Business Vantage Point Blog

Corporations, limited liability companies and other entities must be formed under the laws of a specific state, but the ability of those entities to act does not stop at the state border. An entity doing business in a state other than its state of formation must register to do business as a foreign entity in that other state. The applicable statutes, however, do not define the activities that require registration beyond the vague term “doing business”; rather, the statutes only provide a non-exhaustive list of examples that represent activities “not constituting doing business.”

Thus, whether an entity must register in a foreign jurisdiction requires a fact-based examination that turns, in part, on distinguishing the entity’s intrastate activities from its activities in interstate commerce. (More detail on this analysis is available in this article.) The explosion of remote work in recent years has made this determination even more challenging, as employees increasingly work in foreign jurisdictions where the employing entity does not have an office.

Because entities may be able to take advantage of the interstate/intrastate commerce distinction to structure their businesses in ways that avoid the registration requirement, it is important to not overlook two considerations that strongly favor such structuring: personal jurisdiction and state tax liability.

Registration Can Subject Entities to Personal Jurisdiction in a State

In a 2023 decision, the U.S. Supreme Court held that an entity can be sued in a foreign jurisdiction that has no contact with the controversy other than the defendant’s registration to do business in a state if the state has adopted a consent-by-registration statute.[1] In other words, a state may require as a condition to granting the foreign entity authority to do business in the state that the foreign entity consent to general personal jurisdiction in the state. There are only a few states that have such consent-by-registration statutes, but an entity should consider carefully whether registration could subject it to personal jurisdiction and, if so, whether steps can be taken to avoid the registration requirement through appropriate structuring of its business activities.

Registration Can Subject Entities to State Taxation

The concept of “doing business” is used in the law for at least three distinct purposes: (1) to determine whether a court can exercise long-arm jurisdiction over a party in a given case; (2) to determine whether a party can be taxed in a given state; and (3) to determine whether an entity can be required to register as a foreign corporation in a given state. Since long-arm jurisdiction and taxation are linked to specific contacts between the party and the state, the level of contact needed to support long-arm jurisdiction or taxation is generally less than the level of contact needed to trigger a registration requirement.

U.S. Supreme Court cases have held that there is a hair trigger to being subject to taxation in a state (e.g., a salesman physically filling a customer’s store rack with a few packs of gum). So, when an entity registers to do business in a state, the state may interpret the registration as an acknowledgment that the entity should also be taxed. Every state will pass along to the taxing authorities in that state that it has registered to do business. Moreover, even though the entity may later surrender its registration to do business in the state, it may be more difficult to convince the state that the entity is no longer subject to taxes there. Also, in some states, the reverse will happen as well. If an entity files a state tax return, the state will require the entity to register to do business there regardless of the level of contacts for registration purposes.

Takeaways

Some entities register to do business in each state where they have employees, even if those employees work remotely and the entity has no office in the state. While this approach has the advantage of simplicity, it may expose the entity to personal jurisdiction for lawsuits brought against it and state taxes to which it might not otherwise be subject. By adopting a more thoughtful approach and arranging its business practices to avoid the registration requirement in certain states, an entity may be able to limit this exposure.

[1] In the 2023 case, the state in question was Pennsylvania. Pennsylvania’s statute, 42 Pa. C. S. § 5301, includes the following provisions: “(a) General Rule — the existence of any of the following relationships between a person and this Commonwealth shall constitute a sufficient basis of jurisdiction to enable the tribunals of this Commonwealth to exercise general personal jurisdiction over such person ... (2) Corporations — (i) incorporation under or qualification as a foreign corporation under the laws of this Commonwealth; ... (3) Partnerships, limited partnerships, partnership associations, professional associations, unincorporated associations and similar entities — (i) formation under or qualification as a foreign entity under the laws of this Commonwealth.”