Domestic v. Foreign

A company, whether doing business as a corporation, LLC, partnership, or other statutory business entity, is a “domestic” company in the state in which it was founded, and is considered a “foreign” company in all other states. “Domestic” and “Foreign” are common terms throughout the United States. For example, an LLC formed in Arizona is domestic LLC in Arizona and a foreign LLC in Colorado. States have the power to prohibit foreign companies from doing business within their borders unless the business complies with the state’s conditions. Every state has used of this power by enacting foreign qualification provisions in their state business entity laws.

Every state’s foreign entity act requires a business to register with that state’s regulatory authority (typically the Secretary of State) if the company is “transacting business” (also called “doing business”) within that state’s borders. What does this mean? Well, in all states, the statute does not specifically define the phrase “transacting business” in relation to foreign registrations. “Transacting business” is a legal determination that is dependent on specific facts unique to each business.

At most, state statutes provide a limited list of common activities that do not qualify as “doing business” such that a company would be required to register. For example, under the Revised Code of Washington, Chapter 23.95, lists activities like “(c) Maintaining accounts in financial institutions;” (e)  Selling through independent contractors;” and “(j) Owning, without more, property.” twelv” activities that would not require a foreign entity to register.

Making the Determination

Each state has unique requirements and each business’s activities are different, so a licensed business attorney should be consulted to help determine if your business should register in a state. However, there are a few general factors to keep in mind that make it likely you are “doing business” in another state such that you would have to register to transact business there. Those factors are:

• The existence of a physical office or location in the state weighs strongly in favor of “doing business.” However, simply owning real property, or holding mortgages on real property, generally isn’t considered doing business.
• If you have an employee(s) in a state that is providing services to clients located in that same state, it is likely transacting business, and the entity needs to register.
• If you regularly enter into binding contracts in the state, this weights in favor of “doing business”. (Entering into contracts that must be approved by an office located outside of the state before becoming binding is often listed as an activity that is not considered “doing business.”)
• Property held by your company in the state.
• If the amount of business in the state is substantial or accounts for a substantial portion of your entity’s overall business, this weights in favor of “doing business.”
• Many states don’t consider using independent contractors in the state an activity that constitutes doing business.

Conclusion

While this blog is by no means comprehensive, it should set you on the way to determining if your business needs to register to do business in another state in which it is operating. To learn more about how a business would go about registering as a foreign entity, check out our blog.

This blog is for educational purposes only and does not constitute legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. Speak to a licensed attorney if you need help or advice in how your organization should be managing state registrations. If you have any questions or would like to learn more, please contact Coleman Scroggins at Coleman@apexlg.com or visit our website