How To Tell If You Are "Doing Business" In A Foreign State And Why It Is Important To Know
In our previous article on the Moe’s Southwest Grill case, posted June 16, 2015, we explained the importance of complying with state filing requirements to maintain limited liability status in any state where your company is regularly doing business. The case demonstrated how a failure to do so could cost your business the ability to protect its rights and have other substantial legal repercussions. Now, we take up the important question of what instate activities constitute “doing business” to require such state registration as a foreign entity.
What does it mean to “do business” in a state?
Generally, a business’s level of activity in a state is a good indicator of whether or not they would be considered “doing business” for state registration purposes. For some corporations, it can be obvious when their business is operating a store or shop to conduct regular business in a state, as was true for Moe’s Southwest Grill restaurant. For companies not engaged in traditional retail or service provision businesses, it may be more unclear when the blurry line between “doing business” and conducting minor transactions is crossed. It is important to be mindful of this opacity and take caution so that your business is prepared to make the necessary arrangements for compliance.
The March 4, 1988 decision by the Maryland Court of Special Appeals in J.C. Snavely & Sons, Inc. v. Wheeler, No. 963, Sept. Term, 1987, outlined the test that Maryland courts use to determine if a corporation is “doing business” in the state. The Court established that a foreign corporation is essentially doing business in any state where it “transacts some substantial part of its ordinary business.” Unlike the similar jurisdictional standard, the “doing business” standard for state registration purposes calls for more than mere business solicitation, it requires an extensive set of activities and management functions within the state. It may be difficult to determine whether your corporation meets this vague standard because the factors, and their relative weights, vary with unique circumstances on a case by case basis. The March 7, 1994 decision by the Maryland Court of Appeals in Tiller Const. Corp. v. Nadler, No. 126, Sept. Term, 1993, affirmed the test from the Snavely case and restated four factors that should be particularly examined among other various factual considerations.
- Whether the foreign corporation pays state taxes. This is often demonstrated through contracts with local suppliers where sales taxes are paid, or where substantial inventory is bought and paid for locally with local taxes paid.
- Whether it maintains property, an office, telephone listings, employees, agents, inventory, research and development facilities, and advertising and bank accounts in the state. Although it is definitely possible to “do business” in Maryland without satisfying everything on this list, courts will examine the extent to which the corporation does maintain the listed items because as a whole they may indicate either substantial business activities over a long period of time, as opposed to lesser or temporary transactions within the state.
- Whether it makes contracts in the state. Courts consider the number of contracts with instate entities and their respective lengths because a few occasional contracts do not sufficiently indicate that a corporation is regularly “doing business” in that state.
- Whether its management functions in the state are pervasive. If few or none of the corporation’s decisions are made in Maryland, the instate interactions may be more transactional than they are suggestive of “doing business.”
According to the Tiller case, Maryland’s laws for foreign corporations are not unique. Such considerations to determine if a corporation is “doing business” for state registration purposes are fairly typical throughout the United States, as they are seemingly based on the Model Business Corporation Act. While this issue for limited liability companies (“LLCs”) has not been analyzed in any Maryland cases, based on the similarity of treatment between corporations and LLCs in other contexts it is likely that Maryland courts would use the same or similar analysis should an LLC context a finding that it is doing business in the state.
It is important to know whether your corporation or LLC is “doing business” in a state to the extent that it must be registered as a foreign entity. Failure to register a limited liability entity that is doing business in a state can have considerable consequences, including the prohibition from bringing suit in the state’s courts. Maryland’s fairly typical approach to determine if a company is subject to such state filing requirements is to consider the unique circumstances of each entity, and make an evaluation based on the “nature and extent of the business and activities which occur in the forum state.” Since this is not a straightforward test, the four factors delineated in both the Snavely case and the Tiller case may be indicative of whether your entity would be considered “doing business” in a state.
Jenny Morris, a J.D. candidate Class of 2017 Georgetown University and a law clerk with WTP in 2015, contributed to the preparation of this article.