The use of social media and e-commerce has allowed even the smallest of small business retailers to market and sell goods outside of their home state. In fact, many “one-person shop” retailers that rely solely on distribution through popular e-commerce platforms such as eBay and Etsy attribute the majority of total annual revenue to sales made outside of their respective home states. And with so many of our Texas-based small and midsize clients following suit—and even marketing through social media sites such as Facebook, Twitter and Instagram—a question that we are increasingly asked, “Do I have to register my business in California [or insert your state of choosing here] if I am doing business in California [or insert your state of choosing here]” The answer, like many legal questions, is not a firm “Yes” or a solid “No”, but rather a tepid “it depends”.
Each state in the U.S. has very specific laws and regulations outlining when a company that is transacting business in that state (the “Host State”) through an entity that was not formed in the Host State (a “Foreign Entity”) is required to register the Foreign Entity in the Host State. In Texas, these regulations are contained in Section 9.001 of the Texas Business Organizations Code (the “Code”). While each Host State’s rules differ slightly, most states’ regulations on foreign registration are fairly similar to that of the Texas Code.
Unfortunately, the Code does not explicitly define what “transacting business” actually encompasses in Texas, and, therefore, leaves open the question of when registration is actually required. The Code does, however, in Section 9.251 provide a list of activities that do not, in and of themselves, constitute transacting business in Texas. Therefore, an entity does not have to register in Texas if the following are the only activities that take place in Texas: filing a lawsuit, maintain a bank account, entering into a contract with an independent contractor, collecting a debt, conducting an isolated and non-repeating transaction within 30 days, or only owning real estate in Texas.
On the flipside, activities that are likely to be deemed as transacting business in Texas, and therefore requiring registration, include the following activities: maintaining an office or having ongoing operations in Texas, having employees in Texas, having items that are delivered to customers in Texas using company-owned vehicles, maintaining inventory in Texas or manufacturing items in Texas. As with the aforementioned negative list, this list is not all-inclusive or dispositive, but rather provides certain factors that could be used when determining both whether an entity is transacting business in a Texas, and, by extension, whether said entity needs to register in Texas. Again, while each state’s rules will differ slightly, the factors used in Texas are also used in most Host States in determining whether an entity must register in the Host State based on the business that it is transacting.
The potential penalties for failing to timely register your foreign entity in the Host State can be significant. As such, it is critical if your business is operating in a state other than the state in which it was formed that you discuss with your attorney whether or not those activities trigger additional registration requirements. At the Strong Firm P.C. we pride ourselves in helping many of our clients navigate these sometimes nebulous registration requirements, and, when necessary, complete that foreign registration process—we would be more than happy to assist you in any of your registration needs.
Eric R. Thiergood, Sr.
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