If an LLC provides an interstate service in a state that it is not registered as a foreign entity, would that be considered illegal?

If your LLC or corporation operates in more than one state, you may have to comply with the bureaucratic requirements of each state in which you do business -- a process called "qualifying to do business" in a state. Whether or not you must qualify to do business in a state depends on a number of factors, discussed in this article.

In addition to qualification requirements, you should also know about tax issues and dealing with potential lawsuits in other states. Although these issues aren't discussed in this article, you can get more information on these topics from Nolo's eGuide, How to Do Business Outside Your State, by Anthony Mancuso and Rich Stim.

When You Must Qualify to Do Business in Another State

Although every state has its own variations on when a business must qualify as a "foreign" (out-of-state) corporation or LLC, they all follow this same basic principle -- companies must qualify in a state if they are engaged in intrastate business in that state. If the business in which they are engaged in a state is merely incidental to a larger interstate business operation, they may not have to qualify.

Intrastate -- must qualify. Your LLC or corporation must qualify to do business in any state where it is engaged in intrastate business. This means that at least part of your business is conducted entirely within that state's borders. For example, if your business has a warehouse in another state and you sell and ship from that warehouse to customers within that state, you are engaged in intrastate business in that state.

Interstate -- do not have to qualify. On the other hand, a state can't make you qualify or pay taxes in that state if you only engage in interstate business to other states -- meaning that all of your business is conducted across state lines. For example, if you sell and ship merchandise from your home state to residents in other states, you are engaged in merely interstate business, which cannot be regulated by other states.

Exceptions to intrastate rule. States exempt certain types of business from the definition of intrastate business. Here are some examples of the types of business activities that out-of-state corporations and LLCs can conduct without having to qualify:

• mail order or telephone sales, if they are the only business activities the company engages in within a state
• maintaining a website, if the website is the only presence you have in other states
• national (not local) advertising campaigns to customers in that state
• selling through independent contractors in that state.

How to Qualify to Do Business in Another State

Qualification is simply a registration process that involves filing paperwork and paying fees -- similar to the procedures and fees required for incorporating your business or forming your LLC. As part of the process, you must also designate a registered agent -- a person or company who resides in the state who agrees to accept legal papers on your behalf in the state. Qualification fees range from $100 to $300 (depending on the state).

Once you are registered in a state, you must report and pay state income and sales taxes, as well as abide by state employment tax filings if you have sufficient payroll, property, and sales in the state.

If You Don't Register Where You Should

If you don't qualify in a state where you meet the requirements for qualifying, there may be consequences.

Penalties. You may be subject to financial penalties known as late-qualification penalties. Under California law, for example, there is a late-qualification penalty of $250 plus $20 per day for willful (knowing, not inadvertent) failure to qualify.

Disallowed from bringing lawsuits. Most states prevent companies that have not qualified in that state from bringing a lawsuit in that state's courts. Under these laws (known as closed-door statutes), a court will delay or dismiss your lawsuit if the defendant objects because you did not qualify your business in the state.

Play It Safe

It makes sense for you or your lawyer to find out the rules in states in which your business is engaged in any intrastate business. If you conclude that your activities might be considered intrastate business in some states, it's best to qualify to do business in those states. Better to deal with the inconvenience and modest filing fees ahead of time rather than face penalties and court delays if the state determines that you should have qualified, but didn't.

The simple answer to this question is that each state is different, so you need to work with someone who can help you understand the laws of the state where you want to do business. In my opinion, it's sufficient to have an attorney near you research the compliance requirements for that state.

Often, the question is whether you will have a place of business in the state. Typically it is not necessary to register in a state simply because some of your products will be sold within the state, or even if you have sales people who travel to the state to promote your products.

However, a state may be more stringent about certain kinds of products or services, and some local governments impose requirements.