I started a web/video production business with my family -- LLC taxed as a partnership. Two of the partners are in Colorado, which is where we registered as an LLC. The other three partners live in Illinois.
Most of our customers this year ended up being from Illinois -- we produced videos and built websites. On my tax return, I'm interpreting that I owe "replacement" tax in Illinois. I'm just about to mail my tax return, when it hit me: Do I need to register as a foreign LLC in Illinois? Will they accept my tax payment, or mail me a penalty for not registering? Does creating websites/videos for clients in IL constitute doing business? We have no physical address there.
Thanks so much.
You have raised one of the most vexing issues for companies doing business in more than their own state. Typically the question of whether you must register in Illinois or any other state is whether you are "doing business" in that state. Illinois says the following activities do not constitute doing business:
§ 45-47. Activities that do not constitute transacting business.
(a) Without excluding other activities that may not constitute transacting business in this State, a foreign limited liability company shall not be considered to be transacting business in this State, for purposes of this Article 45, by reason of carrying on in this State any one or more of the following activities:
(1) Maintaining, defending, or settling any proceeding.
(2) Holding meetings of the managers or members or carrying on other activities concerning internal company affairs.
(3) Maintaining bank accounts.
(4) Maintaining offices or agencies for the transfer, exchange, and registration of the limited liability company's own securities or maintaining trustees or depositaries with respect to those securities.
(5) Selling through independent contractors.
(6) Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if orders require acceptance outside this State before they become contracts.
(7) Owning, without more, real or personal property.
(8) Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature.
(9) Having a member or manager who is a resident of this State.
This list is not exhaustive.
If you fail to register, your contracts and the like are valid but you could be excluded from IL courts.
If you did the work in Colorado for Illinois clients, I think there is a good chance you were not doing business in Illinois for purposes of registration. The registration gives you the right to enjoy services of the foreign jurisdiction. if you only served customers there, you may fall outside of the doing business definition. It is, of course, worth further investigation.
If they work in IL, then they have IL source income and have to pay taxes there, in addition to the ability to defend there (as well pointed out by the other answerer.).
Does creating websites/videos for clients in IL constitute doing business? yes
Sales Tax is another issue for you to explore.
Sit down with a tax attorney and plan this out.
Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.
My colleagues provided excellent observations.
As a separate business matter, I hope you have a complete operating agreement and have resolved intellectual property ownership issues. If you have not done so, this is a costly mistake. The operating agreement and selection of applicable law and venue is critical if you have members in multiple states.
You should speak with a business attorney. Good luck.
This answer is for informational purposes only and is not legal advice regarding your question and does not establish an attorney-client relationship.