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Across State Lines: Registering Your Online LLC for Nationwide Success
In today’s digital age, the internet has paved the way for entrepreneurs to establish businesses that transcend geographical boundaries. The rise of online businesses, including Limited Liability Companies (LLCs), has prompted many entrepreneurs to ponder the question: “Should I register my online LLC in each state it operates?” This article aims to provide valuable insights into the intricacies of registering an online LLC in different states, navigating the legal landscape, and making informed decisions with the guidance of an attorney.
Understanding Online LLCs
A Limited Liability Company (LLC) is a versatile business structure that offers limited liability protection to its owners, known as members while allowing for flexibility in management and taxation. Online LLCs, often referred to as e-commerce businesses or internet-based ventures, conduct their operations primarily through digital platforms. These businesses can attract customers from across the nation, blurring the lines of traditional state-based business operations.
The Nexus Conundrum
The concept of “nexus” refers to the degree of connection or presence a business has in a particular state, which determines whether the state has jurisdiction to impose taxes and regulations on that business. In the case of an online LLC, determining nexus becomes crucial to understanding whether registration is required in each state where the business has a significant presence.
Factors Influencing Nexus
Several factors contribute to establishing a nexus for an online LLC, such as:
- Physical Presence: A physical office, employees, or inventory stored in a state may trigger a nexus.
- Economic Activity: Substantial sales, transactions, or revenue generated from a particular state can establish a nexus.
- Affiliate Relationships: Ties with in-state affiliates or partners might create a nexus, depending on the nature of the relationship.
State Registration Requirements
Registering an online LLC in each state it operates in can be a complex and time-consuming process. Each state has its own set of rules and regulations governing foreign (out-of-state) LLCs. Common steps for registering an out-of-state LLC include:
- Appointing a Registered Agent: A registered agent is an individual or entity responsible for receiving legal documents on behalf of the LLC in the state.
- Filing a Certificate of Authority: This formal document grants the online LLC permission to operate within the state’s jurisdiction.
- Paying Fees: States impose filing fees for the registration process.
Benefits of Registration
Registering an online LLC in each state it operates in can offer several benefits, including:
- Legal Protection: Registration ensures the LLC’s legal recognition and access to state courts.
- Tax Compliance: Proper registration helps in complying with state tax laws and avoiding penalties.
- Brand Credibility: Registered businesses often gain credibility and trust among customers.
- Access to Local Markets: Registration might be necessary to access certain markets and operate legally.
Seeking Legal Counsel
Navigating the complexities of registering an online LLC in multiple states requires expert legal guidance. Consulting an experienced business attorney can help entrepreneurs:
- Assess Nexus: Determine where the business has Nexus and must register.
- Ensure Compliance: Comply with state-specific registration procedures, avoiding potential pitfalls.
- Manage Costs: Strategically choose states for registration, considering expenses and benefits.
- Mitigate Risks: Understand the potential legal risks associated with multi-state registration
As the digital economy continues to evolve, entrepreneurs must adapt to the changing landscape of online businesses. Registering an online LLC in each state it operates might be a daunting task, but with the right legal counsel, businesses can navigate the complexities and reap the rewards of expanded reach and market presence. By understanding the nexus concept, state-specific requirements, and the benefits of registration, entrepreneurs can make informed decisions that set their online LLCs on the path to success across state lines.
Navigating Business Registration Across States
Is it true that an LLC must register and pay filing fees in all 50 states?
The assumption here is that if the LLC is selling online to people in all 50 states, does it need to register in all 50 states? You might say, “Well, what does the registration look like?”
Let’s say you have an LLC in California. If you are doing business in New York, New Jersey, and every other state, the states require that you register there. So the simple answer is yes. By law, if you are doing business in another state, you must register there. That is what the law of those states says. But practically speaking, that is expensive because not only do you have to register there, but usually you have to have a physical address where you can be served a lawsuit there. So now you are paying for a registered agent service.
The Renewal Conundrum: One-Time Fee or Ongoing Process?
The second part of this question is: Is it a one-time fee or do you have to keep doing it?
In most states, you have to keep renewing it every year. That also means paying registered agent fees every year in all these states. Well, as you can imagine, this is extraordinarily expensive for a small business.
Strategies for Businesses of All Sizes
So what are you going to do about it?
It is fine if you are on Amazon. You can afford to have these registered agent offices and annual renewals in every state. But most businesses simply can’t afford it. So what they often do is either not file to do business in any state except their own, where they already have the LLC registered, or they pick one or two states where they may have a lot of sales occurring.
The Hidden Dangers of Non-Registration
Well, you might say, “Well, what’s the risk of not registering your business in 50 states? Because it sounds like I can’t afford it”. Here is the risk: If somebody whom you sell to in a state where you haven’t registered goes to sue you, you probably won’t know about the lawsuit because if you are sued in, let’s say, New York and you don’t have a registered office there, you don’t have a registration with New York. Under New York law, the person suing you can serve the notice on the government there. Serve the summons and complaint. And there is a specific process in the statute that they have to follow, but there is a very reasonable chance you will never get a copy of these documents. And so you don’t know about the lawsuit, which means you can’t show up. And if you don’t show up at that lawsuit, they win by default.
It is called a default judgment. So now, they have a judgment against you in New York. Let’s say they sued you for $50,000, and the judge granted that. So now you have a $50,000 judgment against you in New York.
Options for Enforcement
What do they do with that?
Well, they have a couple of options. First, they can garnish and levy funds in a national bank.
So if they go after, like, Huntington, Wells Fargo, or one of these big national banks, they can levy your funds because they have an office in New York. A New York judgment applies to a bank with an office in New York. Now they can freeze the funds in your bank account.
The Ripple Effect: Transfer of Judgments
Another option is they transfer that judgment to the state where you live, docket it there, they get it filed there, and under the United States Constitution’s full faith and credit clause, the judgment in New York is given full faith and credit in your state so the courts must accept that judgment and docket it. Now they have a judgment in your state; again, you may not even know about this, but now they can go freeze assets, lien them, levy them, garnish them, have a sheriff sale, whatever is allowed by state law in that state.
So, I’ve had this happen with clients. I had a client who reached out to me and said, “Hey, somebody just froze a lot of money in our bank account, and apparently, it has to do with a Minnesota lawsuit from a long time ago.” And sure enough, I looked, and they had not registered in Minnesota, but they were doing business in Minnesota. They were sued in Minnesota. They didn’t know about it. They didn’t show up. They lost. That judgment came, and they now froze money in the bank account. There is a process to try to undo these judgments, but in general, they are very difficult to do. And in this case, the court refused to undo the judgment.
Mitigating Risk and Making Strategic Choices
And so, as a result, because this business did not register to do business in Minnesota, they owed a large amount of money to somebody who had sued them. They had a good argument for why they didn’t owe the money. They potentially could have won the case, but it was too late. That is a worst-case scenario.
Practically speaking, most businesses only register to do business in the state where they have significant sales. You can also have an arbitration clause in there, which requires that they serve you in arbitration. So that increases the odds that you are not going to get hit with a lawsuit in that state because they are required under the contract to arbitrate with you instead of suing you.
So, are you required by law to register in any state where you have sales, business, employees, or a presence?
You are. Each state requires that.
I am Aaron Hall. I am an attorney for business owners and entrepreneurs.
I do this educational channel to help you spot issues to discuss with your attorney and to help you identify ways to avoid problems. But keep in mind, it is an educational channel. This is not a replacement for using an attorney who understands the law in your state, and in your jurisdiction, and can take the time to understand your particular goals, concerns, and exceptions that might apply to you.
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