Expanding a Small Business Across State Lines
Expanding a Small Business Across State Lines

Unlike many countries, a company, once it is organized, can only do business in the State of incorporation.

 

In many countries, a company, once it is organized, has the power to do business throughout the national territory.

The situation is different in the US where a corporation, a limited liability company, or another form of entity is, by its charter, only allowed to “do business” in the State where it is organized.

A. When is this “Doing Business” Criterion Met?

To conduct activities in another State, a company must seek the authorization of the Department of State in the State where it is planning to expand.

This process is designated by terms such as “qualification,” “request for authority,” or terms of like import. Although the authorization should be obtained before expansion activities are initiated, the request may be submitted as soon as the need for the authorization is ascertained, but penalties may then be assessed in certain States.

“Doing business” or “conducting activities” are terms of art that do not necessarily reflect the language used by savvy business people. In general, not much guidance is to be found in the statutory language as to when a company crosses the threshold into “doing business” in a particular State.

For example, the New York State Business Corporation Law, in section 1301, simply contains a negative listing of activities that do not require qualification, such as maintaining bank accounts or holding corporate meetings in another State.

The Commerce Clause of the U.S. Constitution prevents States from regulating strictly interstate commerce or subjecting it to conditions or authorizations. It, therefore, follows that the mere selling by a vendor, located in State 1, to a customer, located in State 2, does not constitute “doing business” in State 2, that would require the vendor to register in State 2, without any other indication of a more substantial presence in State 2.

To use, again, New York State as an example, based on a memorandum published by the Office of General Counsel of the New York State Department of State, and citing case law, “To be doing business in this State [New York] implies corporate continuity of conduct…”

Although the standard for determining this may require legal analysis, precautionary registration in a State without considering whether it is necessary is not advisable as this would constitute an admission that the company is, in fact, “doing business” in that State, and might result in the unnecessary assessment of corporate and/or franchise taxes.

In most States, the presence of an employee, even working out of his or her own home, constitutes “doing business.” Conversely, sales solicitation by an independent contractor (sales representative) is not “doing business”, provided that the sales representative has no authority to enter into contracts on behalf of the vendor-principal.

However, the existence of an independent sales representative in another State will trigger the obligation of the principal to register as a vendor for sales tax purposes,

States will also find that an out-of-state company is doing business in that State if it owns or leases property in that State, or maintains an inventory in that State, or delivers products into the State using the company’s own trucks.

Next page- Seemingly Innocent Activities within a State Have Resulted

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