Company Structure, Formation & Corporate Basics

Defining “qualified to do business” and where to be qualified

If your company is incorporated in one state (e.g., Delaware), but you are “doing business” in one or more other states (e.g., California, Massachusetts, New York, etc.), then the laws of the states in which you do business require your company to be “qualified to do business” there. To qualify to do business in a state, you typically need to make a simple filing with the Secretary of State’s office that describes your business. You will also typically need to file reports and pay a fee (typically referred to as a “franchise tax”) in that state annually.  

“Doing business” is defined differently in each state by the laws of that state, and so whether the business your company is conducting requires you to qualify to do business in a particular state depends on the rules of that state. Most states provide guidance on the types of activities that do not constitute doing business rather than those that do. For example, in most states, merely having an employee or consultant, soliciting or accepting orders or even defending a lawsuit in that state is not enough activity to constitute “doing business.” The fact that your company does business online and therefore could reach every state does not, in and of itself, mean you have to qualify to do business in every state. In contrast, having an office or employees regularly and physically located in a state will often mean you will need to qualify to do business in that state.

Most new corporations take steps to qualify to do business in the state where they are initially headquartered. For example, a Delaware corporation with its principal place of business in California would likely qualify to do business as a foreign corporation in California to start. Because each state defines “doing business” differently, you should seek guidance from your legal counsel when engaging in any new activity within a state.