What Constitutes Doing Business - CT
CTKNOWLEDGE SHAREWHATCONSTITUTESDOINGBUSINESS2016 EDITION
CTWhat Constitutes Doing BusinessBy a corporation in States Foreignto the state of its incorporation2016 Edition 2016, CT. All rights reserved.
CONTENTSINTRODUCTION1THREE KINDS OF DOING BUSINESS3PENALTIES FOR FAILURE TO QUALIFY7Suits By Unqualified Foreign CorporationsEffect of Subsequent QualificationDefense of SuitsValidity of Corporate ActsCounterclaimsSuits By Assignees and SuccessorsPersonal LiabilityMonetary PenaltiesStatutory Citations71417192022262831STATUTORY “DOING BUSINESS” DEFINITIONSAPPLICABLE TO ORDINARY BUSINESSCORPORATIONSThe Model Act ProvisionThe Revised Model Act oradoConnecticutDelawareDistrict of i353536373738383839393940414142424343
ontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaSouth est VirginiaWisconsinWyomingPuerto RicoVirgin 525353545555555656565758596060626363646465
ContentsBritish ColumbiaManitobaNew BrunswickNewfoundlandNorthwest TerritoriesNova ScotiaNunavutOntarioPrince Edward IslandQuebecSaskatchewanYukon Territoryv656666676868686869697070STATUTORY “DOING BUSINESS” PROVISIONSLIMITED TO LENDING MONEY ON SECURITY73SPECIFIC DOING BUSINESS ACTIVITIES75IntroductionInterstate and Foreign CommerceIsolated TransactionsCorporate Secondary ActivitiesIn GeneralAdvertisingBank AccountsBooks And RecordsMaintaining an OfficeMaintaining and Defending SuitsMeetings in StatePreliminary ActsHolding Interests in Resident BusinessesFranchise OperationsHolding CompaniesParent And Subsidiary CorporationsPartnerships, LLCs, and Joint VenturesContractingFederal ContractsSubcontractingSubmitting 114
viContentsCreditCollecting DebtsExtending CreditLending Money On SecurityEntertainmentBroadcastingExhibition of FilmsProfessional Sporting Exhibitions And GamesProduction of Films and ShowsLeasingLeasing Personal PropertyLeasing Real PropertyOil and Gas LeasesManufacturingPerforming ServicesIn GeneralCorrespondence SchoolsField WarehousingInstallation of Machinery and EquipmentResearch WorkTransportation CompaniesProperty OwnershipPersonal Property OwnershipProcessingPurchasingReal Property OwnershipSalesCommission Merchants and BrokersConditional SalesSales from TrucksSales of Repossessed GoodsSales of SamplesSales of SecuritiesSales Through BrokersShipments on ConsignmentShow 4155156156158160161162166166
ContentsSpecialty SalesmenSubscription SalesSelling Over the Internetvii171173174DOING BUSINESS IN175CanadaGuamPuerto RicoThe Virgin Islands175176176177PERSONAL JURISDICTION179LIMITED LIABILITY COMPANIES185
INTRODUCTIONsion is reached as to whether or notqualification is required.Most states have adopted eitherthe Model Business CorporationAct or the Revised Model BusinessCorporation Act. Therefore, theprovisions of both of these ModelActs dealing with activities requiring qualification and penalties fornot qualifying are set forth anddiscussed in the following chapters.In addition to what constitutesdoing business within the UnitedStates, this book contains chapterson doing business in Canada,Guam, Puerto Rico and the VirginIslands. The statutes defining certain activities that do or do not require qualification for Canada, theCanadian provinces, and territories, Puerto Rico and the VirginIslands are reproduced.To a very large extent, the answers to doing business questionsare found in court decisions. Thesedecisions have been accumulatedand analyzed and form the basisfor the articles in the section entitled, “Specific Doing BusinessActivities.”There are three kinds of doingbusiness questions. One question iswhether a foreign corporation doing business in a state will be subject to service of process in thatWhen a corporation does business outside of the state in which itwas organized, it may be requiredto “qualify”—i.e., to obtain a certificate of authority and to appointa resident agent upon whom process may be served. Although thecorporation laws of every staterequire foreign corporations doingbusiness in the state to qualify, nolaw contains a comprehensive definition of the term “doing business.” What constitutes doingbusiness within the meaning ofqualification requirements is thequestion which this book attemptsto answer.The risks of failure to qualifyare great. In all states, unqualifiedforeign corporations doing intrastate business are denied access tostate courts. An unqualified foreigncorporation is also subject to fines,and, in several states, its directors,officers or agents may be fined.These sanctions are discussed under the heading “Penalties for Failure to Qualify.”The statutes of most states listcertain activities in which a corporation may engage without qualifying. Some states also defineactivities which will require qualification. These statutory provisionsare reproduced in this book andshould be examined before a deci-1
2state. The second is whether a foreign corporation will be subject totaxation. The third is whether itwill be subject to the state’s qualification requirements. The firstchapter, “Three Kinds of DoingBusiness,” looks at the differencesbetween these three types. Thefinal chapter takes a more in-depthlook at a state’s power to subject aforeign corporation to the inpersonam jurisdiction of its courts.Members of the Bar may feelfree to call upon the nearest officeof CT Corporation System for additional information on doingbusiness or for statutory changesenacted after the publication of thisbook.It may be noted that businesscorporations are not the only typeof business entity that are requiredto qualify before doing business ina foreign state. Nonprofit corporations, limited liability companies,limited partnerships and limitedliability partnerships are amongIntroductionothers that are subject to a qualification requirement. The chapterentitled “Limited Liability Companies” addresses some doing business issues related to that type ofbusiness entity. However, thisbook deals mainly with foreignbusiness corporations. When dealing with any other business entitythe statutes and case law dealingwith the issue of what constitutesdoing business and the penaltiesfor failure to qualify for that specific business entity type must beconsulted.WHAT CONSTITUTES DOINGBUSINESS is presented as a serviceto the Bar. The information it contains has been gathered together toprovide a convenient reference ina difficult area. It is hoped that itwill prove helpful both to the attorney familiar with the field andto the attorney who is only occasionally concerned with corporatework.
THREE KINDS OF DOING BUSINESSWhen a corporation does business outside of its state of incorporation, it may find itself: (1) subjectto taxation by the state, (2) subjectto service of process and suit in thestate, or (3) required to qualify todo business in the state. The levelof business activity that will constitute doing business is different for each category. InFilmakers Releasing Organ. v.Realart Pictures,1 the court notedthat “This much seems to beclear. . .the greatest amount ofbusiness activity is required to subject a corporation to the state’sstatutory qualification requirements.”2 Therefore, where a corporation’s activities in a state aresufficient to require qualification, itfollows that the corporation willalso be amenable to service of process and to being taxed by thestate.Some corporation laws specifically state that their doing businessdefinitions should not be used indetermining if a corporation is doing business for any other purpose.Georgia, Kentucky, Michigan, Nebraska, New Jersey, North Dakota,Oklahoma, and Vermont providethat their doing business definitionsections do not apply in determining the contacts or activities thatmay subject a foreign corporationto service of process or taxation inthe state.3 Colorado, Delaware,Florida and Utah state that theirdoing business definitions do notapply to the question of whether aforeign corporation is subject toservice of process and suit.4 Nevada and Virginia exclude personaljurisdiction from their definition.5Minnesota and New Hampshire3. Code of Georgia Annotated, Sec. 14-21501; Kentucky Revised Statutes, Sec. 14A.9010; Michigan Compiled Laws, Sec.450.2012; Revised Statutes of Nebraska, Sec.21-20,105; New Jersey Statutes Annotated,Sec. 14A:13-3; North Dakota Century CodeAnnotated, Sec. 10-19.1-143; OklahomaStatutes Annotated, Title 18, Sec. 1132; Vermont Statutes Annotated, Title 11A, Sec.15.01.4. Colorado Revised Statutes, Sec. 7-90801; Delaware Code, Title 8, Sec. 373; FloridaStatutes Annotated, Sec. 607.1501; Utah CodeAnnotated, 1953, Sec. 16-10a-1501.5. Nevada Revised Statutes, Sec. 80.015;Code of Virginia, 1950, Sec. 13.1-757.1. 374 S.W. 2d 535 (Mo. App. 1964).2. See also: Wagner and Wagner AutoSales, Inc. v. Tarro, 889 A.2d 875 (Conn.App. 2006), Sinewellan Corp. v. FarmersBank of Delaware, 345 A. 2d 430 (Del. Super.1975); Alliance Steel, Inc. v. Piland, 134 P.3d669 (Kan. App. 2006); Marco Leather Co. v.Argentinas, 617 N.Y.S. 2d 617 (Sup. 1994);Ronson Art Metal Works, Inc. v. Brown &Bigelow, Inc., 104 F. Supp. 716 (S.D.N.Y.1952); State v. Ford Motor Co., 38 S.E. 2d242 (S.C. 1946); Questech, Inc. v. Liteco, AG,735 F.Supp. 187 (E.D. Va. 1990); contra;Marcus v. J.R. Watkins Co., 188 So. 2d 543(Ala. 1966).3
4exclude taxation.6 The District ofColumbia, Idaho, Kansas, Pennsylvania, and Washington excludeservice of process, taxation or regulation under state law and NewYork excludes service of process.7Tennessee simply states that itsdoing business definition appliesonly for purposes of its qualification requirement, “and for no otherpurpose.”8A state’s power to tax or to assert jurisdiction over a nonresidentcorporation is limited by the Constitution. Generally, it can be statedthat the question of service of process on an unqualified foreign corporation turns on “traditionalnotions of fair play and substantialjustice.” The power of a state tosubject a foreign corporation to thein personam jurisdiction of itscourts is discussed in the chapterentitled “Personal Jurisdiction.”Whether a state may tax an unqualified foreign corporation engaged in interstate commercegenerally depends on the corporation’s “nexus” with the state. In6. Minnesota Statutes Annotated, Sec.303.03; New Hampshire Revised StatutesAnnotated, Sec. 293-A:15.01.7. District of Columbia Code, Sec. 29105.05; Idaho Code, Sec. 30-21-505; KansasStatutes Sec. 17-7932; Pennsylvania StatutesTitle 15, Sec. 403; Washington Revised Code,Sec 23.50.370; New York Business Corporation Law, Sec. 1301.8. Tennessee Code Annotated, Sec. 48-25101.Three Kinds of Doing BusinessNorthwestern States Portland Cement Co. v. Minnesota,9 the Supreme Court sustained Minnesota’sright to impose properly apportioned nondiscriminatory net income tax on an unlicensed foreigncorporation operating exclusivelyin interstate commerce, where thecorporation had a sufficient nexusor connection with the state. Without “some definite link, some minimum connection” between thestate and the corporation’s activities therein, the imposition of sucha tax would violate the due processclause of the 14th Amendment.Since that decision, local activities,such as the maintenance of an office, have been relied upon by thecourts as constituting the necessarynexus.In Complete Auto Transit, Inc. v.Brady,10 the Supreme Court heldthat the Commerce Clause will notprevent a state from taxing interstate commerce if the tax is appliedto an activity with a substantialnexus to the state, and the tax isfairly apportioned, nondiscriminatory, and related to services provided by the State.The purpose of the nexus requirement is to ensure that the taxburden is not placed upon personswho do not benefit from servicesprovided by the state. In National9. 358 U.S. 450 (1959).10. 430 U.S. 274 (1977).
Three Kinds of Doing BusinessBellas Hess, Inc. v. Dep’t of Revenue of Illinois,11 the Court held thatIllinois could not compel an outof-state mail order company tocollect a use tax when the company’s only nexus to Illinois wassending catalogues and orders bymail to Illinois residents. But, inD.H. Holmes Co. Ltd. v. McNamara,12 the Court held that Louisianacould impose a use tax on the mailorder sales of a corporation thatalso operated 13 department storesin the state. And in Quill Corporation v. North Dakota,13 the Courtheld that North Dakota could notimpose a use tax on a mail ordercompany whose only contact withthe state was soliciting residentsthrough the mail and telephone.The Court stated that the company,by engaging in continuous andwidespread solicitation of NorthDakota residents, had establishedminimum contacts under the DueProcess Clause, even though it hadno physical presence. However,the tax was still unconstitutionalbecause the company did not havesufficient nexus to the state underthe Commerce Clause.As a result of the Court’s decision in the Northwestern case citedabove, and its denial of certiorari inBrown-Forman Distillers Corp. v.11. 386 U.S. 753 (1967).12. 486 U.S. 24 (1988).13. 504 U.S. 298 (1992).5Collector of Revenue,14 and International Shoe Co. v. Fontenot,15Congress enacted the Federal Interstate Income Law,16 which places a limitation on the states’ powerto tax purely interstate commerce.It specifically prohibits states andpolitical subdivisions thereof fromimposing a net income tax on income derived within the state frominterstate commerce where theactivities of the taxpayer in thestate were limited to the solicitation of orders.The general rule concerningwhat constitutes doing business soas to require a foreign corporationto qualify has been stated as follows: “It is established by wellconsidered general authorities thata foreign corporation is doing,transacting, carrying on, or engaging in business within a state whenit transacts some substantial part ofits ordinary business therein.”17Doing business is really not subjectto definition and each case mustbe considered and decided in thelight of its distinctive factual situation.The first step to determining if acorporation must qualify in a state14. 101 So. 2d 70 (La. 1958), cert. den.(mem.) 359 U.S. 28, 79 S. Ct. 602 (1959).15. 107 So. 2d 640 (La. 1958), cert. den.(mem.) 359 U.S. 984, 79 S. Ct. 943 (1959).16. P.L. 86-272, 15 U.S.C. 381 et seq.17. Royal Insurance Co. v. All States Theatres, 6 So. 2d 494 (Ala. 1942).
6is to examine the state’s corporation law. Most state laws list certain intrastate activities, such asmaintaining bank accounts or holding board meetings, that a foreigncorporation may engage in withouthaving to qualify. When there is astatutory statement covering thecorporation’s particular situation,the statute will hold. Otherwise, theissue is for judicial determination.The issue of whether a foreigncorporation is required to qualifyin a state usually comes before aThree Kinds of Doing Businesscourt when the corporation bringsan action in the state’s courts.Becauseunqualifiedforeigncorporations transacting intrastatebusiness may be barred frommaintaining an action in a state’scourts, the defendant will assert theplaintiff’s unqualified status as adefense. The court must then determine if the plaintiff’s activitiesin the state constituted “doingbusiness” so that the corporationwould have been required to qualify under the corporation law.
PENALTIES FOR FAILURE TO QUALIFYEvery state has enacted a statutedenying unqualified foreign corporations access to state courts. Somestates have provisions similar toSec. 124 of the Model BusinessCorporation Act, which states that“No foreign corporation transacting business in this State without acertificate of authority shall bepermitted to maintain any action,suit or proceeding in any court ofthis State, until such corporationshall have obtained a certificate ofauthority.” The states that haveadopted similar provisions areAlaska, Colorado, Illinois, Minnesota, New Jersey, New Mexico,North Carolina, North Dakota, andRhode Island.Other states have adopted a provision similar to Sec. 15.02 of theRevised Model Business Corporation Act which provides that “ASuits By UnqualifiedForeign CorporationsFew corporations confine theiractivities to their home states. Inorder to protect their interests inforeign states, corporations musthave access to those states’ courts.However, an unqualified foreigncorporation may be prevented frombringing or maintaining an actionin the courts of a state in which itdoes intrastate business.1 Becauseof the Constitution’s CommerceClause, a state may not prevent anunqualified corporation from usingits courts if the corporation is engaged exclusively in interstatecommerce.21. Proof that an unlicensed foreign corporation had been doing business in the state asto other transactions has been held not toprevent the corporation from maintaining anaction arising out of a transaction or series oftransactions in interstate commerce. BrownBroadcast, Inc. v. Pepper Sound Studios, Inc.,242 Ark. 701 416 S.W. 2d 284 (1967); Newspaper Publishers, Inc. v. St. Charles Journal,Inc., 406 S.W. 2d 801 (St. Louis (Mo.) Ct. ofApp. 1966).2. SGB Construction Services Inc. v. RaySumlin Construction Co., Inc., 644 So. 2d 892(Ala. 1994); Johnson v. MPL Leasing Corp.,441 So. 2d 904 (Ala. 1983); Camaro TradingCo., Ltd. v. Nissei Sangyo America, Ltd., 628So. 2d 463 (Ala. 1993); Joison Limited v.Taylor, 567 So.2d 862 (Ala. 1990); InlandCasino Corp. v. Superior Court, 10 Cal. Rptr.2d 497 (Cal. App. 4 Dist. 1992); Imex International, Inc. v. Wires Engineering, 583 S.E. 2d117 (Ga. App. 2003); International CapitalEquipment Limited v. Computer Atlanta, Inc.,715 F. Supp. 371 (N.D. Ga. 1989); MassTransfer Inc. v. Vincent Const. Co., 585N.E.2d 1286 (Ill. App. 5 Dist. 1992); GoodwinBros. Leasing, Inc. v. Nousis, 373 Mass. 169,366 N.E. 2d 38 (1977); Shulton, Inc. v. Consumer Value Stores, Inc., 352 Mass. 605, 227N.E. 2d 482 (1967); Simplified Tax Records,Inc. v. Gantz, 333 S.W. 2d 328 (St. Louis(Mo.) Ct. of App. 1960); Invacare Corp. v.John Nageldinger & Son, Inc., 576 F. Supp.1542 (E.D.N.Y. 1984); SCS/Compute, Inc. v.Meredith, 864 P.2d 1292 (Okl. App. 1993);Statler Hotels v. Herbert Rosenthal JewelryCorp., 351 S.W. 2d 579 (Tex. Civ. App.1961); L.B. Foster Co. v. Nelson Bros. Const.Co., 424 P.2d 881 (Utah 1967).7
8Suits By Unqualified Foreign Corporationsforeign corporation transactingbusiness in this state without a certificate of authority may not maintain a proceeding in any court inthis state until it obtains a certificate of authority.” The states thatadopted similar provisions are Arizona, Arkansas, Florida, Georgia,Hawaii, Indiana, Iowa, Kentucky,Maine, Michigan, Mississippi,Missouri, Montana, Nebraska,New Hampshire, Oregon, SouthCarolina, South Dakota, Tennessee, Utah, Vermont, Virginia, WestVirginia, Wisconsin, and Wyoming.The statutes of Alabama, California, Delaware, District of Columbia, Idaho, Kansas, Louisiana,Maryland, Massachusetts, Nevada,New York, Ohio, Oklahoma,Pennsylvania,Texas and Washington, also provide that unqualified foreign corporations doingbusiness in their states may notuse their courts. However, theirstatutes are not based on either theModel Act or Revised Model Actprovisions.Because an unqualified corporation is denied access to state courts,it cannot enforce contracts it madein the state.3 But an unqualifiedcorporation doing intrastate business may be permitted to enforce acontract in a state court if the contract was entered into outside ofthat state.4 However, in an Ala-
swers to doing business questions are found in court decisions. These decisions have been accumulated and analyzed and form the basis for the articles in the section enti-tled, “Specific Doing Business Activities.” There are three kinds of doing business que
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