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Eric Geringswald
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Eric Geringswald Posted on : Insider Community

To qualify or not to qualify? The answer can depend on the transaction type and the jurisdiction

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A corporation that transacts business outside its state of incorporation without first qualifying to do business may be at risk of sanctions and penalties, could be denied its day in court, or suffer delayed or cancelled transactions.

Not all corporate activities require qualification. The widely-accepted definition of doing business in a particular state is “regular, repeated, and continuous business contacts of a local nature,” but courts interpret and apply this definition differently. Thus, the question of whether a corporation is doing business for qualification purposes is determined on a case-by-case and state-by-state basis.

Qualifying to Do Business in Another State: The CSC 50-State Guide to Qualification takes a deep dive into the question of qualification, providing careful analysis and case illustrations of the types of activities that do and do not trigger and do not trigger the qualification requirement.

The following excerpt is from Chapter 2 the 2019 Edition of The CSC 50-State Guide to Qualification, “Corporate Activities that do not Require Qualification.” It explores the “isolated transactions” exception, and the ways that courts in different states have applied this exception:

Conducting an isolated transaction that is complete within 30 days and that is not one in the course of repeated transactions of a like nature does not constitute doing business for qualification purposes. Many states have adopted this provision without any changes and others have altered the time limitation. For example, Illinois increased the time limit to 120 days, California and North Carolina increased it to six months, and Maryland, Massachusetts, and Vermont place no time limit on the length of time in which the transaction must be completed.

An isolated transaction that cannot be completed within the statutory time limit constitutes doing business for qualification purposes. In a Texas case, the court found that a foreign corporation should have qualified in Texas because a sales contract could not be completed within 30 days. (Gosch v. B&D Shrimp, Inc., 830 S.W. 2d 652, 654 (Tex. App. 1992)). In that case, two parties entered into a sales contract for a shrimp boat. One provision of the sales agreement required the buyer to pay a percentage of the cash proceeds from daily shrimp catches over the course of a year. Even though this contract and the disbursement of proceeds was an isolated transaction between the two parties, and there was no evidence that the foreign corporation intended to enter into continuing business activity in Texas, the foreign corporation was required to qualify because the payment to the seller was to take place over a time period that exceeded 30 days.

While it is fairly simple to determine whether a corporation has complied with the statutory time limit, it is more complicated to determine whether a corporation’s activities constitute an “isolated transaction,” and the answer can vary from state to state. The key issue is whether the activity is sporadic, casual, and isolated, such that it does not constitute carrying out the ordinary affairs of the corporation. A single act that is part of the ordinary business of the corporation can become more than an isolated transaction if it indicates a willingness or intent to conduct other business in the state, or to conduct continuous business. (See, e.g., Barker v. County of Forsyth, 281 S.E. 2d 549, 551 (Ga. 1981)).

For example, in Maryland, where the isolated transaction exception does not have a time limit, a court found that two unique contracts did not trigger the qualification requirement. (Aeropesca, Ltd. v. Butler Aviation Internat’l, Inc., 411 A. 2d 1055 (Md. App. 1980)). In that case, a corporation entered into one contract to repair a plane part, and another contract to purchase a plane. After noting that the foreign corporation did not maintain an office, schedule flights, solicit or transact any other business, or have any other contacts with Maryland, the court concluded that two contracts were nothing more than sporadic, isolated dealings and did not constitute doing business for qualification purposes.

In contrast, in the following Georgia case, a court found that the foreign corporation’s activities in Georgia were sufficiently continuous to indicate an intent to do business there. (Barker v. County of Forsyth, 281 S.E. 2d 549 (Ga. 1981)). In that case, a Vermont corporation contracted with a Georgia landowner to build an alpine slide. The Vermont corporation spent almost $24,000 designing the slide, sent staff members to Georgia for two weeks, and entered into a sales agreement to purchase land where the slide would be situated. When the Georgia county denied building permits, both parties brought suit against the county. The county sought to have the Vermont corporation dismissed from the suit because it had failed to qualify to do business in Georgia. The court granted the county’s motion, even though the Vermont corporation did not intend to build other slides in Georgia, concluding that the extent of the activity was considerable enough to indicate continuity.

A similar conclusion was reached in New York, where the court found that the plaintiff foreign corporation had engaged in sufficient activities to trigger the qualification requirement. (Franklin Enters. Corp. v. Moore, 34 Misc. 2d 594 (N.Y. Sup. 1962)). In that case, a foreign corporation sold a freezer to a couple in New York and later filed suit in New York to recover the balance owed on the purchase price. The defendants argued that the plaintiff corporation could not bring suit in New York because the corporation was doing business in New York without qualification. The plaintiff corporation argued that the sale was an isolated transaction that did not trigger the qualification requirement. The court disagreed, finding that the corporation had engaged in sales activities — including advertising in New York and setting up an answering service to handle calls in connection with its freezer sales — that did not constitute an isolated transaction. Thus, the plaintiff corporation could not maintain an action to recover on its contract.

As this excerpt indicates, determining whether to qualify to do business in a foreign state can be a complex and time-consuming task, but it needs to be done in order to avoid the harsh consequences of making the wrong decision. Qualifying to Do Business in Another State: The CSC® 50-State Guide to Qualification is a comprehensive toolbox that can help with that determination.

A Qualification Handbook for all 50 states

The book explores the Model Business Corporation Act (MBCA), which serves as a template for most states’ laws governing foreign corporations’ business activities within their borders. It examines the activities listed in the MBCA that are not subject to regulation, and the activities that require a foreign corporation to register to business. There is also a discussion of how internet and e-commerce activity could trigger qualification requirements, and a look at the consequences of doing business without qualifying.

Step-by-step instructions are provided for qualifying to do business in foreign states, as well as registration procedures for charitable organizations.

The handbook also includes a comprehensive scope of annotated qualification statutes for all jurisdictions, giving legal practitioners easy access to the current statutes and relevant case notes that relate to doing business in a foreign state.

Two easy-to-use charts summarize the activities that do not constitute doing business and the consequences of failing to qualify. Both charts include comments and citations. The appendix contains a list of qualification forms for all 50 states and the District of Columbia, with forms on the companion CD-ROM.

2019 Edition

The Qualification Handbook is updated annually. Significant changes found in the 2019 edition include:

  • An updated list of states that have enacted exceptions to their qualification rules for foreign corporations transacting business or providing services while responding to disasters or emergencies.
  • New case studies illustrating activities that do and do not constitute doing business in a foreign state.
  • Insightful analysis of a recent Supreme Court case that could impact future litigation against online retailers who have not registered in a state to do business.
  • Updated information on registering and qualifying nonprofits in foreign states.

The charts have been updated and changes to qualification statutes for all 50 states and the District of Columbia have also been captured in the book’s statutory section.

The 2019 Edition of Qualifying to do Business in Another State is available as a softbound book or as an ebook, compatible with dedicated e-reader devices, computers, tablets and smartphones that use e-reader software or applications. It is also available on the LexisNexis Digital Library.