For many founders, business formation in Delaware is preferrable regardless of where the business plans to operate. There are many reasons for that, including preferable corporate taxes, business friendly laws and regulations, and favorable legal precedent. It can also be beneficial to form in Delaware because so many entities do — it makes Delaware like the metric system of entity formation in that it creates a more coherent and consistent process for those that use it.
While forming in Delaware is preferrable, conducting business exclusively in Delaware may not be. As a result, some businesses will choose to qualify or register their entity in other jurisdictions. Businesses that want to enjoy the benefits of being formed under the laws of Delaware while conducting operations outside of Delaware must determine when qualification is required, recommended, or unnecessary. The answer will depend on a few factors, but mainly the entity type, the jurisdiction the business will operate in, and the entity’s line of business.
Each state has its own laws governing the formation, registration, and operation of different entities within its borders, and its department of state, or equivalent, is usually the governmental organization that oversees the operation of foreign entities. The laws typically define what activities constitute doing business in a state such that foreign registration would be required and outline the consequences of doing business without authority to do so. Entities which operate in multiple states, regardless of whether they register as a foreign entity, may be liable for taxes based on their operations in those states.
What Constitutes “Doing Business”?
In New York, the corporation and limited liability company laws have substantially the same parameters for determining whether a foreign entity needs to register with the Secretary of State to do business. Section 1301 of the New York Business Corporation Law and Section 803 of the New York Limited Liability Company Law each provide a non-exhaustive list of activities that do not constitute doing business in the State: (i) maintaining or defending any litigation or like dispute; (ii) holding meetings of its directors or managers, as applicable, or its equity holders; (iii) maintaining bank accounts; and (iv) maintaining offices or agencies only for the transfer, exchange, and registration of its equity interests or appointing and maintaining depositaries or trustees, as applicable, with relation to its equity interests. Due to the scope of activities a business could conduct outside of that list, the courts in New York have provided more refinement to the question of what constitutes doing business in New York but have indicated that the decision must be made on a case-by-case basis. In Highfill. Inc. v. Bruce and Iris, Inc., 855 N.Y.S.2d 635, 637 (2008), the Appellate Division of the New York Supreme Court held that there is a presumption that a foreign corporation conducts business in its state of incorporation as opposed to New York and to be considered doing business in New York, a foreign corporation “must be engaged in a regular and continuous course of conduct” within the state. Given the uniformity of the language in the statutes governing corporations and LLCs, there is a strong likelihood that the same analysis would be applied to an LLC.
In Florida, Sections 607.1501 to 607.1532 of the Business Corporation Act and Sections 605.0901 to 605.0913 of the Florida Revised Limited Liability Company Act govern foreign entities. Similar to New York, the Florida statutes do not provide a clear definition of what constitutes doing business. An LLC that owns income-producing real property or tangible personal property in the state is considered to be doing business in Florida[1], but otherwise there are no specific activities that would be considered doing business for either a corporation or an LLC. Instead, the Business Corporation Act and Limited Liability Company Act each list the following activities that are not considered doing business in the state: (i) maintaining, defending, mediating, arbitrating, or settling any proceeding; (ii) any activity concerning an entity’s internal affairs, including meetings of shareholders and directors, or members and managers, as applicable; (iii) maintaining accounts in financial institutions; (iv) maintaining offices or agencies for the transfer, exchange, and registration of the entity’s securities; (v) selling through independent contractors; (vi) soliciting or obtaining orders, by mail or through an agent, if they require acceptance from outside the state before becoming contracts; (vii) creating or acquiring indebtedness, mortgages, or security interests in real or personal property; (viii) securing or collecting debts, enforcing mortgages, or security interests in property securing the debts, and holding, protecting or maintaining property so acquired; (ix) transacting business in interstate commerce, (x) conducting an isolated transaction completed in 30 days; (xi) owning and controlling a subsidiary formed or transacting business in Florida, or voting the shares or membership interests of a subsidiary lawfully acquired; except in the case of a subsidiary limited partnership that manages or controls the partnership or exercises the powers and duties of a general partner; and (xii) owning, protecting, maintaining real or personal property.[2]
In Massachusetts, an entity is considered to be engaging in business if it: (i) owns or leases real estate in Massachusetts; (ii) is involved in constructing, altering, or repairing any structure, railway, or road; or (iii) engages in any other activity requiring labor.[3] However, the Commonwealth has also delineated specific actions that are not considered engaging in business: (i) maintaining, defending, or settling any proceeding; (ii) holding meetings of directors/shareholders or carrying on other activities concerning internal affairs; (iii) maintaining bank accounts; (iv) maintaining offices or agencies in connection with securities; (v) selling through independent contractors; (vi) soliciting/obtaining orders through a third party or remotely if they require acceptance outside Massachusetts; (vii) isolated transactions not in the ordinary course of business, transacting business in interstate or foreign commerce; and (viii) performing banking activities under MGL ch. 167, or insurance activities under MGL ch. 175. The statute also provides that the lists of activities that do and that do not constitute conducting business are non-exhaustive.
What Is Required to Qualify or Register to Do Business?
Foreign corporations and limited liability companies seeking to conduct business in New York must file a Certificate of Authority with the New York Secretary of State.[4] A corporation may use the form provided by the N.Y. Secretary of State or they can prepare a form containing all of the required information. The application must include the corporation’s name, jurisdiction and date of formation, the corporate purpose, and, to the extent accurate, the application should also state that the entity is not formed for any activity requiring the consent of any state official, department, board, agency, or other body. If such a consent is required, the consent would need to be included in the application. The application must also include the county in New York where the corporation will have its office, either a designation of the Secretary of State as the entity’s proxy for process of service or a statement designating another party to serve as such proxy which includes the name and address of such individual. Finally, the application must contain either a statement that the foreign corporation has not engaged in any activities constituting business in New York or must include a consent from the New York State Department of Taxation and Finance authorizing the entity to register to do business[5], as well as a certificate of existence or good standing from the entity’s state of formation. The fee for filing the application of authority is $225,[6] and the form must be signed by an officer, director, attorney-in-fact, or authorized person of the foreign corporation[7].
The Application for Authority for an LLC in New York[8], similar to a corporation, may be on the form provided by the Secretary of State, or the entity can choose to prepare their own form with all of the required information. The application must include the LLC’s name, jurisdiction and date of formation, the county in New York where the entity’s office will be located, or if there are multiple, the primary place of business, and either a designation of the Secretary of State as the LLC’s agent for service of process, or if the entity will have a different registered agent in state, the name and address of the individual to serve as a registered agent in the state. The application should attach a copy of a certificate of good standing, or like certification, in the entity’s state of formation, along with a statement in the application that the LLC is in existence in its state of formation at the time of the application, and the name and address of either the authorized officer in the LLC’s jurisdiction of formation where its articles of organization are formed, or if the articles are not publicly available, a statement that the LLC will provide copies of the articles upon request and the name and address of the individual responsible for providing those copies. The fee for an LLC’s application for authority is $250[9], and it must be signed by at least one member, manager, attorney-in-fact or authorized person[10]. Foreign LLCs are also required to, within 120 days of filing their application for authority, either publish a copy of the application, or notice containing the substance of the application in two separate newspapers (one daily and one weekly) in the county of the LLC’s primary place of business — some, but not all, counties designate specific newspapers that must be used. The publication must occur once a week for six consecutive weeks, and at the end of that time frame, the LLC will receive an affidavit of publication that must be filed with the Department of State, along with a certificate of publication, for a fee of $50.[11]
Under Florida law, foreign entities that conduct business in the state must file a Certificate of Authority with the Department of State to qualify to do business in the state. For a corporation, they must use the form provided by the Department of State which includes the corporation’s name, jurisdiction of incorporation, date of incorporation and duration period, principal office and mailing address, registered agent, and the current names and addresses of the directors and officers of the company. The Certificate of Authority application also needs to include a certificate of existence or good standing, a written acceptance from the registered agent, and, if applicable, a board resolution authorizing use of an alternate name. The fees to file the Certificate of Authority include a $35 filing fee and a $35 fee to designate a registered agent, and the corporation may also elect to pay an additional fee of $8.75 each for a certified copy of the Certificate of Authority or a certificate of status.
For a limited liability company, the Certificate of Authority application also must be on the form provided by the Florida Department of State which contains the LLC’s name, jurisdiction of formation, principal office and mailing address, initial registered agent with written acceptance of the position, and the name, title and address of at least one person with management authority. The application also must include a certificate of existence or good standing from the LLC’s state of formation, and, if applicable, a consent authorizing the use of an alternate name. The fees to file a Certificate of Authority for an LLC include a $100 filing fee, a $25 fee to designate a registered agent, an optional $30 fee for a certified copy of the Certificate of Authority, and an optional $5 fee for a certificate of status.
Once a Certificate of Authority application for both a corporation or an LLC has been approved, the Florida Department of State will issue a letter of acknowledgement, and if the entity requests, a certified Certificate of Authority for the fees listed above.
To qualify to do business in Massachusetts, corporations must file a certificate of registration[12] and LLCs must file an application for registration[13]. The certificate of registration can be completed on the form provided by the Secretary of the Commonwealth, or on a self-drafted form that contains all of the required information and is formatted in the same manner as the form provided by the Secretary of the Commonwealth.[14] The certificate of registration must be filed within 10 days of a corporation beginning to transact business in Massachusetts and must contain the corporation’s name, its state or country and date of incorporation, the street address of the principal office, the address of its registered office in Massachusetts, the name of the corporation’s registered agent and that agent’s consent to serving as registered agent, the corporation’s fiscal year, a description of the business activities the corporation will conduct in Massachusetts, and the names and business addresses of the corporation’s current directors and officers.[15] The certificate of registration must be signed by the chair of the board of directors, or the corporation’s president or another officer[16], and must include a certificate of legal existence or good standing from the secretary of state of its state of incorporation. The fees to file the certificate of registration are $400 if filed in person or by mail; and $390 if submitted by fax. Once the entity has been qualified to do business in Massachusetts, they must file an annual report each year with the Secretary of Commonwealth, which has a fee of $125 if submitted by mail or in person, and $110 if submitted online or via fax.[17]
For an LLC, the Application for Registration must be filed within 10 days of the LLC’s commencement of transacting business in the Commonwealth. The application for registration can be completed on the form provided by the Secretary of the Commonwealth, or a self-drafted form that contains all of the required information.[18] The application for registration must be signed by an authorized person and must include the LLC’s name (and any other name that the LLC proposes to do business under in Massachusetts), its jurisdiction and date of organization, the general character of the business that the LLC proposes to conduct in the Commonwealth, the address of the LLC’s principal office (both outside of the Commonwealth and, if applicable, within the Commonwealth), the names and addresses of any managers of the LLC, the name and address of the LLC’s resident agent, along with such resident agent’s consent to such appointment, and as applicable, the LLC’s date of dissolution.[19] The application for registration must have a certificate of legal existence or good standing from its jurisdiction of formation attached. Additionally, to the extent that the LLC is to render professional services in Massachusetts, it must also attach a brief description of the service(s) to be rendered, the name and address of each member or manager who render the service(s), a statement that the LLC will comply with any requirements promogulated by the applicable regulating board, and a certificate from the regulating board indicating that the members or managers who will render the service(s) are licensed to do so.[20] The fee to file an application for registration is $500. The LLC will thereafter need to submit an annual report with the Secretary of the Commonwealth on the anniversary of its registration in Massachusetts each year, which shall include a $500 fee. [21]
What Are the Consequences of Conducting Business as a Foreign Entity Without Prior Qualification?
If an entity fails to file its application for authority, the New York Attorney General may file an action to prevent the unauthorized foreign entity from doing business in New York, and the entity will be barred from maintaining any action, suit, or special proceeding until such time as it is authorized to do business in the state.[22] In order to receive that authorization after operating without it, the entity must pay any fees that it would have incurred from the state during the period it was operating, and for corporations, they must also receive a consent from the New York State Department of Taxation and Finance to conduct business to be included in the application.
If a foreign entity conducts business in Florida without authority to do so, they are barred from maintaining any action or proceeding in the state. They are also expected to pay all taxes and fees for the periods they operated without authority and may be subject to a fine of $500 to $1,000 for each year that they operated without the required Certificate of Authorization.
In Massachusetts, a corporation that conducts business without authority shall be liable for all late fees, interest and penalties resulting from its failure to file as well as a penalty determined by the Secretary of the Commonwealth for each month that it transacted business without registration.[23] An LLC that conducts business in Massachusetts without authority shall be subject to a yearly fine of not more than $500, and may not maintain any action or be awarded a recovery in the Commonwealth. Additionally, both a corporation and an LLC that opt to conduct business in Massachusetts without authority to do so shall be deemed to have appointed the Secretary of the Commonwealth as its attorney for service of process.[24]
Conclusion
Clearly, the laws surrounding foreign qualification in different states can be very nuanced and vary greatly. For that reason, it is important to conduct a risk assessment for each specific entity in each jurisdiction where an entity seeks to conduct business in order to minimize the potential consequences of failure to do so.
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Unless expressly provided, this Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
[1] 605.0905(3)
[2] 605.0905(1) and 607.1501(2)
[3] MGL ch. 156D §15.01(b)
[4] NYBCL § 1304(a), NYLLCL § 802(a).
[5] NYBCL § 1304(a)(8)
[6] NYBCL § 104-A(l)
[7] NYBCL § 104(d)
[8] NY LLCL § 802(a)
[9] NYLLCL § 1101(k)
[10] NYLLCL § 207(a)(6).
[11] NY LLCL §802(b)(i).
[12] MGL ch. 156D, § 15.01(a)
[13] MGL ch. 156C § 48
[14] 950 Mass. Code Regs. 113.06(03) and 113.07
[15] MGL ch. 156D § 15.03(a) and 950 Mass Code Regs. 113.48(2)
[16] MGL ch. 156D § 1.20(f)
[17] MGL ch. 156D § 1.22, and 950 Mass. Code Regs. 113.13(1)
[18] 950 Mass Code Regs. 112.06(3)
[19] MGL ch. 156C, § 48
[20] MGL ch. 156C § 6(c)
[21] MGL ch. 156C § 48
[22] NYBCK § 1303, and NY LLCL §809.
[23] MGL ch. 156D § 15.02(d)
[24] MGL ch. 156D § 15.02(e)
