Doing Business Out of State? You May Need to Qualify

Every state has adopted its own body of law when it comes to the legislation of foreign entities.

As a Michigan business, it is almost certain that your company conducts operations outside of the state in one way or another. Whether it be a warehouse in Ohio, sales agents in Illinois, or a supplier relationship in Kentucky, out-of-state entity has become a practical reality for almost all business owners.

But when does “transacting business” in another state have actual legal and regulatory implications? The answer to this question could ultimately determine whether your business must be “qualified” in those out-of-state jurisdictions in order to continue interstate operations. An entity formed in Michigan is considered to be “domestic” within the state.

In other words, assuming you have filed the necessary formation documents with the state, you are free to conduct business within the borders of Michigan without having to further qualify. However, a business that expands its operations outside of Michigan may be considered a “foreign” entity within those states, triggering the need to qualify as a foreign business with the proper state authorities.

Every state has adopted its own body of law when it comes to the legislation of foreign entities. Though there is likely to be many similarities across the various jurisdictions, subtle differences in each state could determine the requirement for qualification. As a rule of thumb, if you maintain a physical location in a state or are conducting repeated business transactions in that state, it is likely that you will need to qualify.

In Michigan, however, rather than listing all of those activities which may constitute transacting business, the State lists those activities which are permitted without first having to qualify. Generally, an entity will not be required to qualify in Michigan provided its activities in the State only include, among other things:

  • Maintaining bank accounts
  • Selling through independent contractors
  • Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside Michigan before they become contracts
  • Creating or acquiring indebtedness, mortgages, and security interests in real or personal property
  • Securing or collecting debts or enforcing mortgages and security interests in property securing the debts
  • Owning, without more, real or personal property
  • Conducting an isolated transaction that is completed within 30 days and that is not a single transaction in the course of repeated transactions of a like nature. 

In other words, if a business is conducting an activity in Michigan other than one of the listed excluded activities, it is likely that qualification as a foreign entity will be necessary.

Seeking qualification as a foreign entity is generally a simple process. Most states merely require you to file a form and pay a fee, usually between $100 and $300. In addition, there may also be annual filing requirements similar to the annual reports required annually by Michigan. 

On the other hand, a failure to qualify when required could have significant consequences on not only your business, but on you individually. For example, in Michigan, a foreign entity that transacts business without being qualified is subject to a civil penalty of up to $10,000, and, in the case of an LLC, each manager, member, or authorized person who authorizes, directs, or participates in the transaction of business is subject to a civil penalty of up to $10,000.  Further there could also be certain tax consequences as an entity which qualifies in a foreign state must pay income and other taxes to the proper taxing authorities.