foreign state.
As these examples demonstrate, the rules for determining when an entity is considered “doing business” in a foreign state and is required to qualify, can be complicated and very fact specific. However, failure to register when registration is required can result in a negative impact on the business.