The statistics really haven’t changed over the past few years. New York not only remains one of the most expensive states in our fair Union to live and do business, but we also have one of the most oppressive tax structures to boot. All in all, this usual makes for an incredibly unfriendly environment for starting and/or maintaining a business in New York State.
Call it a trickle down effect if you will, but this hostile fiscal climate invariably impacts entrepreneurs’ decisions as far as where to incorporate or whether to even do business in New York. Such being the case, even when companies decide to do business in New York, before doing so, they will often make a strategic decision first – namely, forming their business in another state so that their business is subject to not only friendlier corporate governance laws, but also a less oppressive tax and regulatory structure. That’s all well and good in theory, at least until you start “doing business" in New York.
Quick side note. Just so there is no confusion, when I use the term “foreign" business, I’m not talking about a company that’s been set up in Bangladesh or some other far off land. Foreign in this sense that I’m using it refers to businesses that were formed outside of New York, but in another state (even if that business was formed by a New York resident with the intention of doing business exclusively in New York). If we were talking about companies formed in another country, those would be referred to as “alien" entities.
New York, like many other states, requires “foreign" businesses to register with the Department of State before conducting business in order to take full advantage of the State’s laws and corporate protections. Registering your foreign entity is a simple enough matter. I do, however, always recommend utilizing competent attorney to assist with the process because failure to do so properly could lead to disastrous consequences for your business later. In order to register, it’s merely a matter of filing some paperwork with the Department of State and thereafter obtaining a Certificate of Authority to transact business here. Simple enough, right?
At the end of the day, business owners need to understand that forming a business in another state is not a panacea to your New York corporate woes. While there may be times that doing so makes sense, owners need to recognize certain facts, not the least of which include that you could be opening your business up to potential litigation in more than one state by undertaking this strategy, and that you will face increased costs by maintaining your business in two separate states. Whether this approach makes sense for your business is fact dependent and one that should be considered with counsel.
Assuming for a moment that you do form a foreign business – then what? What happens if you fail to register it or if you do so improperly? What risks do you run? The long and short of it is that doing business in New York as an “unauthorized" company will subject your business to considerably greater liabilities. The downsides are very real. Depending on the nature of your industry, your company may be entirely banned from conducting business here unless you’ve registered and secured the permission of the necessary state agencies to conduct business (i.e., insurance companies and other industries subject to strict governmental regulation). Your business could likewise find itself subject to fines depending on the illegal practice(s) in which you’ve engaged.
Another reality of doing business in New York as an unauthorized foreign entity is that you will be precluded from affirmative access to the court system unless and until you have qualified to do business in the State. This prohibition is codified in New York’s Business Corporation Law, and is designed to “to protect domestic corporations from unfair competition and to place them on an equal footing with corporations who are using the facilities provided by the state of New York in the conduct of their business." Others, however, will still be able to gain jurisdiction over you, even though you’re not registered here. One of the goals of any company, regardless of the locale in which it is conducting business, is to enjoy the protections offered by that jurisdiction’s laws, while similarly being able to access its legal system. Without the benefit of those advantages, an unauthorized company could well find itself behind the eight-ball as far as protecting its interests.
Whatever your rationalization for forming your business in another state, the lesson here is simple. If you’ve chosen to do business as a foreign entity, make sure to register with the Department of State! It’s fairly quick. There’s only a nominal expense for doing so. But it will likely save you a major headache down the road should some dispute involving your company arise. Heaven knows there are certainly enough challenges in business without creating additional and unnecessary burdens for yourself; this is an easy fix, so strongly consider it.