There are two main times Authority should be a concern of your business contemplating doing one of the three things above–before you start and when you are ready to stop.
What you should know going in.The first thing you should think about before transacting business in another state is whether the kind and quantity or frequency of the business contemplated will trigger the requirement that you obtain Authority from the Foreign State. Luckily, each U.S. state has virtually identical provisions for what constitutes “transacting business” there. In Georgia, for example, O.C.G.A. sec. 14-2-1501, et seq., contains the requirement that a Foreign Business must obtain authority from the Secretary of State within 30 days of transacting business here, and then goes on to describe actions that do not create the necessary Nexus to trigger the Authority requirement. If your activity is not on the list of exclusions, you will have to register with the Secretary. A word of caution, however. Even if you think your activity is on the list and that your business therefore is not required to apply, you should double check with an experienced business attorney. Sometimes the description of the activity includes legal “terms of art” that exclude far more limited activities than would be apparent from a more casual reading of the statute. The second thing you should think about is investigating the applicability of these requirements to your business before actually acting. It happens all of the time. A client just wants to see if the market justifies the legal expense before hiring someone to help walk them through whether it is necessary to obtain a Certificate of Authority. And even though the same client would buy insurance before a fire happens, the business goes ahead with testing the market in a Foreign State before checking out the regulatory issues. Bad move. So, how can you mess this up and what are the consequences? Here, mistakes generally result from one of two things: misinterpreting whether Authority is required or ignoring requirements to obtain such Authority until after the passing of the required filing period. Misinterpretations happen in two basic ways. One, the client or his/her attorney misreads the statutory requirements. Or more commonly, two, the client decides to forgo any consultation, simply calling up the Foreign Secretary of State’s office and/or department of revenue to ask them for advice about whether it is necessaryto obtain Authority. As to the second approach, I have never heard of a state saying, “it is not required,” if the person on the phone agrees to answer that question at all. Rule 590-7-5-.04 of the Georgia Administrative Code prohibits Corporate Information Center personnel from providing “legal interpretations concerning the Code or … provid[ing] tax and business advice.” (They should tell you to consult an attorney.) And what if you should decide just to punt and figure it out later? Well, the penalties are mostly the same type in every state–that is, a business is prohibited from using the state court system, and it must pay monetary fines, though the amount of those fines may vary widely. Continuing our example, O.C.G.A. sec. 14-2-1502, sets forth the penalties for failure to obtain authority in Georgia. As to the first, non-monetary penalty–you may ask, why is a bar to accessing state courts a concern? In short, no certificate of authority means that your business cannot sue anyone here. A client owes you money? Vendor breaches its contract or turns in shoddy work? You need a certificate or you will not be able to resort to the courts for recourse or enforcement. Period. Notwithstanding this limitation on your access to the courts, however, your business can still be sued by a vendor or client or employee or anyone else in Georgia. And while you are allowed to defend, you cannot counterclaim in that litigation–that is assuming you find out about the lawsuit at all. See? The main difficulty in mounting a defense to a lawsuit when you fail to obtain Authority is that you may not learn about the lawsuit until after a default judgment is executed. The reason for that is, lawsuits against unauthorized Foreign Businesses are served on the Domestic Secretary of State. In our example, if the Georgia Secretary doesn’t find out where in the world your business is domiciled and who is your registered agent there, you may not learn about the suit until it is too late to prevent a default judgment. In addition to the litigation concerns, your business also will be liable for a civil penalty in the amount of $500 in Georgia. (In some states, the penalties are way, way greater.) The Georgia Secretary of State is expressly prohibited from waiving penalty or releasing your business from that liability. Furthermore, your business also may be tapped for each missed annual registration and late filing penalty. And all of these costs would have be paid before you are allowed to actually obtain a Certificate of Authority at a cost of $225. <<<All you would have paid, if you’d filed in a timely fashion…. Your business will also be liable for any taxes, penalties, and interest with the Department of Revenue for the same period. You may also be hit with local penalties for failure to obtain a business license or business tax certificate in the county or city where required with its attendant taxes, interest, and fees.
What you should know when you withdraw.Given all of the above, what steps should be taken when your business decides to no longer do business in the Foreign State? Well, your business will have to pay all of the fees for withdrawal and certify it owes no debts in or to the state, including taxes, penalties, and fees. In some states, a letter or certificate of “no taxes due” must be sent by the Department of Revenue to the Secretary of State before the Secretary will allow your business to withdraw. Difficulties can arise in those states when you file a “final return,” but fail to withdraw in a timely fashion. Some states will continue to require at least a minimum flat tax for as long as you remain authorized to do business there and will assess penalties and interest on that minimum should you fail to pay. So timely withdrawal and coordination with the state and local taxing authorities is mission critical if you like not paying the government money unnecessarily.
In conclusion, do the right thing when considering doing business outside of your state of formation or Domicile and when ceasing doing such business. Failure here can end up being a very costly mistake. If you have any questions or think you may have made a mistake in filing or failing to file, please do not hesitate to contact us at 404-558-7771 or through our Contact Us link in the top menu.]]>