What Constitutes “Doing Business” in a State?
When expanding a business beyond the borders of its formation state, many entrepreneurs face a critical question. What does it mean to be “doing business” in a different state? The answer isn’t always straightforward. The definition of “doing business” can vary between states. Knowing when your company is considered to be conducting business elsewhere is key to staying compliant and avoiding penalties.
What Does It Mean To Be “Doing Business” in a State?
The term “doing business” generally refers to conducting regular, ongoing commercial operations within a state. Each state has its own rules and regulations. These define what constitutes company activity. Below are some common factors that may show your company is active in another state:
- Maintaining a physical office or facility: A storefront, office, or warehouse in another state often means you’re operating there.
- Hiring employees in the state: If employees work there, your company typically must register—even if you’re not physically located in that state.
- Frequent sales or transactions in the state: Without a location, you may still need to qualify if you regularly sell or serve customers there.
- Holding business meetings in the state: Some states consider your company active if you hold regular meetings, including board meetings, within the state.
These are just a few of the scenarios in which your entity might be subject to a state’s legal requirements. The key takeaway: “doing business” doesn’t require a permanent location—it’s defined by how often and where you operate.
When Are You Considered Not “Doing Business”?
Not all activities in another state constitute business operations. 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 engaging in 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 company is operating in another state, you’ll likely need to file for foreign qualification. Despite the term, “foreign” doesn’t mean international. Here, it refers to company activity outside the state where your business was formed.
Foreign qualification means a business formed in one state registers to legally operate in another. For example, if your LLC was formed in Texas but expands to California, you must apply for foreign qualification there.
The process usually involves:
1) Filing a Certificate of Authority: This is the formal documentation that grants your company the right to operate 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 conducting 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 company 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 carry out business.
Final Thoughts
Understanding when you’re engaged in 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 business activity and DBAs are two distinct concepts 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 company stays on the right side of the law, no matter where you operate.
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