Monday, March 18, 2013

When Do You Need to Register Your [Delaware] Corporation in New York and Why?

I frequently explain to my startup clients that forming their business in Delaware (or another state they choose if it is not their home state) may not be enough: they also need to register it in every state where they intend to do business. This means that if they intend to conduct business in New York, they are required to qualify their company as a foreign corporation or LLC in the State of New York.

First, it is important to distinguish three separate concepts: (1) when do an entity’s activities in New York become sufficient to subject it to personal jurisdiction of New York courts (a jurisdictional doing business test); (2) when do an entity’s activities in New York become sufficient to require it to pay taxes in New York (a taxation doing business test), and (3) when does an entity need to apply for authority to do business in New York (a qualification doing business test). In short, in analyzing the jurisdictional test, courts look at the company’s activities within the state as well as activities outside of the state but directed at the state (Civil Practice Law and Rules Sections 301 and 302). Courts have applied the Commerce clause to address the taxation doing business test. Its approach is outlined in Complete Auto Transit v. Brady, 430 U.S. 274 (1977) that sets a 4-prong test. It is important to understand that even if a company is subject to New York jurisdiction and / or taxation, it does not necessary mean that it has to also qualify to do business in New York. But the opposite is true: if a company is qualified to do business in New York, New York courts have personal jurisdiction over it, and it is required to pay taxes in New York.

Now, let’s look at the qualification doing business test: what does it means to be “doing business” in New York.

The definition of “doing business” in New York is often a source of confusion. The laws do not provide us with a clear definition but instead provide a non-exclusive list of activities that do not constitute doing business. So, according to the New York Business Corporations Law Section 13-1301, a corporation is NOT doing business within the State if it conducts one or more of the following activities: holds meetings of its shareholders and directors here, maintains bank accounts, maintains an office only for the transfer, exchange and registration of its securities, appoints and maintains trustees or depositories with relation to its securities, or maintains or defends any action or proceeding, whether judicial, administrative, arbitrative or otherwise, or settles claims or disputes.

Most of the definition of what constitutes “doing business” in New York comes from court decisions and is very fact specific. To summarize, to be “doing business” in New York, a foreign organization’s activities must be (1) of local, intrastate character; (2) regular, permanent, continuous and systematic; and (3) vital and essential to the organization’s business (not merely incidental). Let’s look at some examples:

  • A foreign organization engaged in manufacturing in New York was “doing business” here because that is a substantial part of the ordinary business of a manufacturing corporation. On the other hand, the conducting of research and the training of employees in New York does not constitute business sufficient to require a foreign entity to register if it is not organized for the purpose of doing research and training. 
  • An occasional or casual corporate presence in New York, without more, is not considered “doing business.”  
  • The presence of three full-time and four part-time employees, working out of a one-room New York office rented by an airline which has no flights leaving or arriving in New York, and which maintained the office merely to receive requests for space on flights originating outside the U.S. and to relay confirmations of availability when received from the European office, was considered to be “doing business” in New York. 
  • Solicitation and servicing by a foreign sales agency of New York accounts through sales representatives present in New York, if systematic and continuous, was considered “doing business” in New York. 
  • Entering into one or two contracts in New York does not usually constitute “doing business”. 
  • The mere advertisement of a foreign company’s business in New York newspapers does not constitute “doing business”. However, the fact that an organization had advertised in New York papers and employed an answering service was found to evidence sufficient intent to do business in New York. 
  • A correspondence school, chartered in another state, whose in-state activities were limited to the soliciting of students, the forwarding of the necessary materials and the collection of fees was not “doing business” in New York. 
  • The fact that the school maintained numerous offices (thirty) within the state staffed by its employees who gave instruction at the various offices within New York constituted “doing business” in the state. 
  • Mere ownership and leasing of real estate, incidental to another enterprise, is not “doing business”. However, if a foreign entity is organized for the very purpose of leasing or acquiring title to land as its business, it would be “doing business” in New York. 
  • Evidence of occasional or casual sales does not typically constitute “doing business” in New York. New York courts do not view factors such as fact that a foreign corporation has customers in New York, or that it makes deliveries into the state from its out-of-state factory, to be controlling. However, a systematic selling of merchandise may constitute the “doing of business” in New York. 
In conclusion, determination of what constitutes “doing business” in New York depends on the facts of the case.  Failure to qualify in New York as a foreign entity while doing business here will leave a company without access to New York courts until it obtains authority and pays all due fees, taxes and penalties.

 This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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