July 9, 2018
Introduction to Foreign Registrations
Every limited liability company (LLC) and corporation (each a "Business Entity") must have a state of organization (for a limited liability company) or incorporation (for a corporation), meaning the state where such Business Entity is created and governed by relevant statutes. A Business Entity conducting business within its state of organization / incorporation is known as a "domestic Business Entity." However, a Business Entity that conducts business anywhere outside of such state becomes classified as a "foreign Business Entity" in the new state in which it transacts business[1]. When a Business Entity intends to conduct business operations in a foreign state, such Business Entity must comply with the applicable "foreign registration" requirements imposed by the new state.
In this article, Virginia's foreign registration laws will be used to exemplify when and why an out-of-state Business Entity establishing itself in Virginia must register as a foreign Business Entity. While foreign registration requirements are somewhat similar from state-to-state, Business Entity owners interested in conducting business outside of the Commonwealth of Virginia should consult with an attorney or at a minimum confirm the requirements for the specific state in which they seek to conduct business operations.
When does a Business Owner Need to Register as a Foreign Business Entity?
A foreign Business Entity seeking to transact business in Virginia may not properly do so until after such Business Entity registers for and obtains a certificate of registration from the Virginia State Corporation Commission (the "Commission")[2]. Although Virginia law does not specify the types of activities that constitute transacting business within Virginia, it does provide a non-exhaustive list of activities that do not qualify as transacting business[3], some of the more pertinent examples of which include:
- maintaining, defending or settling any proceeding;
- holding owner meetings or carrying on any other activities concerning the Business Entity's internal affairs;
- maintaining bank accounts;
- maintaining offices or agencies for the transfer, exchange and registration of the foreign Business Entity's securities or maintaining trustees or depositaries with respect to those securities; and
- selling goods or services through independent contractors.
Although by no means exhaustive, some of the more common activities that do trigger registration requirements include:
- buying or renting real estate within such jurisdiction;
- employing W-2 employees (i.e., not independent contractors) that work within such jurisdiction; or
- maintaining a "substantial presence" in such jurisdiction, which requires a very fact-specific analysis.
Consequences of Conducting Business Absent a Certificate of Registration
Failure to register as a foreign Business Entity can have drastic consequences on a business. For example, a foreign Business Entity without a valid foreign registration certificate may not maintain any legal action, lawsuit or court proceeding until such Business Entity obtains a foreign registration certificate from the Commission[4]. However, please note that an unregistered foreign Business Entity can still be sued and may be at risk for a judgment against it, if such Business Entity's owners and/or managers cannot be located for notification that a legal proceeding has been initiated against such Business Entity[5].
Not only are there legal repercussions for failing to register as a foreign Business Entity, but unregistered foreign Business Entities transacting business in Virginia will likely be penalized monetarily. In some situations, the Commission may impose fines as high as $5,000 on the managers, members and employees of an unregistered foreign Business Entity that conducts business in Virginia[6].
Conclusion
The Commission rejects almost 40% of the applications to transact business in Virginia that the Commission receives from foreign Business Entities because of incomplete and/or improperly completed applications[7]. In order to avoid the legal and monetary ramifications of transacting business as an unregistered foreign Business Entity in Virginia (or in any other state), it is imperative that these applications be completed properly and timely.
Contact Arlington Law Group today to determine whether your Business Entity is currently required to complete a foreign registration and for assistance with your foreign registration filings in Virginia, Maryland or the District of Columbia.
[1] Carter A. Bishop & Daniel S. Kleinberger, Limited Liability Companies: Tax and Business Law ¶ 5.09 (Thomas Reuters 1994 & Supp. 2018).
[2] Va. Code § 13.1-1501 (2004)
[3] Va. Code §13.1-1059 (2004)
[4] Va. Code § 13.1-1057(A) (2013)
[5] Va. Code § 13.1-1057(E) (2013)
[6] Va. Code § 13.1-1057(D) (2013)
[7] Frequently Asked Questions Foreign Business Entities, Va. Stat. Corp. Commission (last visited June 28, 2018).
