Out-of-State Business Registration: Why It Matters

Why Register Your Business in Other States?

Registering your business in other states is crucial for several reasons. Firstly, it ensures you are informed if your business is sued in another state, preventing default judgments against you. Secondly, it helps you avoid penalties, taxes, and fines associated with non-compliance.

The Risks of Non-Registration: A Real-World Example

A compelling case highlights the dangers of not registering. A business owner found a significant amount of money frozen in their bank account due to a lawsuit in another state they were unaware of. This occurred because the business was not registered in the state where it was operating, leading to a default judgment that allowed the plaintiff to freeze the business’s bank assets.

How Lawsuits Proceed Against Unregistered Businesses

If a business is unregistered in the state where it operates, it may not be notified of lawsuits, leading to default judgments. This lack of notification is often due to the legal requirement that lawsuits be served to a registered agent within the state. Without registration, the state itself may accept service on behalf of the business, unbeknownst to it.

Defining Significant Presence in a State

A significant presence in a state, which necessitates registration, can include factors like having an office, employees, or substantial sales in that state. Even business banking relationships or required licenses can create a significant presence, warranting registration.

Practical Steps for Registering Your Business in Another State

To register your business in another state, determine the appropriate state office for LLC or corporation registrations. Businesses are registered as foreign entities in states where they do not originate. This involves submitting the necessary forms and paying a registration fee, which varies by state.

The Balancing Act: Registration Costs vs. Legal Risks

Deciding which states to register in involves balancing the cost and inconvenience of registration against the risk of lawsuits and penalties. While some states offer free renewal, others require annual fees, making widespread registration potentially expensive and time-consuming.

Conclusion: Weighing the Importance of State Registration

Considering the potential legal and financial ramifications, businesses with a significant presence in a state should seriously consider registration. This not only protects against unexpected legal issues but also aligns with state laws to avoid penalties.

Video Transcript

Why Register in Multiple States?

When do you need to register your business in other states? This is important for a couple of reasons. First, you want to know if you get sued in a lawsuit. You don’t want a lawsuit to move forward without your knowledge, because then you lose by default. The second reason is you want to avoid penalties, taxes, and fines for not registering in a state when you were supposed to.

A Real-Life Example of Legal Complications

Here is a true story. Some years ago, a business owner contacted me on the phone, frantically saying he had a large amount of money frozen at a local bank. He had no idea what it had to do with. He was told that it was garnished or levied. He didn’t quite understand what was going on. So, as we investigated, here is what we found out.

Consequences of Not Registering

This business had been sued in one state. And then, when the business owner and the company he owned never knew about it, the plaintiff won by default. So that means they got everything they asked for from the court. The court then signed a judgment. That judgment got transferred to a state where the company had a bank account, and now all that money has been frozen.

How Legal Issues Arise from Non-Registration

So the question is, how could this ever happen? Well, the business was incorporated in one state but did not register in the state where it was doing business. And so when there was a lawsuit in that state, the company never knew about it because they weren’t registered there.

Legal Process for Out-of-State Businesses

Let me explain how that happens. When a plaintiff initiates a lawsuit, they are typically required to file the lawsuit in court and serve the lawsuit on the parties who are defendants. Serving the lawsuit means hand-delivering the document to them. But what happens if you or your company doesn’t have a presence in that state?

The Challenge of Legal Notifications in Unregistered States

For example, let’s say you sell a product to somebody in Wyoming. They then go sue you in Wyoming, and you are not registered there. How would they deliver that document to you? Well, one option is that they could have it delivered to you in your state. But typically, under state laws, the statute says, “If you don’t register in that state, you can serve the state of Wyoming or whatever state it is in.” Maybe you are serving it on the Secretary of State or some other office. But they get the legal documents on your behalf, and now you are deemed served for lawsuit purposes. Even though you don’t have the documents. You don’t even know there is a lawsuit against you or your company.

The Importance of Being Informed

So, because you don’t know, you don’t respond. The plaintiff wins by default. And now, that plaintiff has a judgment issued by a court under the United States Constitution, the full faith and credit clause of the constitution, a judgment issued in one state is valid in every other state. So what needs to happen then is that judgment needs to be domesticated in a state where you have a bank account and then the plaintiff, who is now considered a judgment creditor, gets to take the money out of your bank account.

Avoiding Legal Ignorance

That is through the state garnishment and levy process. You don’t have to understand all these concepts or all the legal terms I have just used, but what you do need to know is this: If you don’t register in a state, you may not know about a lawsuit against you in that state.

Potential Financial and Legal Penalties

The other problem with not registering is that you may violate state law, and as a result, you might have fines or penalties issued by the state government.

Determining the Need for State Registration

So how do you know if you need to register in a state? Well, generally speaking, the concept is if you have a significant presence there. Well, what does that mean? It means if you have a physical presence, like an office, you have an employee, you have an independent contractor, or you have sales there. Now, maybe not just one sale, but if you have a few sales, many states will consider that a significant presence. If you have any business banking relationships there, or if you are required to have any sort of license to operate there. So, as you can see, many companies have several relationships in other states.

Practical Considerations for Business Registration

Maybe you are utilizing a vendor who is operating out of another state, a software vendor, for example. Now, practically speaking, you might be wondering, “Wait a second. If I use Google and I use Microsoft and I use a few other different companies, do I have to register in those states?” Technically speaking, you might be under state statute. But practically most small businesses don’t, because if there is some sort of lawsuit between you and Google, you would probably know about it, or you and Microsoft would probably know about it. But the key takeaway here is that if you are not registering in those states, you run the risk of not knowing if there is a lawsuit against you in that state until it is too late.

How to Register Your Business in Other States

So how do you register in a state? You can register your business in each state by determining which office handles the registrations of LLCs or corporations and contacting them. Typically, it is listed on the website, and you would register as a foreign entity because it is foreign to that state. Your LLC is foreign to Wyoming if, for example, it is a Delaware LLC.

Strategic Business Operations Across States

So let’s say, for example, that you are operating in California, you have a Delaware corporation, and you have customers in Wyoming. So at a minimum, you would want to register in California because you have a presence there. You already registered your corporation in Delaware, so you are covered there. You don’t have to re-register. And then, because you have a significant presence in Wyoming, you would need to also register there.

Ensuring Legal Compliance

That way, if you got sued in California, New York, or Wyoming, you would know about it because the lawsuit would be served on the state. And if it is served that way, then they will forward it to you. Sometimes, in a lawsuit, you will also get it sent to you directly. And that is great.

Balancing Cost and Compliance

So technically, you would need to register in every state where you have significant business activity, but practically speaking, that can get expensive and time-consuming because in every state you are paying a registration fee and you typically have to renew that registration every single year.

Weighing the Risks and Costs of Registration

Now, many times, that renewal is free. The fees are based on a state-to-state basis, but practically speaking, most business owners have to weigh the chances of getting sued versus the expense and inconvenience of registering in multiple states. So that will be one consideration, which states do you want to register in? And that is something you can work with your business attorney to determine.

Mitigating Risks with Proper Registration

The second risk here is that if you have a prominent presence in a state and you are supposed to be registered there under that state’s laws, but you haven’t, you may be subject to fines and penalties. And so that is another reason why, whenever you have a significant presence in a state, it is valuable to have a registration in that state.

Final Takeaway: Proactive Registration Strategies

So what is the takeaway here? If you have a significant presence in a state, carefully consider whether you should register your company in that state.