December 23, 2015
By: James H. Nicoll
Many businesses that operate in New York State will at some point be presented with a business opportunity in another state. Business owners need to be mindful of the corporate filing requirements of other states in which they operate. This blog post provides an overview of the corporate filing requirements that may be applicable when a New York business engages in operations in another state.
States generally require foreign entities (i.e., entities that were formed in another state or jurisdiction) that are “doing business” within their state to make a corporate filing, which filing is often referred to as a foreign qualification filing. What constitutes “doing business” varies according to the law of each state, but some guidelines are generally applicable. The hiring of employees within a state and the opening of an office within a state are typically sufficient to constitute doing business within such state. A number of other activities may also constitute doing business within a state. When a question arises as to whether specific activities constitute doing business in another state, the relevant facts and circumstances should be discussed with legal counsel.
A foreign qualification filing typically entails filling out a form to be filed with the Secretary of State of the appropriate state. The form most often requires basic information about the foreign entity such as its name, date of formation and state of formation. In addition, the form may require the filer to designate an entity within the state that is authorized to accept service of process on behalf of the filer (which facilitates the ability of third parties to bring lawsuits against the filer in the relevant state). The state where the foreign qualification filing is made may also require that the foreign entity obtain a certificate of good standing (i.e., a certificate confirming that the entity is in existence and, in some states, has paid all requisite corporate or franchise taxes) from the state in which such foreign entity was formed. The filer is typically required to pay a filing fee to the state where the foreign qualification filing is made. The time that it takes for a foreign qualification filing to be accepted can range from one day to several weeks, depending on the state where the foreign qualification filing is made. In some states, a filer can pay an additional fee to receive expedited service.
The consequences of failing to comply with state law regarding foreign qualification can be serious. These consequences depend on the law of each state, but may include penalties, fees and taxes. In addition, the making of a false statement in an application for foreign qualification may subject the filer to penalties under the law of the applicable state. Businesses that fail to qualify as a foreign corporation may also be denied the right to initiate lawsuits in the applicable state. In addition, potential lenders and potential acquirers of a business will often scrutinize whether requisite foreign qualification filings have been made, and the failure by a business to be in compliance with foreign qualification requirements could delay the closing of a transaction.
Note that doing business in other states may also require filings and/or registrations with the taxation authorities and certain licensing authorities of the relevant state. A discussion of such filings and/or registrations is beyond the scope of this blog post.