Registering an out-of-state (foreign) LLC.

Many limited liability companies (LLCs) engage in interstate business, rather than restricting their operations to one state. In such cases, an LLC is required to register as a foreign LLC in the states in which it does business (other than the state in which it is organized). Failure to register can result in penalty assessments (including criminal prosecution), although, in most states, a failure to register will not cause members to lose limited liability. However, an LLC cannot sue in a state court, obtain a license or perform other similar acts without registration.

Procedure

A foreign LLC generally registers to do business in a state by filing an application and paying a fee. An annual fee is also usually required. In most states, registration requires disclosure of the LLC's name, state of organization and the name and address of the registered agent in the state for which the application is being made. Forms and fees are available from the state agency charged with LLC registration.

Name issues: One potential problem when registering as a foreign LLC arises when the LLC's name is confusingly similar to an LLC already formed or registered to do business in the state. In such cases, the state statute controlling the use of a fictitious name must be consulted to determine if a remedy exists. The LLC may be allowed to do business in the state under a name different from its registered name in the state of organization. To avoid this problem, when an LLC is formed, the organizers should consider reserving its name in every state in which it anticipates conducting business. In any event, an LLC should always register a trade name or fictitious name to protect itself from others using that name in conducting business.

What Is "Doing Business"?

Registration of a foreign LLC is required whenever the LLC conducts business in a state. Most state statutes list the transactions that do not constitute the conduct of business in the state. While these exclusions protect an LLC from registration, they are relatively limited in scope and only include such items as:

1. Selling through independent contractors;

2. Maintaining bank accounts;

3. Owning real or personal property with no other actions;

4. Soliciting orders by mail or through personal contact when acceptance of the order must occur out of state before the order becomes a contract;

5. Conducting isolated transactions in the state during the year;

6. Creating security interests in or deeds of trust on property; and

7. Holding meetings in the state.

While not an exhaustive list of safe-harbor transactions, the foregoing transactions illustrate the nature and quantity of actions an LLC can take without registering as a foreign LLC. Any other business transactions probably will require the LLC to register.

Which State Controls?

If an LLC is required to register as a foreign LLC, the operating agreement should specify which state's law will govern the LLC's operations. Normally, this will be the state of organization's laws. However, if the operating agreement is silent, another state's laws may control, particularly when the transaction has a closer connection with that state. Even when the operating agreement specifies which state statute govern, another court can apply its own law, because of public policy or when the application of the operating agreement would produce an unconscionable result. However, most courts will generally defer to the operating agreement's provisions.

This case study has been adapted from PPC's Guide to Limited Liability Companies," 10th Edition, by Michael E. Mares, Sara S. McMurrian, Stephen E. Pascarella II and Gregory A. Porcaro, published by Practitioners Publishing Company, Fort Worth, TX, 2004 ([phone]; www.ppcthomson.com).

Editor: Albert B. Ellentuck, Esq. Of Counsel King & Nordlinger, L.L.P. Arlington, VA