Get a Handle on These Issues If You’re Doing Business Outside the State

Important: The materials appearing below are intended for general information purposes only and may or may not reflect the most current legal developments.  These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation.  Your use of the information in these articles is at your own risk and does not form an attorney-client relationship.  Articles are not updated for developments occurring after the article is written.

By Dirk Bartram

October 17, 2017

Thinking about expanding your business out of state?  Do you already have out-of-state customers or clients and wonder what issues lurk?  Read on if you answered yes to either of these questions.

This article explains the following issues you need to manage when doing out-of-state business:

  • Whether your company can legally do its business in another state.
  • Whether your company can use its name in another state.

This article covers issues that apply to all businesses. However, issues that apply only to a specific type of business or industry are beyond the scope of this article.

Here’s a brief explanation of terminology used in this article.  The word (i) “company” means a for-profit corporation or an LLC; (ii) “foreign state” means a state other than the one in which your company was formed.  For instance, Oregon would be a foreign state to your Washington company; (iii) “foreign company” means a company formed in another state or country.  For example, your Washington corporation would be a “foreign corporation” to the State of California.

Can my company legally do business in another state? 

The general rule is yes–your existing Washington for-profit corporation or LLC will be eligible to do its business in the other state.  However, there are limited exceptions to the rule.  For instance, California doesn’t allow LLCs to render many types of professional services, such as law and accounting, though they may be rendered by a professional corporation.  Be sure to verify that no exception to the general rule applies to your company.

Even if your company is eligible to conduct activities in another state, it still must qualify to conduct those activities if they constitute “doing business.” Qualification procedures vary from state to state. Most states require a foreign company seeking qualification to file paperwork before doing business in the state and every year thereafter.  The paperwork will often require disclosure of the names of its officers and directors and other basic information.  Also, qualification usually requires the company to pay fees every year (typically $100-$300), to appoint an agent with an office in that state to receive service of process for the company, and to follow certain rules and regulations.

So what activities constitute “doing business” that require qualification in the foreign state? The term is not specifically defined. However, there are activities that states almost always consider to be “doing business” within their borders. For instance, the Oregon Secretary of State’s website (as of the date this article was written) lists the following activities, conducted in Oregon, as “doing business” in Oregon:

  • Maintaining an office.
  • Maintaining a place of business, other than an office, where affairs of the corporation are regularly conducted.
  • Having employees or representatives provide services, such as accounting or personal services, to customers as the primary business activity.
  • Having employees or representatives provide services incidental to the sale of tangible or intangible personal property, such as installation, inspection, maintenance, warranty, or repair of a product.
  • Having an economic presence through which the taxpayer regularly takes advantage of Oregon’s economy to produce income.
  • A stock of goods.

Most other states would agree with Oregon that the activities above constitute doing business in their states, and thus require qualification.

Oregon also lists activities that do not constitute doing business and thus do not, without more, require qualification.  Many other states take the same position:

  • Maintaining, defending or settling any proceeding.
  • Holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs.
  • Maintaining bank accounts.
  • Selling through independent contractors.
  • Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts.
  • Owning without more real or personal property.
  • Conducting an isolated transaction that is completed within 30 days and is not one in the course of repeated transactions of a like nature.
  • Transacting business in interstate commerce.

So what are the penalties if your company fails to qualify in a foreign state when required?  In all or nearly all states, your company would be barred from bringing a lawsuit in that state’s courts.  Your company would be barred, for instance, from suing a business in the foreign state’s courts for breach of its contract with you or for supplying a defective product or service to your company.  In many cases, a foreign company can remove the bar to sue by qualifying to do business any time before the suit, after paying all unpaid registration fees and penalties. In some states, the penalties for failing to qualify when required can be substantial, especially if the failure to qualify persists for a significant period of time.

Some states also penalize the individual acting on behalf of a corporation that was required to qualify but didn’t. For instance, California statute provides that any person who transacts business on behalf of an unqualified foreign corporation that was required to qualify, knowing that it wasn’t qualified, is guilty of a misdemeanor.

For many companies, the consequences of failing to qualify in a foreign state outweigh any potential advantages of not filing, so they qualify in the foreign state when in doubt as to whether it’s required. However, qualifying to do business might, in some states, bolster the argument that the company can be required to collect and/or pay tax to the state.  If you have doubts about whether your company should qualify in a foreign state, contact a business attorney familiar with representing multi-state businesses.

Can my company use its name in other states?

This question actually comprises two questions: (1) can my company qualify to do business using its company name;  and (2) can my company use its company name as its trademark?

In most states, a Washington company can qualify to do business under its company name if it’s “distinguishable on the record” from all company names already registered with that state. The states impose the requirement to insure there won’t be two or more companies with identical names filing with state agencies, thus causing confusion within the agencies. It usually doesn’t take much to meet the “distinguishable” standard.  For instance, say your company name is Ornery Bikes Corp., and an Ornery Cycles Corp. is already on file with the foreign state. In many states, the names would be distinguishable since the primary parts of the names, “Ornery Bikes” and “Ornery Cycles”, can be distinguished by their spellings.

If your company applies to qualify in a foreign state, the state will inform it whether it’s company name is distinguishable on the record and thus available for qualification. If your company’s name is not distinguishable, your company will be required to do business in the state under a distinguishable name. After qualification is complete, your company will be issued a foreign qualification certificate showing the name under which the company qualified (call it the “qualification name”). The company will be required to use the qualification name for filing with state agencies, and should be included when the company signs contracts in the state.

However, even if your company is allowed to use its company name for qualification, that doesn’t mean it can use its company name as a trademark. As explained above, a purpose of assigning a qualification name is to avoid confusion at state agencies.  A trademark, on the other hand, must avoid confusion of the purchasing public.  A trademark serves the purpose of identifying to actual and potential customers the source of the goods or services the company offers. Trademarks are used on websites, store signage and displays, advertising, and products and their packaging and tags. If trademarks are confusingly similar, there is the potential for confusion in the markets for goods and services.

Your company should not use its name as a trademark in another state if a business is already using a confusingly similar trademark there, unless your company has priority under a federal trademark registration. The confusingly similar standard was developed to prevent confusion among customers as to who is providing the goods or services. Many factors are considered when deciding if trademarks are confusingly similar, such as whether they are used for the same or related products or services, and whether the two names are similar in sight, sound or meaning.

The confusing similarity standard for trademarks is usually harder to meet than the distinguishable standard for qualification names. For example, though “Ornery Bikes Corp.” is distinguishable on the record from “Ornery Cycles Corp.”, the two names are confusingly similar assuming the products or services offered by the two businesses are the same or related.  The reason:  the two names are very similar in sound and appearance, and have the same meaning. Contact an attorney with appreciable trademark experience if you have questions about using your trademark in a foreign state.
We’re happy to help if you have questions about your multi-state business.  Give us a call at 206 624 4788.

THINGS YOU SHOULD KNOW ABOUT THE NEW WASHINGTON LLC ACT

Important: The materials appearing below are intended for general information purposes only and may or may not reflect the most current legal developments.  These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation.  Your use of the information in these articles is at your own risk and does not form an attorney-client relationship.  Articles are not updated for developments occuring after the article is written.

By Dirk Bartram

September 10, 2015

The state legislature recently overhauled Washington’s Limited Liability Company Act (the “Act”). The new Act, which takes effect on January 1, 2016, will affect all limited liability companies formed under the laws of the State of Washington, whether formed before or after the effective date. LLCs have become the leading type of entity for new businesses, so the law will affect a lot of businesses. This article sets out some of the changes in the new Act. It is written to inform existing or prospective LLC members, managers and key personnel, as well as people who do business with LLCs.

Before talking about the new changes, some preliminary explanations will help. Under the current Act, the LLC members may, but are not required to, enter into an agreement among themselves concerning the LLC, known as an “LLC agreement.” The LLC agreement addresses issues like member voting, how to admit new members, whether and how a member may transfer his/her membership interests, how members share profits and losses, and other issues important to the members. If there is no LLC agreement, then the LLC is governed entirely by the current Act. For that reason, the current Act’s provisions are called “default rules,” because they apply in the absence of—or in default of—an LLC agreement.

If there is an LLC agreement, then in most cases its provisions will govern the LLC rather than any contrary provision in the current Act. However, there are certain default rules that may not be changed by the LLC Agreement. Those particular default rules were made “nonwaivable” by the legislature to protect the public or LLC members. They apply even if the LLC agreement purports to change them.

The new Act works within the same framework. That is, it has waivable and nonwaivable default rules, and the waivable default rules may be changed in an LLC agreement. However, you will see below that the new Act has made some important changes within that framework.

Who Calls the Shots?

Under the current Act, the default rule is that the LLC members manage the business, and any LLC member may bind the LLC to legal obligations in the ordinary course of business within the scope of their authority. However, the LLC may be designated as manager-managed rather than member-managed. If that’s the case, then managers (who are selected by the members) rather than members manage the business, and only a manager may bind the LLC to such obligations within the scope of his or her authority.

The same is true under the new Act. However, under the current Act, the status of the LLC as member-managed or manager-managed is designated in the Certificate of Formation filed with the Secretary of State. Under the new Act, the designation must be made in the LLC agreement. If there is no LLC agreement or it is silent on the matter, the LLC will be deemed to be member-managed.

Take away for LLC members and managers: If you want your LLC to be manager-managed, make sure you have an LLC agreement that says so.

Take away for people dealing with LLCs: If you’re engaging in a major transaction with an LLC through its manager, make sure its LLC agreement sets out manager-management. Get a representation and warranty that the LLC agreement you’ve been provided remains in full force and effect. Verify that the manager with whom you are dealing has been duly appointed.

Oral or Implied LLC Agreements

Under the current Act, if the members wish to alter the waivable default rules, they may do so in a written LLC agreement. However, under the new Act, the waivable default rules may be altered by either a written or oral LLC Agreement (except for one limited exception pertaining to a member’s rights to dissent from a merger).

To illustrate, under the current Act and new Act, the default rule is that no new member may be admitted to the LLC without the consent of all existing members. Under the current Act, this default rule can be changed only by a written LLC Agreement between the members. Under the New Act, the members can also orally agree to change this rule.

Take away for LLC members and managers: In spite of the new Act’s allowance for non-written agreements, we recommend that any LLC with more than one member have a written LLC agreement. Otherwise there is more potential for dispute, since any member could try to argue that a default rule in the new Act was modified by oral conversation or course of conduct. Moreover, the LLC agreement should contain a clause that says the agreement may only be amended by subsequent written agreement, so as to reduce the risk of inadvertent amendment in conversation or course of conduct.

     These are just two of the important changes made by the new Act. We’ll present more in our October installment of Washington Bizlaw.

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Why Choose Henke Bartram, Business Lawyers? 

We help entrepreneurs and businesses buy, sell and create companies, and help them complete other transactions that are key to their advancement.  We are:

  • Veteran business lawyers. We don’t delegate to junior lawyers, so our clients get the seasoned judgment of a tested business lawyer, every time.
  • Lawyers with a CEO’s outlook. We pay close attention to the legal details, but always with the larger business purpose in mind.
  • Accessible. We make sure that our clients can reach us when they need us.

Our service approach is entrepreneurial–we provide creative, proactive, high caliber legal work. See more about us at www.henkebartram.com. Contact us at dbartram@henkebartram.com to find out if we’re the right lawyers for you. Initial consultations are free.

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