When filing an entity – either a business or not-for-profit corporation or a limited liability company – the first thought is often, “where should I file?” The most obvious answer is, “where the entity is located”. While this is a valid answer, it may just be a starting place.
It is tempting to file in an entity’s home state and leave it at that. After all, in this day and age, most companies operate all over (especially considering that most entities have a web presence, which transcends boundaries). However, this belief may end up being very costly.
While it is true that an entity should be initially filed where its main office or place of business resides, there is also a very real requirement to file in any other state in which it is located or conducts business. Such a filing in the additional state(s) is called an “application for authority to do business” in that state (also known as a “qualification”). Failure to file a qualification in any state in which the entity is “doing business” will result in taxes and possible penalties assessed against the entity.
What constitutes “doing business”? If companies nowadays operate all over and on the Internet, is it necessary to file in every state? Generally, no. The answer is found in every state’s “foreign” entity statutes. Every state defines (generally) what it considers “doing business” and, while it varies by state, some basics apply everywhere. Where an entity has an office or a bank account are the two most common indicators of “doing business”. Other things like where the entity actively promotes its business or where a significant amount of business is generated may be factors used to determine whether a company is doing business, and therefore must “qualify” to do business, in that state. The general “rule of thumb” is, if you think you are doing business in a state, you probably are.
Failure to file an application for authority (“qualify”) to do business in a state where you should end up costing a great deal. Not only will the entity have to pay the general initial expenses (filing fees, fees for obtaining certificate of good standing from the original state, annual franchise tax and or annual report fees, income tax fees, etc.), but it may have to pay penalties for failing to file and arrears for any previous years in which it operated without authorization. These fees can add up quickly!
To file a qualification, it is generally necessary to be up to date and in good standing in the state in which you originally filed the entity. Assuming that the entity is in good standing, it will file an Application for Authority to do Business (sometimes called a “Foreign Business Application” or something similar), accompanied by a Certificate of Good Standing from the “home” state and the required filing fees in any state in which it is doing business. Further, most states require a registered agent located within that state to accept service of process, annual reports, tax documents or official correspondence from government agencies. If the entity does not have anyone who resides physically in that state, it may have to retain a third-party company like Blumberg to be its registered agent. There are annual fees for that, as well. This could add up considerably if the entity needs to qualify in multiple states.
In order to accomplish these seemingly herculean prerequisites, it may be easier to rely on a service company, such as Blumberg, to make sure that all of the requirements have been met and that the company is represented by a registered agent where it needs to be. Using an experienced and nationwide company to manage its filings and statutory obligations will save time and expense. Further, when the overwhelming task of coordinating all annual requirements, filings and fees come up, it helps to have a service company like Blumberg, with its JULIUS® portal, to assist an entity in remaining in compliance with each states’ laws. The JULIUS® portal is an electronic website which allows its customers to view filed documents, service of process and annual reports and provides reminders of annual report and franchise tax filing dates and the related state fees. This is an invaluable tool when a company has to remember deadlines and fees across multiple states. As an added bonus, Blumberg can do all of the necessary filings on behalf of the entity every year. No missed deadlines or assessments!