Registering Your Business
After you establish your legal entity, you will want to tell everyone about it. One entity that you must tell about it is your state’s government.
Domestic v. Foreign Entities
Most states require you to register to do business within that state. You are either considered a domestic business entity or a foreign business entity. From the prospective of a state, domestic business entities are entities that are headquartered in a state. Foreign business entities are business that are headquartered outside of the state but transact business within the state. For example, a business that is headquartered in Illinois but transacts business in Iowa is a domestic business to Illinois and a foreign business to Iowa. Each state requires both domestic and foreign business to register and file yearly reports.
If a business does not register with a state, there are two main (legal) consequences for the business: 1) limited access to the court system and 2) statutory penalties for not registering.
Limited Access to the Court System
Many states have statute indicating that an unregistered, foreign entity cannot maintain a civil action in that state until it obtains authority to transact business. See e.g. 805 ILCS 5/13.70(a). “Transacting business” has various meanings depending on which state is at issue. In general, however, transacting business does not include maintaining bank accounts in a state, merely living in state, or holding corporate meetings in a state. 805 ILCS 5/13.75.
This is an issue that does not seem like a big deal - until it is. Assume you are a Wisconsin company and you contract with a supplier in Illinois to distribute your product. The supplier fails to adequately supply products and is in breach of your contract. One remedy is to sue them for the damages. You will have to sue the supplier in Illinois (unless the supplier transacts business outside of Illinois). If you are not registered to do business in Illinois (even if you are located in another state), a defense of the supplier is that you violated Illinois statute and cannot maintain a civil action. This may lead to additional problems even if you become compliant and attempt to sue the supplier again because of other legal principles that prevent multiple suits for the same action.
Penalties for Not Registering Your Business
All too often, business owners talk themselves out of registering to do business with a thought process like this: I just started out, I'm only making nominal money, I need to put my financial resources somewhere else like marketing, I will register when I have extra cash. Please, do not follow this dangerous thinking.
Almost all states have statutory penalties for not registering to do business. For example, in Florida, a corporation is required to pay the Florida Department of State a penalty of $5 for each day it failed to be registered to do business or up to $500. Fla. Stat. 607.0501 (5). Similarly, foreign businesses are also liable for not registering to conduct business in other states. For example, Florida requires a foreign corporation to pay all fees and taxes that would have been do if the entity had registered in addition to a civil penalty of not less than $500 or more than $1,000 for each year (or part thereof) in which it transacted business without a certificate of authority. Fla. Stat. 607.1502(4).
Overall, registering with your home state and any state where you transact business can save you a lot of money (and headaches) down the line.