• What Does it Mean to "Do Business" Outside of the State of Incorporation?
• What Does it Mean to Be "Doing Business" in Virginia?
• Qualification to do Business In Virginia
What Does it Mean to "Do Business" Outside of the State of Incorporation?
In order for a corporation to lawfully conduct business outside of its state of incorporation, it must first qualify to do business within each foreign state. Usually, this involves as a preliminary matter, the securing of a certificate of authority to transact business from the state after completing an application and paying a fee to the state. As part of this process, the entity is usually required to appoint a registered agent/registered office within the state.
This rule applies not only to corporations, but may apply to limited liability companies, limited partnerships, and business trusts, etc., cumulatively referred to as "business entities," or "entities" for the purpose of this article. While qualification to do business is a relatively simple and inexpensive process in most states, the failure to qualify may have serious repercussions for the entity. So what then does it mean to be "doing business" within a state?
As might be expected, there is no hard and fast answer to this question. The answer will vary depending on the laws of the forum state in which the foreign entity wishes to conduct business. Accordingly, the advice of a lawyer experienced in such matters in the forum state is often desirable or necessary. To further complicate matters, there are at least three different meanings of the terms "transacting" or "doing" business: (1) transacting business which would require a foreign corporation to qualify, i.e., obtain a certificate of authority; (2) transacting business which would subject a foreign person or entity to service of process; and (3) transacting business which would subject a foreign person or entity to state taxation. The legal tests for determining whether or not a foreign corporation is transacting business in Virginia differ as the situation falls within one or the other of these classifications. This article focuses on qualification.
While the laws and qualified attorneys of each foreign state must be referenced in order to reach a valid legal conclusion for each entity, there are broad areas into which a court may look. For instance, a business must have a "presence" (but not necessarily a physical presence) within a foreign state for it to be subject to that state court's jurisdiction. Occasional isolated acts will generally not amount to presence, but regular business activities will. Incidental activities that do not constitute a business entity's main business purpose, may also typically not rise to the level of "doing business." Frequently, courts will use a "sliding scale" approach to ascertain whether a foreign entity is conducting business in a state at a level requiring qualification.
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What Does it Mean to Be "Doing Business" in Virginia?
In Virginia, section 13.1-757 of the Code requires a foreign entity to obtain a certificate of authority from the State Corporation Commission ("SCC" or "Commission") before it is permitted to conduct business. While the Code does not give specific examples of what may constitute "doing business" in the Commonwealth, section 13.1-757 (B) provides a non-exhaustive list of activities that will not be considered such. These activities are: (1) maintaining, defending, or settling a proceeding; (2) holding board of directors or shareholder meetings, or carrying on other activities concerning internal corporate affairs; (3) maintaining bank accounts; (4) maintaining offices or agencies for transfer, exchange, and registration of corporation's own securities or maintaining trustees or depositories for such; (5) selling through independent contractors; (6) soliciting or obtaining orders via mail, employees, or agents, if orders must be accepted outside the Commonwealth; (7) creating or acquiring indebtedness, deeds of trusts, and security interests in real or personal property; (8) securing or collecting debts or enforcing deeds of trust, and security interests in property securing debts; (9) owning, without more, real or personal property; (10) conducting isolated transactions finished within thirty days that are not part of a course of repeated transactions of similar kind; (11) for a period of less than ninety consecutive days producing, directing, filming, crewing or acting in any film, television program, commercial, or promotional film to be sent outside of the state for processing, editing, marketing and distribution; or (12) serving, without more, as a general partner, or as a partner in a partnership which is a general partner of, a domestic or foreign limited partnership which does not otherwise transact business in the Commonwealth.
The Fourth Circuit in Moore-McCormack Lines v. Bunge Corp., 307 F.2d 910 (1962) explained that in order to determine if a foreign entity is "doing business" within Virginia, "that each case must be decided on its own facts." Id. at 914. Since it is not always simple to determine precisely what constitutes "doing business," it is advisable for foreign entities to consult qualified attorneys in each state in which they wish to have any business contacts.
Qualification to do Business In Virginia
To apply for a certificate of authority in Virginia, a foreign corporation must apply with the SCC using the prescribed forms. Virginia Code section 13.1-759 specifies the application procedure requiring such information as the name of the corporation, where the corporation is incorporated, the date and duration of incorporation, the address of the corporation's office and directors, stock information, and information pertaining to the corporation's registered agent in Virginia required by Va. Code Ann. § 13.1-763. If the SCC finds that the application complies with all legal requirements and requisite fees have been paid, then it will issue a certificate of authority to conduct business within the state.
Once a foreign entity receives a certificate of authority from the State Corporation Commission, it has the authority to conduct business within the state, but will have no greater rights than a domestic corporation. The Commission nevertheless retains the authority to revoke this certificate. See Va. Code. Ann. § 13.1-761 (2003).
If a foreign entity does not seek qualification in Virginia, and it is found to be doing business in the state, serious consequences may result. For instance, an entity transacting business without a certificate of authority may not maintain proceedings to enforce its rights in the Commonwealth until it obtains such certificate. This means that the entity may not bring any affirmative claim, either as plaintiff or as a defendant asserting a counterclaim in any suit. This applies equally to successors to foreign corporations that were found to be transacting unauthorized business. A court may also stay a proceeding commenced by a foreign corporation, its successor, or assignee until it determines whether it needs a certificate. Those officers, directors, and employees of foreign entities who transact business without a certificate, knowing that such qualification is required, may be fined penalties between $500 and $5000 per person. Such foreign entities are also deemed to have appointed the clerk of the SCC its agent for service of process. See Va. Code. Ann. § 13.1-758 (2003). However, fortunately, and unlike certain other states, the failure of a foreign entity to obtain a certificate of authority does not impair the validity of the corporate acts or prevent the entity from defending proceedings in the Commonwealth. See Va. Code. Ann. § 13.1-758(E) (2003). Also, once the business entity has qualified and paid all penalty fines and fees, any prohibitions against enforcement of its rights in Virginia courts would be eliminated.
© 2003, Robinson & Gerson, P.C.
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