This is the 22nd in a series of brief articles that Moye White is sending to its clients and friends to provide practical insight about the opportunities and challenges presented by today's economy.
Business owners of growing businesses are always on the look out for opportunities to expand into new locations. Laws may vary, however, and failure to comply may have a significant impact on your business. It is important to understand the legal obligations that may impact your business before you venture into a new city or state. International expansion may require additional compliance steps, but those obligations are beyond the scope of this article.
Whether a company is doing business in a new state is not always obvious. For example, consider whether delivering or installing certain goods across state lines or making collection calls to residents of a different state is considered “doing business.”
Rather than defining “doing business,” many state statutes describe certain limited activities that do not require compliance with the state’s laws. These vary by state, but often include limited activities such as (i) holding board or shareholder meetings in the state; (ii) maintaining bank accounts; (iii) selling through independent contractors; or (iv) conducting an isolated transaction that is completed within 30 days. As a general rule, if your company is conducting any business beyond these limited exceptions—for example establishing an office, hiring employees, or conducting repeated business transactions in a state—the company should determine the steps necessary to comply with the laws of the state. If your business consists primarily of Internet or mail order sales without the use of resident salespeople, such sales may not constitute “doing business” if the orders require acceptance outside the state before they become contracts.
Consider the following issues when preparing to engage in business in a new jurisdiction.
First, consider whether your new opportunity is in a different state from where your company is organized or incorporated. If so, you may need to file paperwork (often called a “qualification” or “certificate of authority”) with the secretary of state of the state where your opportunity is located prior to doing business in that state. As described above, if your company is conducting any business beyond certain limited exceptions, your company should probably seek to be qualified in such state.
Failing to properly qualify to conduct business can have serious repercussions, including fines and penalties, and losing the ability to enforce any of your company’s rights in the courts of the state. This can, for example, prevent you from collecting amounts owed to your business for goods or services sold.
The licensure requirements of a new jurisdiction are another issue to consider. Most states have licensing requirements for certain professions, including building contractors, teachers, accountants, lawyers, medical professionals, and others. Licensing requirements vary by profession, but may include minimum educational requirements, testing, evidence of experience practicing the profession, registration, and payment of licensing fees.
Penalties for failing to be properly licensed vary, but may including professional sanctions, an inability to collect on completed work, or criminal liability.
An additional issue your company should address when expanding to a new jurisdiction is taxes. A company may be subject to city, county or state sales taxes, employment taxes, occupational taxes, and property taxes in a location where it is conducting business.
Failing to properly pay all required taxes can also have significant repercussions. Jurisdictions may even be able to file a tax lien in your company’s assets that will prevent you from conducting your business in the ordinary course.
Finally, some states may impose specific obligations on the conduct of certain business in a state regardless of whether such business is “doing business,” is required to qualify, becomes licensed or pay taxes. For example, a number of states have fair debt collection practices laws that may impose reporting and compliance obligations on persons who attempt to collect a debt within the state. Similarly, if you are offering securities to residents of a particular state, you may be subject to state securities regulation.
Consulting with an attorney who is familiar with local laws concerning qualification, licensing requirements, applicable taxes, and other regulatory requirements is the best way to ensure that you are able to take full advantage of the opportunities available in new locations.
For more information contact: Jackie Benson, Dominick Sekich or Ted White, Chair, Transaction Section at (303) 292-2900.
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Moye White LLP has prepared this bulletin to provide general information; however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.