I frequently explain to my startup clients that forming
their business in Delaware (or another state they choose if it is not their
home state) may not be enough: they also need to register it in every state
where they intend to do business. This means that if they intend to conduct
business in New York, they are required to qualify their company as a foreign
corporation or LLC in the State of New York.
First, it is important to distinguish three separate concepts: (1) when do an
entity's activities in New York become sufficient to subject it to personal jurisdiction
of New York courts (a jurisdictional doing business test); (2) when do an
entity's activities in New York become sufficient to require it to pay taxes in
New York (a taxation doing business test), and (3) when does an entity need to
apply for authority to do business in New York (a qualification doing business
test). In short, in analyzing the jurisdictional test, courts look at the
company's activities within the state as well as activities outside of the
state but directed at the state (Civil Practice Law and Rules Sections 301 and
302). Courts have applied the Commerce clause to address the taxation doing
business test. Its approach is outlined in Complete Auto Transit v. Brady,
430 U.S. 274 (1977) that sets a 4-prong test. It is important to understand
that even if a company is subject to New York jurisdiction and / or taxation,
it does not necessary mean that it has to also qualify to do business in New
York. But the opposite is true: if a company is qualified to do business in New
York, New York courts have personal jurisdiction over it, and it is required to
pay taxes in New York.
Now, let's look at the qualification doing business test: what does it means to
be "doing business" in New York.
The definition of "doing business" in New York is often a source of confusion.
The laws do not provide us with a clear definition but instead provide a
non-exclusive list of activities that do not constitute doing business. So,
according to the New York Business Corporations Law Section 13-1301, a corporation is NOT doing business within the
State if it conducts one or more of the following activities: holds meetings of
its shareholders and directors here, maintains bank accounts, maintains an
office only for the transfer, exchange and registration of its securities,
appoints and maintains trustees or depositories with relation to its
securities, or maintains or defends any action or proceeding, whether judicial,
administrative, arbitrative or otherwise, or settles claims or disputes.
Most of the definition of what constitutes "doing business" in New York comes
from court decisions and is very fact specific. To summarize, to be "doing
business" in New York, a foreign organization's activities must be (1) of
local, intrastate character; (2) regular, permanent, continuous and systematic;
and (3) vital and essential to the organization's business (not merely
incidental). Let's look at some examples:
In conclusion, determination of what constitutes "doing
business" in New York depends on the facts of the case. Failure to
qualify in New York as a foreign entity while doing business here will leave a
company without access to New York courts until it obtains authority and pays
all due fees, taxes and penalties.
This article is not a legal advice, and was
written for general informational purposes only.
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.
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