When should I register a business in another state?

A business that expands its operations into a new state might need to register as a foreign business entity. It depends on whether the business’s activities in another state meet that state’s definition of “doing business,” which typically involves having a physical presence or significant economic ties to the state. As technology makes e-commerce and remote work more common, understanding the requirements for qualifying as a foreign business has become extremely important for business owners.

Where Should I Register My Business?

Business owners often wonder where to form their LLC or corporation and whether they can operate across state lines. In most cases, small business owners register their business in the state where they live and plan to operate. 

If you want to operate in multiple states, your business must register as a foreign entity in each state where it “does business” — and doing business is defined under each state’s statutes, which means it can vary slightly.

It’s also possible to form a business in one state and operate in another, though requirements vary by state. For tax purposes, if your corporation meets federal requirements, it can elect S-Corp status regardless of the state of incorporation. While some entrepreneurs consider forming in states with favorable tax laws or incentives, the best choice often depends on your business needs and where you plan to conduct most of your activities.

What Does Foreign Qualification Mean?

Foreign qualification is the process of determining whether an out-of-state business meets the legal requirements to operate in another state. This usually includes the following criteria:

• Business name: The foreign business’s name is available in the state, or it uses an assumed name.
• Good standing: It is in good legal standing in its home state.
• Registered Agent: It has designated an individual or business to serve as its registered agent in the state.
• Many states also require filing a Certificate of Authority and paying a filing fee.

What Counts as “Doing Business” in a State? 

What counts as “doing business” in a state isn’t always clear. In general, it means having a physical presence or making money there. Sometimes, it’s easier to look at what doesn’t count as doing business to better understand what does.

The following factors often require a business to register as a foreign entity:

1. Physical Presence

States will often consider an out-of-state company to be “doing business” there if it maintains a physical presence in that state. The more significant the presence, the more likely foreign entity registration is required.

• Offices: A company that owns or rents office space in a state most likely “does business” there.

• Retail space: Any physical location that involves direct sales to consumers, such as stores or restaurants, counts as “doing business.”

• Warehouses: Storing inventory and equipment typically counts as “doing business.”

2. Employees

Remote work has made this issue more confusing. Generally, a company that has employees in a state is considered to be “doing business” there. However, not every state sees it the same way: some states require more than one employee or even regular in-state operations.

Some states consider employing a resident as “doing business” because it creates an economic connection to the state.

• State taxes: A business that employs someone in a state might be obligated to withhold state income tax and pay state payroll and unemployment taxes.
• State laws and regulations: Employing someone in a state often means the business must follow that state’s employment laws and regulations. These might address issues like wages, overtime, paid time off, and employment discrimination.

3. Legal Obligations

If your business regularly signs contracts in another state, it may be considered “doing business” there. The more those contracts are tied to that state, the more likely you’ll need to register as a foreign entity. But isolated transactions (such as a single, short-term contract) aren’t usually considered doing business in a state.

For example, a business with a contract in a foreign state may be “doing business” if: 

• Length of the Contractual Relationship: The contract lasts over a year and has already been renewed multiple times.
• Location: The vendor performs all contractual obligations, such as delivering goods, in the foreign state.
• Size or Amount: The contract has significant value for both the business and the vendor.
• Enforcement: The contract is governed by the foreign state’s laws, and any lawsuit to enforce the contract must be handled in that state’s courts.

4. Client Contact

A business that has regular, in-person contact with customers, clients, or prospects in a foreign state may be considered to be “doing business” there.

5. Revenue

When a company earns a substantial amount of revenue from a foreign state, that may count as “doing business.” This often happens through high sales volume or major contracts.

What Does Not Count as “Doing Business” in a State

Some business activities generally do not count as “doing business” for foreign registration purposes.

1. Individual Online Sales

A business that sells goods online is not automatically “doing business” in every state where customers make purchases. This can be confusing because a state may require an e-commerce business to collect sales tax without requiring foreign registration.

2. Independent Contractors

Employing independent contractors in a state does not typically require foreign entity registration. This is because contractors don’t create the same type of economic presence as employees.

3. Owning Real Estate

Owning property in a foreign state does not automatically mean a business is “doing business” there. On its own, it doesn’t create a strong enough business connection to the state.

What Happens if I Do Not Register My Business in Another State?

A foreign state can impose penalties on a business that should register there but fails to do so. These may include:

• Fines: The state can assess fines against a business for not registering. Some states may also fine individuals who act on behalf of unregistered businesses.
• Loss of access to courts: A business that fails to register cannot file lawsuits in that state’s courts. This can prevent the business from enforcing contracts or asserting other legal rights.

Can I Register My Business in a Different State?

Yes. It’s possible to incorporate or organize a business in one state and operate it in another. However, the business must register as a foreign entity in any state where it operates.

Can You Set Up an S-Corp in Any State?

Yes. S-Corp status is based on federal tax law. As long as a business entity is properly organized as a corporation under state law and meets the federal requirements, it can elect to be an S-Corp.

What Is the Best State to Register a Company?

This question has no one-size-fits-all answer. Most small business owners form their business in the state where they live and plan to operate. Some may consider states with favorable tax laws or business incentives. Because requirements and circumstances vary, it can be helpful to get personalized guidance.

If you have specific questions about registering your business in another state or want advice tailored to your situation, a Legal Pro can help. Our business formation services support entrepreneurs and business owners through every stage, from starting a new company to expanding across state lines.
 

Key takeaways A company that “does business” in another state must register there as a foreign entity. The definition of “does business” typically means having a physical presence or a significant economic connection to the state. A company that fails to register as a foreign business can face fines and loss of access to that state’s courts.

Additional resources

• What is a Foreign Entity?
•  How to register a business in another state
• How to move your business to another state