Let’s say you are doing business in South Carolina and things are going so well, you decide to do one of the following:
- expand to Georgia;
- buy a Georgia business;
- move your business to Georgia.
Those are all terrific ideas, but before you do any of those acts with regard to Georgia or any other state in the Union, there are a few really important facts you should know about operating across state lines.
Because the right to transact business in another state without discrimination is guaranteed by the U.S. Constitution, people often forget (or are never aware) that interstate operation is still subject to some regulation by that other state. The regulation of “foreign” businesses by each state mainly involves (1) providing a means of determining whether a business must declare its operational presence in the state, (2) allowing a reasonably easy way to register such presence and ensuring exclusive use of the name of the business, and (3) generally, providing monetary penalties for failing to register or properly pay taxes on revenue or income derived from the other state, along with denying the “foreign” business the right to use its court system.
Virtually the same concepts apply in every state, so whether you are a Georgia business considering doing business in Alabama or an Alaskan business which wants to move operations to Hawaii, this is information you need to know. The only things that really vary are the time frame for declaring your intention to operate in another state and the monetary penalty for failing to obtain authority if you ignore the laws on registration.
Before beginning on this subject, my clients find it useful when I define a few terms:
“Domicile” means the place where a business is organized or incorporated or “resides.” A business may or may not have a principal business location in each state, but it can only have one Domicile. Through merger or conversion (if that process is available), a business can change its Domicile.
A state refers to a business Domiciled within its borders as “Domestic Business.”
“Foreign Business” means a business Domiciled in another state but operating in yours. It should be noted that if a business moves from one domiciliary state to a new Domicile, but continues to operate in its previous Domicile, it will be deemed a “Foreign Business” in its previous Domicile and will be subject to regulation as such.
While we tend to think of “foreign” as being from outside of the U.S., in business law land, a business from outside of a nation is actually referred to as an “Alien Business.”
“Foreign State” means a U.S. state other than the one in which a business is Domiciled.
“Nexus” means the minimum connection between your business and a Foreign State needed to create a requirement that the business pay taxes there and/or conform to other requirements in order to operate there legally.
“Authority” means a legal recognition of the presence of a Foreign Business within a state (other than that of its Domicile), which entitles said Foreign Business to all of the rights and approximately the same obligations of a business which is actually domiciled there. This authority is generally evidenced by a state-issued document called a “Certificate of Authority” or something similar.
“Withdrawal” means ceasing doing business in a Foreign State and is generally evidenced by a state-issued document called a “Certificate of Withdrawal.”
There are two main times Authority should be a concern of your business contemplating doing one of the three things above–before you start and when you are ready to stop.
What you should know going in.
The first thing you should think about before transacting business in another state is whether the kind and quantity or frequency of the business contemplated will trigger the requirement that you obtain Authority from the Foreign State. Luckily, each U.S. state has virtually identical provisions for what constitutes “transacting business” there.
In Georgia, for example, O.C.G.A. sec. 14-2-1501, et seq., contains the requirement that a Foreign Business must obtain authority from the Secretary of State within 30 days of transacting business here, and then goes on to describe actions that do not create the necessary Nexus to trigger the Authority requirement. If your activity is not on the list of exclusions, you will have to register with the Secretary.
A word of caution, however. Even if you think your activity is on the list and that your business therefore is not required to apply, you should double check with an experienced business attorney. Sometimes the description of the activity includes legal “terms of art” that exclude far more limited activities than would be apparent from a more casual reading of the statute.
The second thing you should think about is investigating the applicability of these requirements to your business before actually acting. It happens all of the time. A client just wants to see if the market justifies the legal expense before hiring someone to help walk them through whether it is necessary to obtain a Certificate of Authority. And even though the same client would buy insurance before a fire happens, the business goes ahead with testing the market in a Foreign State before checking out the regulatory issues. Bad move.
So, how can you mess this up and what are the consequences?
Here, mistakes generally result from one of two things: misinterpreting whether Authority is required or ignoring requirements to obtain such Authority until after the passing of the required filing period.
Misinterpretations happen in two basic ways. One, the client or his/her attorney misreads the statutory requirements. Or more commonly, two, the client decides to forgo any consultation, simply calling up the Foreign Secretary of State’s office and/or department of revenue to ask them for advice about whether it is necessaryto obtain Authority.
As to the second approach, I have never heard of a state saying, “it is not required,” if the person on the phone agrees to answer that question at all. Rule 590-7-5-.04 of the Georgia Administrative Code prohibits Corporate Information Center personnel from providing “legal interpretations concerning the Code or … provid[ing] tax and business advice.” (They should tell you to consult an attorney.)
And what if you should decide just to punt and figure it out later? Well, the penalties are mostly the same type in every state–that is, a business is prohibited from using the state court system, and it must pay monetary fines, though the amount of those fines may vary widely. Continuing our example, O.C.G.A. sec. 14-2-1502, sets forth the penalties for failure to obtain authority in Georgia.
As to the first, non-monetary penalty–you may ask, why is a bar to accessing state courts a concern? In short, no certificate of authority means that your business cannot sue anyone here. A client owes you money? Vendor breaches its contract or turns in shoddy work? You need a certificate or you will not be able to resort to the courts for recourse or enforcement. Period.
Notwithstanding this limitation on your access to the courts, however, your business can still be sued by a vendor or client or employee or anyone else in Georgia. And while you are allowed to defend, you cannot counterclaim in that litigation–that is assuming you find out about the lawsuit at all.
See? The main difficulty in mounting a defense to a lawsuit when you fail to obtain Authority is that you may not learn about the lawsuit until after a default judgment is executed. The reason for that is, lawsuits against unauthorized Foreign Businesses are served on the Domestic Secretary of State. In our example, if the Georgia Secretary doesn’t find out where in the world your business is domiciled and who is your registered agent there, you may not learn about the suit until it is too late to prevent a default judgment.
In addition to the litigation concerns, your business also will be liable for a civil penalty in the amount of $500 in Georgia. (In some states, the penalties are way, way greater.) The Georgia Secretary of State is expressly prohibited from waiving penalty or releasing your business from that liability.
Furthermore, your business also may be tapped for each missed annual registration and late filing penalty. And all of these costs would have be paid before you are allowed to actually obtain a Certificate of Authority at a cost of $225. <<<All you would have paid, if you’d filed in a timely fashion….
Your business will also be liable for any taxes, penalties, and interest with the Department of Revenue for the same period. You may also be hit with local penalties for failure to obtain a business license or business tax certificate in the county or city where required with its attendant taxes, interest, and fees.
What you should know when you withdraw.
Given all of the above, what steps should be taken when your business decides to no longer do business in the Foreign State? Well, your business will have to pay all of the fees for withdrawal and certify it owes no debts in or to the state, including taxes, penalties, and fees. In some states, a letter or certificate of “no taxes due” must be sent by the Department of Revenue to the Secretary of State before the Secretary will allow your business to withdraw.
Difficulties can arise in those states when you file a “final return,” but fail to withdraw in a timely fashion. Some states will continue to require at least a minimum flat tax for as long as you remain authorized to do business there and will assess penalties and interest on that minimum should you fail to pay. So timely withdrawal and coordination with the state and local taxing authorities is mission critical if you like not paying the government money unnecessarily.
In conclusion, do the right thing when considering doing business outside of your state of formation or Domicile and when ceasing doing such business. Failure here can end up being a very costly mistake.
If you have any questions or think you may have made a mistake in filing or failing to file, please do not hesitate to contact us at 404-558-7771 or through our Contact Us link in the top menu.