Are you registered to do business in every state in which you provide services? What about those states in which your client is based but you provide all your services remote? Or that state in which you have a remote employee who moved away from your corporate office when most businesses transitioned to remote workers in response to COVID-19? For a lot of business owners, they assume that once they have established their company entity, they are free to transact business as they please (whether they established the entity in the state where their corporate office is located or in some other state like Delaware, Nevada, etc.). This, however, is not true, and failure to properly register your business in a state in which you transact business can have grave consequences.
Before we discuss when a business must register in a particular state, let’s discuss the consequences for not properly registering your business. Every state has different penalties for transacting business within their state without properly registering. At a minimum, you should expect a fine and late fees dating back to the first day you began transacting business in that state. These fines and late fees can get in the thousands of dollars. More scary than fines is the fact that failing to register your entity can result in exposure to personal liability! Essentially, the state does not recognize your entity; so, the owners of the entity are liable for the obligations of the company, including breaches of contract and tort claims. All your effort to shield your personal assets could be gone.
Now that we know the consequences, let’s determine when your business needs to register in other states to do business. Just like the penalties, this will vary by state. In general though, states require an entity to register in its state if the entity will transact business in that state (i.e., hire employees, buy or sell products, or manufacture goods). With e-commerce today, so many businesses are buying and selling across state lines even if it’s not intended. The same applies in the service industry with so many services being provided remote. From a legal perspective, a substantial amount of businesses likely qualify as doing business out of state. If that work is infrequent or perhaps services are being provided to an out of state client who was not solicited and the work itself is being performed in the home state, you most likely do not need to register. However, to eliminate any risk of those penalties and loss of personal protection, businesses should consider registering their entity in any state in which they have an employee, have a customer or client who the entity visits in a state outside its home state, and when the entity sells goods out of state.
To register your business, most states’ Secretary of State websites include a foreign entity registration form. The information sought varies from state to state, but often times it is just information related to your entity name, state of incorporation, date of incorporation, date in which you started transacting business in the foreign state, and a registered agent (name and address) located in the foreign state. The filing fee will vary by state, but you should anticipate a filing fee between $200 and $1,000. Given the consequences of not registering your business when you were required, the upfront filing fee expense should be worth your peace of mind.