DOING BUSINESS OUTSIDE YOUR STATE: FOREIGN QUALIFICATION
What does it mean to qualify to do business in a foreign state, and is it something your company needs to do? What happens if you don’t qualify and what are the legal ramifications? If you’re a corporate attorney, are you prepared to advise clients on the matter?LEARN MORE
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Not all business activities require you to qualify, but failure to do so can leave your company facing negative consequences
Join CSC for a complimentary webinar by Beth Lyden and Zachary Beaver of Dykema Gossett PLLC, on state foreign qualifications, recent case law, and critical principles of conducting business outside your state.
Annie: Hello, everyone, and welcome to today's webinar, "Doing Business Outside Your State: Foreign Qualification." My name is Annie Triboletti, and I will be your moderator.
Joining us today are guest speakers Beth Lydren and Zack Beaver from Dykema, and Patrick Nolan from CSC. And with that, let's welcome Beth, Zack, and Pat.
Beth: Thanks Annie. This Beth Lyden here. Thank you for joining us today. So let's launch into it.
So foreign corporations, the basic definition, a corporation is considered a foreign corporation if it's doing business outside of its state of incorporation. And for foreign state, that's going to be any state other than the state of that corporation's formation.
Corporations are legal entities that are created under the laws of the state of incorporation. It exists because of the laws of its own state, and it's subject to regulation by its own state. So if a corporation is properly incorporated and only conducts business within its state of incorporation, it will not be subject to regulation by other states.
In practice, it's rare to limit business activities and operations to the territorial limits of your state of incorporation. And because a corporation is created under state law and is a state created entity, it has no legal existence beyond the limits of the jurisdiction where it's created, so its domestic or home base. And a foreign state could refuse to recognize the existence of that corporation created under the laws of another state and set conditions on that corporation's activities within its borders.
Most states have statutes in effect that require an entity to be qualified or registered. And you have to ask for permission in order to conduct business in another state. Typically, qualification involves obtaining a certificate of authority from foreign states and maintaining a registered office and registered agent, as well as complying with annual or semi-annual reporting requirements and tax liabilities.
So motivations behind . . . I went too far, apologies. Because a corporation is not a natural person, a state can permit or prohibit a foreign corporation from doing business within its borders, this would be interstate commerce, and require that foreign corporations comply with certain conditions provided that those conditions don't violate the Commerce Clause. States may not enact laws that place undue burdens on interstate commerce.
There are consequences when a corporation does business outside its state of formation, and it will find itself subject to service of process and suit in that state, subject to taxation in that state, and they'll be required to qualify to do business in that state. They each involve doing business or transacting business. There's overlap, but these are not exactly the same inquiry.
The description of doing business for purposes of foreign qualification really the focus . . . it's a different inquiry. It's not applicable to other questions, such as whether or not it's going to a minimal service of process under a state's long-arm statute or liable for state or local taxes.
A foreign corporation that's registered or required to register will generally be subject to suit in that state or state taxation. Whereas a foreign corporation that is subject to service of process or state taxation will not necessarily be required to register or qualify within that state.
So for service of process and being subject to suit in a foreign state by virtue it's on statues. That's a slightly different inquiry that's going to have certain context within that state, such as they feel at home. And taxation, states really push the boundaries with that one. Wayfair was huge, because it just did the nexus from physical presence to economic presence. And again, these are different inquiries from whether or not a foreign entity is doing business within a state, which is what we're focusing on today.
So why would a state want a foreign corporation to qualify? The first motivation would be transparency. It's really important for foreign companies to disclose information about themselves to state agencies so that people know who they're interacting with. This information will be publicly shared through the application for authority or a certificate of authority and in their annual report. They're required to keep certain information up to date, such as sometimes like who the directors are. And they can be penalized if they fail to keep this information current and filing these annual reports.
Another reason would be for to facilitate service of process, because you have to maintain a registered agent and a registered office within that state. And they have to continuously maintain that. Without the registered agent requirements, you wouldn't be able to serve process as easily on these companies. You can always still serve process on a company as long as you're following the civil procedure rules. But it ensures that there's an in-state agent and location for service, that it's very easy to locate just going online and checking the secretary of state's filing.
A third reason would be to protect domestic companies. They allow states to make foreign companies doing business in the state make sure that there's no unfair advantage to these foreign corporations for taxes, filing annual reports, and maintaining a registered agent. Those are the primary motivations for protecting domestic citizens and corporations. A bonus is the revenue stream. And with that, Zack.
Zack: All right. Thanks, Beth. So I think to transition from Beth's point is we need to look at the nexus between qualification and taxes. And so in some states, qualifying will subject you to whatever the state's applicable business taxes are. For example, you have sales tax. You have income tax for employees. You have other kind of state mandated taxes that might apply that might trigger.
So generally, once you qualify to do business, there's at least a presumption that you must comply with whatever the state's taxes are for the foreign state. But just because you're required to pay taxes, it doesn't mean you're required to register to do business. So it gets kind of complicated when you start talking about other states that you're going to do business in or other states you may have contact with. If your entity is, for example, you have a Delaware corporation or a Delaware company, doing business in Illinois, you may be subject to some kind of tax based on, you know, interactions you're having in the state of Illinois, but you may not be required to register as a business in Illinois.
And this depends on all the state . . . you know, every state is going to have their own kind of qualifications and their own analysis on how that applies, their own statutes. So it's important to look at those on a state-by-state basis.
For example, one of the important cases they came out I think 2018 was Wayfair in South Dakota, where the Supreme Court of South Dakota implemented a statute which said that they were going to tax ecommerce companies with no physical presence in the state and try to generate revenue. Kind of to Beth's point that that's a key driver for a lot of this stuff is states trying to get their hand on money that they feel they're due.
So they passed the statute to tax these ecommerce companies. It's challenged. It goes ultimately to the Supreme Court. And the Supreme Court said, kind of in a break with history, that it's fine to tax these ecommerce transactions, even though there's no physical presence in the state. And so Wayfair is not required to register as a business in South Dakota, at least to my knowledge of South Dakota law, and so they still are on the hook for taxes.
And so you have to be careful when you're operating in other states because even if you're not required to register, you may owe taxes. And even if you are required to register, it may still change the tax situation. So it kind of just depends on which way it flips depending on the state you're in.
So another good example of this is in Alabama, the state statute is almost silent as to whether or not you're required to pay taxes versus register as an entity. But what the Department of Revenue in Alabama has said is if you own property, if you're a foreign company, you own property in Alabama, you have to pay . . . you will be subject to business tax liability.
And then there's kind of this other approach that says also if you're registered, you're subject to these business taxes. So it kind of makes a distinction very clear, at least in the case of Alabama, that if you're registered with the Secretary of State, you have to pay taxes. But that doesn't necessarily mean and I guess it kind of marries up. So what you have is this two-factor approach. You have A, if you own property, Alabama's going to tax you if you're a foreign entity. Also, if you're qualified to do business, whether or not you own property doesn't matter, they're going to tax you. And so you kind of see how the state doesn't tie to one or the other. They are trying to cast a broad net to make sure you fall within what they think they have the taxing authority over.
So even if a state has jurisdiction for tax purposes, they may decide not to exercise general jurisdiction for litigation, for court and service of process proceedings. So that's important, because it kind of goes back to the last point, which is even if you're paying taxes, the states may say, "We don't really want you to fall under our court systems. We don't really want you to be held in, in Alabama or whatever state, but we do want your revenue." And so it's very important to know kind of what the state landscape is before you get really involved in registering your foreign entity.
And as a result of this, one of the important things you've seen is a lot of law firms will not give "not subject to tax" opinions. So if you're doing a legal opinion for any kind of deal, any kind of entity, anything like that, most law firms won't opine if it's not their state, the state they operate in because it's too muddy. They don't want to get involved in it. And there's just a lot more at play. So you just kind of see the law firms staying away from that generally.
So what requires foreign qualification? When does your entity need to register with another state? The key test is whether you're doing business. And so the question is: What is doing business? Well, in a true lawyer answer, the answer is it depends. And there's 50 states. You know, you have a myriad of laws. Some have adopted the Revised Model Business Corporations Act, some have not. Some have taken pieces of it, some have not. So what you see is kind of all over the map as far as how states approach the way they govern foreign entities. About half the states in the U.S. have adopted the Revised Model Business Corporations Act and the governing provisions.
But to make things even more complicated, those provisions about doing business are generally in the negative. So it doesn't say, "This is doing business," in the statute. It says, "This is not doing business," in the statute. And so then it's kind of left up to courts and attorneys and businesses to figure out what is doing business. And there's some general guidelines, which I'll get into here in a minute. But it's just important to understand that most of the time it's viewed in the negative.
So I think the not doing . . . so when you look at it in terms of not doing business, what it does is it leaves a lot of room for states to be creative and aggressive, because if you had a list of 10 things that are doing business, that would subject an entity to be qualified in your state, arguably the things left off of the list are not doing business and therefore would not trigger some kind of registration requirement or foreign qualification.
So by making the list in the negative states say, "Well, we're going to carve out these things . . . these things are not doing business, these 10 things. Everything else, we're not going to opine on. There's no statute on." So it kind of gets sorted out in court. And it's kind of left open for interpretation based on whatever the statutes are, or other existing statutes, or case law, or precedent, or whatever else is out there in that state. So it doesn't foreclose the state's availability to bring you in and say, "No, what you're actually doing is business."
So a few things that are generally considered doing business, these are not adopted by any particular state. These are just general guidelines on what we've seen as constituting doing business and things that, you know, this should guide you as to whether you're thinking an entity is doing business in a foreign state. So, you know, this is very specific, depending on the state involved. But generally speaking, if you have a physical location, facilities, offices, stores, warehouses, things like that, that is a factor that would cut towards you doing business in a state.
Similarly, if you have employees in a state, and whether or not it's 1 employee or 100 employees, it does make a difference, but there's no clear distinction. So if your one employee is facilitating millions of dollars in transactions, that might be a good indicator that you're doing business, even though it's only one person. So it's just important to consider kind of the weight of the involvement.
Whether you regularly contract within the state, the foreign state. If you make one contract . . . this was a good example I've seen before. If you're selling, if you make one contract and you sell $200,000 worth of goods to one person, that's less likely to be viewed as doing business as if you were to do half a dozen or a dozen contracts for $200,000, with a dozen people or businesses or whoever in the state. So you kind of have this factor. So even though you have the same dollar amount in the deal, maybe having a dozen contracts affects the state more or raises that threshold to the level where the state does want to get involved. And again, there's no clean line on that. It kind of is fluid based on all the factors.
Whether you regularly hold customer meetings is an important factor, because, you know, part of what, as Beth mentioned, part of the idea is to protect the citizens within the state. So if you're meeting with customers, you're soliciting customers in the state, you have offices, you have employees, it starts to look like you're really conducting business, and the state probably is within its rights to try to rope you in and make you qualify.
And then lastly, whether there's significant revenue, and this kind of goes back to what I just said about the contracts. If you have, you know, what is significant revenue? Well, we don't know. Maybe it's $200,000, maybe it's $100 million, but it also will depend kind of on all the other factors out there. And so, for example, like I mentioned the Wayfair case in South Dakota, even though it dealt with taxes and not so much revenue, the State of South Dakota set a threshold of $100,000 for goods or services in the state. And so for them, that was significant enough to trigger a tax bill for the transactions.
And so it may be something similar to that when it comes to revenue that companies should look at and say, "Well, how much are we doing? You know, when you look at all these kind of five factors, what's the weight of our involvement in the state, and really is it going to rise to a level where we just need to qualify and make sure this is all taken care of?"
So a few examples. As I mentioned, you know, most states have adopted the Model Business Corporations Act provisions for what is considered not doing business. So again, in the negative.
So in Illinois, and this is from the statute, so you know seven and eight are blank, because the Illinois statutes are blank, but arguably they would insert or change as they needed to. So in Illinois, maintaining, defending, or settling any proceeding is not doing business. Holding meetings is not doing business. Maintaining bank accounts is not doing business.
But the key important thing, when you look at this list, is these things individually are not doing business. But in the aggregate, they could be doing business. If you're doing all of these things, plus, you know, anything from the previous slide of having offices, employees, or any of those things, you may be considered doing business.
So while this list says this individual thing is not doing business, it's important to understand it's all viewed in the broad context. And not just, well, as long as I just own personal property or real property, I'm fine. Well, if you own real property and you're ushering goods in and out of it, and you have employees at a dock taking care of those goods, that might be a different story. And so it's important to understand these are kind of safe harbors, but it's not a complete protection, as long as these are the only things on the list.
So continuing with what is considered not doing business, there are some states that have public policy exceptions for doing business. So for example, you know, in Texas recently, we had the ice storms, which put out some of the windmills and really disrupted the power grid and the situation down there. So if the utility companies were to go in, or you had vendors that dealt with the windmills or the chemicals that they sprayed to de-ice them, any of those kinds of transactions, if there's a declared emergency and companies are going down there to deal with this emergency, a lot of states have sort of this public policy exception so that they're not being roped in for this one time, emergency situation and now they have these onerous requirements to register and pay tax and do these things.
And of course, like, you know, any of these other, most of the prior slides, these are state specific, and there's not necessarily, you know, an overriding blanket of how this would apply. But as a general rule, a lot of states look at it this way, because you don't want to discourage people from helping your state out in an emergency. You don't want to discourage us from helping each other and that sort of thing. So there's kind of this broad public policy exception for that.
And then what you'll see sometimes, which I don't think is necessary, is kind of this interstate and foreign commerce carve out, which some states will put into their statutes. And it basically says, you know, if this business is involved in foreign or interstate commerce, then we're not going to restrict it unnecessarily with state law. And, you know, there would be some kind of carve out or some kind of exceptions to the requirements. But I don't think that's necessary, because at the end of the day the U.S. Constitution prevails. So it really doesn't matter if the states provide this carve out. You're not getting anything. Either the constitution governs or it doesn't. And if it does, then, you know, kind of what the states say at that point, it really doesn't matter. You didn't need to carve out if the constitution was going to prevail anyway.
So those are just a couple of other not doing business things to be aware of. They're not kind of the enumerated ones. These are just more overriding. They may be out there. So just kind of be aware of that.
So again, this is kind of going back to the slide a few back where we discussed what doing business is. So you usually have to qualify in a state if you have a physical presence, if you're repeatedly engaging in transactions, if you have employees, or if you engage in intrastate commerce, meaning within the boundaries of that state. And so these may be different requirements for tax versus qualification purposes.
And that's something that you really just have to be aware of, on a state-by-state basis case by case, whether what you're doing rises to the threshold of tax liability or, you know, other kinds of fees, or whether it requires you to register. And if registered, if qualifying requires you to also pay some taxes. So it's just kind of an interplay that you have to be aware of on a state-by-state basis.
And CSC provides some really good services for that purpose. They can kind of provide you some charts and help assist you, you know, guide you through the filings and the requirements that you'll need for each specific state. So, you know, make sure you consult with them if you have questions about that kind of thing. They'll be able to help you with that.
So one of the things I mentioned before is your activity within a state is going to be viewed cumulatively. So if your company is engaged in one sort of activity, but it's kind of minor, you may not be required to qualify. But again, you know, if it rises to a certain threshold, you may be required to register. And so the way this is looked at from the courts is, you know, each piece is kind of weighed together with all the pieces to figure out if it's going to get there in that specific state, if you're going to be required to do certain things.
And so, like I said, having a sales rep may not be enough, even some employees, having warehouse goods might not be enough. But, you know, when you look at all of these things sort of together, it may be. And so you know, Darrell Pierce was with the firm, he recently retired this year. And he's a really . . . he gave this presentation last year, just a brilliant legal mind. And he had a quote from the early 1900s. And I don't know the case, but I did copy the quote, because I thought it was such a good look at how courts are going to look at these qualifications and kind of how we got to where . . . the history of kind of how we got to where we are. And so a lot of these issues have been resolved as far as protecting citizens and taxation and some of this stuff. It still gives a good sense.
So the quote is, from the court, in this case was, "It was a practice of many tramp, predatory, rapacious foreign corporations organized under the laws of nobody knew where to violate contracts or injure folks in our state and avoid process."
So this kind of sets a tone that I think should stick with a lot of people that when states are setting these laws and the courts are reviewing them, and they're trying to decide if a company should be subject to the state's laws or qualify as a foreign entity or doing business, there's this tone of we're not going to just let companies come in and do whatever they want. So, you know, be aware of that. Be aware of what these companies are . . . what your company is planning to do, what they are doing, and just make sure that squares with whichever states you're operating in.
So I think that quote, even though it's 115 years old, I think it sets a good tone to understand the real nexus here is to protect citizens within the states. And so that's what the states are going to do, aside from trying to generate revenue. That's what they're going to try to do. I think the next slide I'm going to turn over to Beth.
Beth: Thank you. Yeah, so if you're a corporation that wants to operate in a foreign state, there are a number of motivations for not wanting to qualify. Or as Zack mentioned, there are significant public policy and interests that the foreign state would want to protect. So a lot of these motivations, you can still . . . there are ways of rendering them moot. So if you want to avoid certain tax or revenue requirements, true, that is a significant motivation for not wanting to qualify as a foreign corporation. However, you run the risk of not being able to avail yourself of the court system of that foreign state, and you risk having your contracts possibly invalidated prior to you being qualified. We'll go into more details about that later.
Or you don't want to have to comply with certain registration and compliance requirements of these other states. Again, Wayfair kind of really pushed the boundaries with taxation. And some states, if you want to be able to obtain a license, in order to collect sales and use taxes, you have to register as a foreign entity. So it's really important to look into the licensing requirements of any particular state, see if those require you to qualify without going into the question of whether or not you're doing business. So that is something that definitely needs to be looked into.
As for service of process, having a company registered as a foreign corporation does aid this. It makes it much easier. You know who to serve process on and where they are, and this information must be kept current. However, if you're able to get general jurisdiction over a foreign corporation, and it complies with the rules that let's for getting, for serving process, you can still be held in the courts of that foreign jurisdiction.
Generally, there's been a presumption that if you registered as a foreign corporation, that you've consented to general jurisdiction within that state. Recently, over the past year, court cases have been trending towards . . . well, against this so that by merely qualifying as a foreign corporation within a state, it doesn't equate to consent to general jurisdiction. This kind of goes against the grain, but this is where case law is heading. So it's important to pay attention to what you're doing and pay attention to the fact that the transaction, like conducting business, for general jurisdiction purposes, is different from doing business or qualification requirements.
So there are a number of adverse consequences for failing to qualify as a foreign corporation. Generally, the Model Business Corporation Act, they have a number of penalties, and their primary goals are to encourage foreign corporations to qualify and to provide some method for states to collect reasonable, non-punitive fees.
Since the additional tax liability is a significant factor in a corporation's decision whether or not to qualify in a foreign state, it makes sense for states to include hefty monetary penalties for failure to comply with the qualification statutes. Generally states are highly motivated to pursue foreign corporations that are non-compliant with their qualification statutes, primarily to discourage unfair competition with domestic companies. And the fact that pursuing these non-complying corporations result in a significant revenue stream for the states is more of an added bonus at that point.
So the primary penalty under the Model Business Corporation Act is that you are closed out from availing yourself of the court systems of the particular state. So a state can prevent a company from bring suit or proceedings in that state's courts unless and/or until it qualifies. Basically the policy is that they close the courts to that non-complying foreign company, because it shouldn’t benefit from that court system and enforcing its rights when it's violated state law, and it's about paying its fair share.
Under the Model Business Corporation Act, a foreign corporation may not maintain proceedings in any court of a particular state until it's registered to do business in the state. That still is pretty significant. And it can vary from state to state. The importance of the "until" is that there's a possibility of a cure here.
So let's say a company was not qualified to do business in a state and they wish to enforce their contract rights and they file litigation while they're unqualified. They would need to, and this particular statute because it's until, would need to qualify as a foreign cooperation within that state in order to continue this proceeding, because the filling itself initiating litigation isn't necessarily prohibited under this, but maintaining it is. So it's a really important one. Some states have "unless and until," and that can be seen as a bar on even filing. This would, in some instances, extend a counterclaim filed against a foreign corporation that is not qualified within a state as a defendant.
The distinction between maintain and defending is usually, in most states, they are aware of that distinction as a counterclaim you would be able to make in any litigation. However, you might not be able to obtain a judgment facing those counterclaims until you've actually registered to do business.
And when you cure, that means that you have to make up for any revenue that you haven't been paying during that time period.
All right. Pat, you wouldn't mind taking over?
Pat: Thank you, Beth. Thank you very much. This is Pat Nolan from CSC. And what we're looking at here on the screen is a real-life example of a qualification project that I handled back in 2015. Looking at it now, I can't believe it's six years ago.
But in any event, a Fortune 500 client of CSC's came to us. And for whatever reason, they had been doing business for 15 years, since 2000, but had not qualified. So what I show on the screen here are the two fees. The one they had to pay because they were 15 years late is the first fee. And the second one is what they would have paid had they timely qualified back in 2000. So right there, Illinois, 21,000 plus, versus $1,800, very expensive. You don't want to get in that situation too often.
Illinois is fair though, and we'll talk a little bit more about this in a later slide. Illinois bases their fees on the proportion of your business and property in their state versus that business and property everywhere. So, for example, if you're doing a million dollars throughout the country and only $100,000 in Illinois, the basis for your fee would be one-tenth. So that's a positive. But as you can see, these fees can build up quickly especially if you qualify after you've been doing business. Beth mentioned a little penalty there. And they were kind of delineated here in the next bullet point, so I'll kind of leave them out.
Another state they had to qualify in was the state of Florida. And looking at that, the $70 fee in 2000 is still the same fee today in 2021. But because they had not qualified, they paid $1,920. Georgia likewise, had they qualified timely, it was $225. They ended up paying $825. And they say everything is big in the state of Texas, and their filing fees are too. I took the liberty of looking up their fee today. It's $750. Five years ago, it was . . . well, in 2000, I should say, was $600. And they ended up having to pay almost $10,000 because they were so late.
Not every state asks the question, the date that you began doing business. These states clearly do. My own home state is a unique example. On the application for authority for corporations, the last question they ask you is to simply check a box. But those boxes read as follows: The foreign corporation has not since its incorporation or since the date its authority to do business in New York was last surrendered engaged in any activity in this state. That's Box A. If you can't check that, the only other alternative is Box B, which is the consent of the New York State Tax Commission is attached.
Now, I know we have a large audience out there. I don't know how many folks practice in New York or have dealt with the New York State Tax Commission. But it is an arduous task and can take quite a long time. So if you have a rush qualification in New York, and you've been doing business, you're probably looking at a minimum of three to four weeks before you can get the Tax Commission to issue that consent.
So I think at this point, I'll turn it back over to Zack, and we'll go from there.
Beth: Thanks, Pat. And just to go back one slide for contract enforcement. So when you do cure, and it's a foreign corporation cures and qualifies as a foreign corporation within the state, all their actions and contracts within that state are retroactively permitted and valid. So some courts have looked at this to the point where they've extended this to invalidate some contracts. So if a foreign corporation did not qualify when it should have qualified in a state and its contract party decides to void that contract, in some states that would be acceptable and approved by the court system, regardless if whether or not the foreign corporation ends up curing and is properly qualified. So that's something to look out for. Again, that's very state specific. Generally, once you cure, you get like solid permissible action. It's getting attractive validation.
So moving along, what's at stake — personal liability. So before the Model MBCA, some states actually held the corporate officers and directors that were acting on behalf of unqualified corporations were actually liable for the debts incurred by those corporations within that foreign state. Following the MBCA, courts conclude otherwise, thankfully, and that corporate officers are generally not liable for debts incurred by the unqualified corporation or corporations whose authority has been revoked, kind of lumping those into the same group here.
They found that the penalties imposed by the Model Business Corporation Act were exclusive. So that is much better for everyone. So under the Model Business Corporations Act, any limitation of liability of a shareholder or director of a foreign corporation is not waived just because that foreign corporation is transacting business in that state without properly registering or otherwise like not complying with the qualification statute. This is more of an extension of the general premise that a corporation is generally subject to the laws of the jurisdiction notice incorporation. So you'd have to look at the corporation or entity laws of the state of incorporation and see whether or not those directors, members would be subject to personal liability.
Beyond that, some states actually impose fines on individuals that act on behalf of these non-compliant, unqualified foreign corporations. You can see a list there. And in some cases, these can actually be criminal offenses, which is terrifying to me personally. So again, you have to look at each state's statutes, and each of these inquiries of whether or not a corporation is acting or doing business within a foreign state is very fact specific. So these are important ones to pay attention to.
And then beyond this, the fees and penalties are not the only costs of failing to qualify. There are a number of them. They are significant, though, the monetary fees and penalties. But in addition to that there are consequences to the enforceability of its contracts, its ability to enforce or defend itself in lawsuits. There's also risk that corporate actions might be invalidated. Any licenses that they need to get might be conditioned on qualification. So there's a number of consequences that should and can easily be avoided by qualifying when necessary.
Zack: Hey, Beth, this is Zack. Could you go back? I'm going to go back one. So I wanted to make one point. You mentioned it can create problems with reps and warranties, loan documents, etc. So I think, you know, in your and I world, in the corporate and the finance lending world and such, I think it's important for businesses to understand that a lot of times what we see and you know, Beth, and I probably draft this in every loan we work on, is a requirement or a rep and warranty that the business involved, the borrower or whoever, or even subsidiaries, or any of these entities involved are going to remain in good standing and current on taxes and all these things.
So what you have to be aware of is if you fall out of good favor with the state, that may trigger a default under loans, under your commercial contracts, under all kinds of other agreements you may not even think of. You may think, well, we're not really going to use this facility anymore. We're just going to kind of let it, you know, fall off. But then what ends up happening is, you know, your bank or your partner or somebody else, you know, finds out that you're not in good standing, and that's a default under some arrangement. And now you have liability there too, that you didn't even think about, and so or maybe you did, but, you know, it didn't matter.
So it's something just to be aware of, I think, especially in M&A and any kind of lending work, that your companies are staying in good standing, not violating any kind of events of default in your agreements. And just make sure that you're aware of those things when you operate or decide not to operate within a state. So that's all I wanted to add, Beth, thank you.
Okay, folks. It's Pat again, and I think I'll speak to this slide a little bit. So we're doing business in the state. Now, what do we do?
Well, if you've already formed the entity, you already have your name. But it's surprising how many people don't realize that because they've say formed a company in Delaware or Nevada, and they've got the name lockdown there, each state is different. So the name would have to be available to qualify in that state. There's ways, you know, to get around it if it's not, such as using a consent to use the name if the state accepts it or qualifying under a fictitious name.
The rest of the slide here is kind of particular to Illinois, but that's a good, broad band of the questions that are asked on the applications. Another thing that I might add, well, Illinois a little unique in that to qualify together with your application, you have to provide a certified copy of your certificate of incorporation and any amendments to it. But most states require a good standing certificate. They just don't want the application and the filing fee. They want to know that you're in good standing in the state that you were formed in.
The other things frequently asked are, of course, you know, the date that you incorporated, as well as the state, the registered agent name and address, names of officers and directors. And, in Illinois, they want to know the total paid-in capital. And as I mentioned earlier, that paid-in capital is the basis for the filing fee. You take your property and business figures, and whatever fraction you get from your property and business everywhere, versus . . . excuse me, property and business in Illinois versus everywhere, that's the fraction you use, multiply it times the paid-in capital to arrive at the filing fee.
My home state is a little unique in that they're one of the few that doesn't require a registered office. In New York, the Secretary of State is the agent for all business entities, and you just have to provide to the Secretary of State an address to which service process can be forwarded. And that can be anywhere in the United States.
Pennsylvania, you don't really need a registered agent, but you do have to have a registered office within the state. And I think in all other states, there may be one or two more exceptions, you do have to have a registered agent in that state.
At this point, I'll give it back to you, Zack or Beth.
Zack: Thanks, Pat. So just some kind of general considerations that people should consider. So for lawyers, if you're issuing a legal opinion, you need to be aware of any consequences if you're opining as to whether an entity is qualified to do business. So something that you may want to say and kind of a drafting point, if you will, is maybe instead of saying that an entity is qualified, that you could schedule the jurisdictions for where it's qualified.
So instead of saying the entity is qualified in every state it's required to be. Well, is that true? Do you know that? I mean, it so it kind of gets you in a trick bag where maybe that's true. But do you really know the law of all of these states that well, to opine on that? And maybe you do, and that's great, and that's fine. But if you don't, you could redraft your opinion or your rep or warranties or however it's set up to say, "Here's the schedule of the entities where they are qualified." So you know, for sure, and you're only speaking to those states, because you scheduled it.
Another consideration is licenses or permits that are required for qualification. For example, insurance and banking, in most states, if not all states, require that you be qualified to operate within that state. And on top of other things, so if you want to be an insurance broker, or the foreign entity or whatever is going to be an insurance broker or a banker, you have to qualify in most states. And then you can get your insurance license, you know, your broker license or your banking license or whatever it is.
And so those are considerations that have to be made when you're advising clients or when you decide to expand or any of that stuff. And so some of that is at a local level too, if you need to get local business permits. If you need to get a town permit or a county permit or something like that, you may be required by the town to do that. And so those are things you have to weigh and look at whenever you're doing any kind of foreign registration.
So another consideration is tax. I'm not a tax lawyer, so I have no idea, you know, the nuances involved. But there's some very clear considerations that are made and that is franchise tax, sales tax, income tax, those are things that are obvious. If you're going to do business in a state, you need to know what the tax consequences are going to be, because you don't want to think it's something and then you get hit with a huge tax bill. And kind of to what Pat discussed earlier is you don't want to think, well, I don't need to register, and then you get hit with a $30,000 franchise tax bill from Illinois because you didn't register in time, you know, and you let it sit for a few years or whatever the case is.
And then kind of also to a point Beth made is maybe you are gearing up for litigation, but you're barred from litigation because you have these back taxes, which now you have to pay to even litigate a claim, you know, which maybe you're owed. And so you just have to understand kind of what the tax landscape is, in each of these states that you're going to do business, so you know what you're getting into.
Aside from that, the consequences of tax, you also should know what kind of compliance requirements are, because some states require you to file annual tax reports or tax statements, or require you to maintain certain documents, you know, in case of an audit or something like that. So it's also important to understand what those state-specific requirements are. But I think, you know, you kind of get a lot of that from either your tax attorneys, your accountants. You know, that'll be a good place to get that information.
So just kind of a general overview, it's really important that attorneys, business consultants, you know, business owners, officers, agents, you have to be proactive in understanding the laws and the landscape of the state you're in and understanding your role in those states. So it goes back to the analysis of: What is doing business? What is not doing business? You have to look at it in the totality of the situation.
And so, if you're doing a few things in a state that you think maybe not be business, it might be worth consulting an attorney in that state or someone experienced dealing with the type of business you're in or the state statutes involved and that kind of thing, because you don't want to be reactive and now you have this huge bill, or now you can't operate out of this facility, which you thought you were going to be able to and you sunk all kinds of capital into preparing it or something like that.
So you have to be proactive. The facts are going to drive each of these cases, and it's going to vary not only case-by-case, but state-by-state. And it's going to change as the law develops too. So this isn't going to be, you know, the here we did this presentation today, and that'll be go forward and don't think about it again. It's going to continue to change in each state based on your situation. So you always have to be looking at the facts involved.
One another kind of important plug is vendors like CSC are good at compiling this information, pulling the resources together, and then advising people on how to deal with these filings, with the requirements of each state, and help guide people through it. And, you know, we use CSC and we use other vendors for the same purpose, because sometimes you have a question and they have this information readily available. So it's a good resource to go to, to try to get some of that information.
So you need to know the ins and outs of your business. You know, you're going to know the business owners, the attorneys, whoever is involved in the business are going to know more closely what the business is doing and how involved it is, you know. And so if you have one employee who's working from home in another state, maybe you know that person's involvement in that other state and what contacts that has and how involved it's going to be with that person being in another state. But that's on the business owners, that's on the companies to know so that they know how to comply if there are any requirements at all, you know, with that one employee or that one facility or whatever the case may be.
You need to consider the consequences of not registering, but maybe you should have. So are there tax consequences, penalties, litigation, you know, etc., that are going to be connected to not registering? Are you going to foreclose certain things that you might have had available to you if you did register?
And then the flipside to that, are there consequences to registering when maybe you shouldn't have or didn't need to? For example, if you registered because you were just trying to be proactive, you just want to make sure you covered your bases, but then in doing so, like in Philadelphia, if you register, it automatically you consent to general jurisdiction in court. So do you want to open yourself up to litigation in Pennsylvania if you didn't have to? And maybe you did have to, you know, that's where it gets into the case-by-case situation. Maybe you already were required to and it doesn't matter, but maybe you didn't, and so you need to consider both of those avenues to decide whether registration was proper.