What Constitutes “Doing Business” in a State?

When expanding a business beyond the borders of the state in which it was originally formed, many entrepreneurs face a critical question: What does it mean to be “doing business” in a different state? The answer isn’t always straightforward, as the definition of “doing business” can vary between states. Understanding when your company is considered to be “doing business” in another state is essential for ensuring compliance and avoiding potential penalties.

What does it mean to be “doing business” in a state?

The term “doing business” generally refers to conducting regular, ongoing business activities within a state. While each state has its own rules and regulations regarding what constitutes doing business, here are some common factors that may indicate your company is operating in another state:

• Maintaining a physical office or facility: If your business has a storefront, office space, or warehouse in another state, this is often a clear indication of “doing business” in that state.
• Hiring employees in the state: Having employees who work within the state typically requires your business to register, regardless of whether your company is physically located there.
• Frequent sales or transactions in the state: Even if you don’t have a physical presence in a state, regularly conducting sales or providing services to customers within that state may require you to qualify.
• Holding business meetings in the state: Some states may consider your company to be “doing business” if you regularly hold meetings, such as board meetings, in the state.

These are just a few of the scenarios in which your business might be subject to a state’s legal requirements. The key takeaway is that doing business doesn’t require having a permanent physical presence, but rather is defined by the nature and frequency of your activities.

When are you considered not “doing business”?

Not all activities in another state constitute “doing business.” Some actions may be considered incidental and therefore exempt from registration. These may include:

• Isolated transactions: Conducting a one-time sale or contract in a state may not require you to register.
• Passive ownership: Simply owning property, such as real estate or intellectual property, may not qualify as doing business unless you’re actively managing it.
• Online sales: For businesses that only sell products online without a physical presence in the state, registration may not be required. However, this is changing as states implement economic nexus laws to collect sales tax from online sellers.

What Is Foreign Qualification?

If your business is considered to be “doing business” in another state, you’ll likely need to file for foreign qualification. Despite the term, “foreign” doesn’t mean international—in this context, it refers to doing business in a state other than the one in which your business was initially formed.

Foreign qualification is the process by which a business that was formed in one state registers to legally conduct business in another state. For example, if you formed your LLC in Texas but are expanding operations to California, you must apply for foreign qualification in California.

The process usually involves:

1. Filing a Certificate of Authority: This is the formal documentation that grants your company the right to do business in the new state.
2. Paying applicable fees: Each state has its own registration fees for foreign qualification.
3. Appointing a registered agent: Many states require you to appoint a registered agent within their borders who can receive official correspondence on behalf of your business.

Failing to file for foreign qualification can result in hefty fines, back taxes, and legal consequences. In some states, you may even lose the right to bring lawsuits within that state.

“Doing Business” vs. “Doing Business As” (DBA)

One common source of confusion is the difference between “doing business” in a state and filing a Doing Business As (DBA) name. While both terms sound similar, they refer to entirely different concepts.

• Doing Business: This refers to the actual activities and operations of a business in a particular state. As mentioned earlier, it involves things like having employees, property, or ongoing transactions in that state.
• Doing Business As (DBA): This, on the other hand, refers to the name under which a business operates. A DBA is a trade name, or a fictitious business name, that a company uses that is different from its legal business name. For example, if your company’s legal name is “Bob’s Baked Goods LLC” but you want to market yourself as “Bob’s Bagels,” you would file for a DBA to use that trade name.

Having a DBA does not give you the authority to operate in a state where you are not qualified. It only allows you to operate under a different name in the state(s) where you are legally registered to do business.

Final Thoughts

Understanding when you’re “doing business” in a state can save your company from legal complications and financial penalties. If you’re expanding your operations or dealing with customers in another state, it’s important to research the local laws and, if necessary, file for foreign qualification. Additionally, remember that “doing business” and “doing business as” are two distinct terms with separate legal implications. Make sure your company complies with both the state’s qualification requirements and any DBA filings.

Navigating state regulations may seem complex, but with the right knowledge and a little help from FormPros, you can ensure that your business stays on the right side of the law, no matter where you operate.