Defining “doing business”

The term doing business is important in LLC law because it creates the guidelines under which you may or may not be required to foreign-file. Of course, you’ll want to foreign-file in as few states as necessary. With each additional state comes additional laws to learn and red tape to follow, as well as some pretty hefty fees. Unfortunately, as you find out in the next section, foreign-filing is sometimes necessary.

Determining whether you’re actually “doing business” in another state can be difficult. What if you tend to ship your products to customers across the country, yet your office and all your employees are housed in your LLC’s home state? Which state’s laws must you follow? Remember, each state’s laws are different. However, if you think that you might be required to foreign-file in a particular state, here are a few questions to guide you:

• Does your LLC operate out of a physical office or retail store in the state?
• Are you often physically in the state, meeting with customers and vendors and transacting business (instead of just speaking with them over the phone or by e-mail)?
• Does a large portion of your LLC’s revenue come from that state?
• Do any of your employees physically work in the state? (In other words, do you pay state payroll taxes?)

If you answered yes to any of these questions, then there’s a good chance that you are doing business in the state and are required to foreign-file your LLC there.

If you’re an online retailer or service provider, don’t freak out. Making money from customers in a particular state doesn’t necessarily mean that you’re transacting business there, as far as the law is concerned.

Foreign-filing to do business in multiple states

Yes, it’s a necessary evil, but with the help of your registered agent and perhaps a good advisor, foreign-filing can be a breeze. Just be aware that if you’re planning on doing business in numerous states, the filing fees can get pretty hefty, especially considering that a lot of states charge more for filing foreign LLCs than they do for domestic ones. Unfortunately, you can’t get out of the fees, but at least you can try to incorporate these costs into your budget.

Registering (also called qualifying) your business in another state is remarkably similar to the formation process. This stuff should almost be second nature to you after creating your original LLC. (I cover those steps in Chapter 6.) Registering is relatively easy, and foreign entities generally have less paperwork to deal with in terms of certain licenses and permits after the registration is completed. Whew … something to look forward to!

When you register, you submit an application. In many states, this application is referred to as a certificate of authority. You can download the basic form off the secretary of state’s website for the state in which you are attempting to register, or you can have a formation company create the application for you.

When filling out the application, you’ll likely have to provide the following:

• The name of your LLC: List the name as it appears on the articles of organization in your home state.
• The name of your LLC in the state in which you are registering: If your LLC name isn’t available in the state in which you’re registering, you may have to select an alternative name under which to do business in that state.
• Entity domicile: This means the date and state in which the LLC was formed.
• Registered agent name and address: Give the name and address of your LLC’s registered agent in the state in which you are registering to do business.
• Your principal office address: It’s common to put your resident agent’s address here as your principal office in the state. However, you can also list your corporate office address if you have an office in that state.
• Name and address of each manager and/or member: The information that is required here varies from state to state. Check the state form you are using or contact your formation company if you have any questions.
• Signature of a manager or member: One manager or member’s signature is required to file the registration.
• Signature of resident agent: Your resident agent is required to sign the application stating that he has agreed to be your resident agent.

In most states, you must show a proof of good standing from your LLC’s home state before you can file your application. This proof is often called a certificate of good standing or certificate of existence. The certificate shows the state with which you are foreign-filing that your LLC is in good standing in the state in which it was formed. To make it even more difficult, some states require that you provide a certified copy of your articles of organization. You can contact the secretary of state’s office in your home state to obtain these documents, or you can have your formation company do it for you. After you’ve obtained your certificate of good standing (and your certified copy of your articles, if required), send it in with your application.

Before your application can be approved by the secretary of state, it must be signed by your resident agent in that state. If you’re registering to transact business in multiple states, you may have a hard time keeping everything in order and staying on top of your filing dates. Running a company is hard enough without all the tedious paperwork involved in maintaining your LLC’s compliance in a zillion jurisdictions. For a nominal fee, you can have a multi-state resident agent company serve as your resident agent in all the states in which you’re doing business. The company can assist you with the filings, stay on top of your paperwork, and even let you know when your filings are due!

After your foreign-filing package is ready to be sent to the state, you mail it to the Secretary of State (called the Department of State in some jurisdictions), along with a check covering the cost of the filing. At www.docrun.com/dummies (password is onesmartdummy), you can find an up-to-date list of all Secretary of State offices and their respective addresses. Then, you just wait for it to be sent back with an “approved” stamp on it!

Working with a formation company to track your filings

Because of the multitude of filings that are required for every state in which you are transacting business, you may want to consider hiring a formation company to handle everything for you. That way, you can maintain compliance and spend your time running your business rather than struggling with strange filings for states you aren’t familiar with and, worse, trying to remember when all those filings are due.

The Big Four registered agent companies offer services tailored to each state. The Big Four include

• Corporation Service Company or CSC (www.cscglobal.com)
• CT Corporation (ct.wolterskluwer.com)
• InCorp (www.incorp.com)
• National Registered Agents, Inc. or NRAI (www.nrai.com)

For instance, for $99 per state, InCorp offers a Company Compliance & Resident Agent Service that tracks your filings, filing dates, mail forwarding, and so on. It also has an online system where you can view all your filing dates, your filings, your corporate documents, a compliance calendar that lists the due dates of all your filings, and so on. These compliance tools — common among the Big Four — are a huge help because filing dates vary from state to state, and the tools can keep you from paying hefty late fees for missed filings. Most smaller registered agents don’t have the technological proficiencies that bigger agencies can afford.

Submitting initial reports

In every state in which you foreign-file, you need to file an initial report. This report is usually identical to the initial report that you file when forming a new LLC, which I show you how to do in Chapter 13. You need to make sure that the information you submit in one state is the same as the information you submit in another state. When you’re doing many filings in other states, sometimes it is hard to remember that your LLC is still only one entity with one set of members and one federal tax identification number.

Obtaining business licenses

If you are foreign-filed in multiple states, you need to apply for state and local business licenses, just as you would if you were forming your LLC in that state in the first place. Use your corporate office address in that state to determine your local jurisdiction (the city or county). If you’re using your registered agent’s address as your corporate office address, then use that zip code to find which local agencies you need to register with. Your registered agent should have this information.

In addition to general state and local business licenses, your LLC may need to obtain other special permits, depending on the type of business you’re engaged in. For example, if you’re operating a physical office in that state, then you may have to obtain a use and occupancy permit. If you’re engaged in a heavily regulated industry such as alcohol, then you may need to obtain special alcohol permits. In Chapter 13, I show you how to file for and obtain the requisite business licenses for your LLC. This information is applicable to foreign-filed entities as well — the only difference is that you’ll be doing it in multiple states rather than just the one in which your LLC is domiciled.

Paying taxes

If you determine that you are, in fact, doing business in multiple states, the tax man in each state will want a piece of the action. How much will you owe? Well, that depends. Each state handles taxation differently. In general, each state requires you to allocate a percentage of your sales according to an apportionment formula, because sales figures alone don’t give a complete picture of how much business you are doing in that state. For example, you may have your headquarters and manufacturing operations based in Rhode Island but make most of your sales in other states. The formula entitles Rhode Island to a larger share of your income.

Fortunately, most states use a common formula involving three factors of your business:

• The property factor is the average value of your in-state property (furniture, equipment, buildings, inventory, and so on that’s stored or used in that state) divided by your total property (the furniture, equipment, and so on that you own everywhere).
• The payroll factor divides your in-state payroll by total payroll.
• The sales factor equals your in-state sales divided by total sales. Note: Some states give sales a double weight because it’s the most important factor.

The states average these three factors to determine how much business you are doing in each state. Because a particular state may use a different formula than the rest, you could end up paying taxes on more or less than 100 percent of your actual income. The LLC may even have to withhold taxes on non-US resident members. Be sure to consult with a CPA in each state to confirm the formulas and each member’s tax obligations.

If you’re selling tangible goods and will be paying sales tax in another state, you definitely need to open up a separate bank account for that state. Keep your sales receipts for each state separate so you know which states to pay sales tax to.

Withdrawing from a state

What happens when you’re no longer doing business in a particular state and don’t want to keep up with the paperwork of being registered there? Withdrawing (or canceling) your LLC is very simple — you just file a certificate of cancellation with the secretary of state’s office in the state from which you want to withdraw.

The certificate of cancellation is a pretty standard form and contains some basic information, such as

• The name of the LLC as stated in the articles of organization
• The name of the LLC as it is doing business in that state, if different
• The effective date of the cancellation, if different from the filing date
• Any other information that the manager or member filing the certificate of cancellation feels is relevant

You can normally download this form off the secretary of state’s website and mail it in with the filing fee. You don’t really need an attorney to file the certificate of cancellation. However, you should seek legal advice if the entity you are withdrawing has assets or physical locations in that state.

Changing your home state

Sometimes, you don’t want to expand your empire as much as you simply want to move your empire. This process is often referred to as domestication or redomiciling, and it means moving your LLC from one state to another.

If the state you’re moving to allows it, you can keep your existing LLC and transfer it to the new state and then dissolve the record in the old state by filing a regular old dissolution. (I discuss dissolution filings in Chapter 16.)

If your state does not allow for this sort of easy transfer, then you need to form a new LLC in the new state, transfer over all of your assets, and then dissolve the old LLC. This isn’t necessarily a simple process; however, if your LLC has elected partnership taxation, there is a good chance it can be a tax-free one. Make sure to speak with a qualified CPA before going this route.

Find out if your state allows a simple redomicile procedure (or if you need to create a completely new replacement LLC in your new state) on www.docrun.com/dummies/redomicile — password is onesmartdummy.