When a company does business in a state outside of where it was organized, it needs to foreign register with the Secretary of State.
Generally, states want companies to foreign register in order to put them on even footing with domestically registered businesses, as well as provide the public with access to basic information about the company.
But what does “doing business” mean? We'll attempt to sort through the different ways states determine that below.
As always, rely on your legal counsel as to whether or not you need to register your business in a state, but as a starting point - states often expect you to be registered if you:
At least 8 states have laws that say exactly what it means to do business in the state. These rules focus on revenue, payroll, and property in the state, and are essentially legislated minimum threshold secretary of state nexus rules.
Some states have revenue-tested nexus rules ($X in the state over some period of time), many of which scale with inflation.
Some states have payroll-based and property-based nexus rules ($X of payroll in the state over some period of time):
For states where there aren’t clear guidelines as to whether you need to foreign register, we typically need to rely on case law and the specific facts of each business. States' views on foreign registration nexus vary widely.
For example, a single transaction in Alabama meant that a company was seen as doing business in the eyes of the court. In most other states however, an isolated transaction has been seen as not doing business.
That said, logically there are some activities that make it clear that companies are doing business in a state:
It’s hard to argue that you’re not doing business in a state if you’re paying taxes there - likewise if you have physical property in the state, or sell to a state government.
Several states require a secretary of state registration in order to complete the application for payroll withholding or sales tax accounts:
Many states have low thresholds for annual payroll in the state necessitating foreign registration – above $50k per year for example. This leads to case law suggesting that it’s valuable to register in a state if you have full-time employees there.
Case law also tells us that states are likely to enforce qualification if your company has employees in particular who can bind the company to contracts, e.g. managers or senior employees.
Similarly, the larger the amount of sales you have in a state, the more likely you are to be seen as doing business in the state.
Registering to do business in a new state typically requires submitting a state-specific foreign registration filing, as well as a certificate of good standing or similar from the state where the entity is domestically registered.
As part of the foreign registration process, each entity needs to appoint a Registered Agent, and then track secretary of state filing requirements.
Discern customers can foreign register in new states digitally in minutes from their Registration Status screen (with no need to get a certificate of good standing, as Discern does it automatically!).
Discern then automatically acts as Registered Agent, tracks secretary of state and franchise tax filing requirements, and automates filing.
Penalties for failing to foreign register your business are wide ranging by state, but generally fall into a few categories: criminal penalties and personal liability, loss of legal protections for entities within the state, and fees and interest charges. Read more about the potential consequences here.
