If you’re an Arizona-based startup that is actually incorporated in another State (for example, Delaware), do you have to register your foreign corporation in order to transact business here in Arizona?
This question is more common than you might think in my Phoenix technology startup law practice. Earlier this month, I met with a cloud middleware outfit that had originally formed as a corporation in a state back east. Their U.S., Canada, and Mexico operations had been relocated here to the metro Phoenix area for several months. During our meeting, I asked the client’s officer if they had registered to transact business here in Arizona. After a puzzled look amongst themselves, they admitted to me that they hadn’t.
Like I said before, this occurs more often than I like to admit. However, what made their example so shocking was that they were actually a very large and quite successful (in terms of annual sales, anyway) SaaS company.
In an earlier blog post, I dealt with this issue in the context of foreign Limited Liability Companies (LLCs) formed outside of but operating within Arizona. In the case of a foreign corporation’s need to obtain authority to transact business here in Arizona, unsurprisingly the answer is nearly an identical “Yes”.
Treatment of Foreign Corporations under Arizona’s Corporation Code
Arizona’s Corporation Code, found in Title 10 of the Arizona Revised Statutes, specifically addresses the requirement of a foreign corporation to first register with the Arizona Corporation Commission if the corporation is transacting business in the state (A.R.S. §10-1501(A)).
Under §10-1501(B) however, the statute carves out a number of scenarios which, if the corporation happens to be covered by, means that it is not “transacting business” and so does not fall under the requirement to first obtain authority in Arizona. One of these exceptions that is often most applicable to my startup clients (particularly the e-commerce ones) is “transacting business in interstate commerce” (A.R.S. §10-1501(B)(11)). So, case closed, nothing to see here, right?
Well, not exactly. At least in my albeit paranoid general counsel role. There are a number of reasons I regularly advise my foreign entity clients with anything more than a fleeting presence here in Arizona should just go through the process of registering with the Corporation Commission for the necessary authority to transact business here.
First off, you might think that the interstate commerce exception applies to your foreign corporation, but the fact of the matter is that it is only by going to court, either against someone who’s suing you or that you’re seeking to sue, or with the Arizona Attorney General’s office (see below) that you will know for certain and even then it will probably be in the hands of a judge to decide.
In other words, lots of uncertainty. In general, most businesses— particularly the kind looking to withstand the scrutiny of the next series of investors or VCs—don’t like uncertainty (hot tip: their attorneys aren’t really fans of uncertainty either!).
What Happens if I Don’t Register My Foreign Corporation?
Next, A.R.S. §10-1502 tells us the consequences of transacting business without authority, as well as the penalties. Below are some of what I think are the biggest ones, along with my annotated comments afterwards:
10-1502(A). A foreign corporation transacting business in this state without a grant of authority shall not be permitted to maintain a proceeding in any court in this state until it is authorized to transact business.
Translation: Your unregistered foreign corporation won’t be able to sue anyone. If you and your business are not the litigious type, then this is probably not a big deal. However, this could be huge to a less established company if a client decides to stiff you on a huge licensing fee or, for example, your landlord suddenly decides to lock you and your employees out.
10-1502(C). A court may stay a proceeding commenced by a foreign corporation, its successor or its assignee until it determines whether the foreign corporation, its successor or its assignee requires authority to transact business in this state. If it so determines, the court may further stay the proceeding until the foreign corporation or its successor obtains authority to transact business in this state.
Translation: Sure, you can always just register to do business once it looks like you have to take someone to court. However, even as an “expedited” filing with the ACC, best case scenario this process could take several weeks. In the meantime, if you need to file for that emergency injunction against someone infringing on your patent or a former employee who misappropriated your trade secrets, a delay of that length could prove costly.
10-1502(D). A foreign corporation that transacts business in this state without authority is liable to this state, for the years or portions of years during which it transacted business in this state without authority, in an amount equal to all fees that would have been imposed by chapters 1 through 17 of this title on the corporation if it had duly applied for and received authority to transact business in this state as required by chapters 1 through 17 of this title and thereafter filed all reports required by chapters 1 through 17 of this title. In addition to all penalties imposed by chapters 1 through 17 of this title for failure to pay the fees, the corporation shall pay a penalty of up to one thousand dollars to this state for violating this section. The attorney general may bring proceedings to recover all amounts due this state under this section.
Translation: On top of whatever penalties might be imposed by the Arizona Corporation Code upon your foreign corporation for not being authorized, the last part of paragraph D also provides for a fine of up to $1,000. While getting dinged for up to $1,000 doesn’t seem all that bad, read on to see why your foreign corporation does not want to get to that point.
10-1502(E). Notwithstanding subsections A and B, the failure of a foreign corporation to obtain authority to transact business in this state does not impair the validity of its corporate acts or prevent it from defending any proceedings in this state.
Translation: This is at least some good news. Even if you are not registered as a foreign corporation, your corporate acts are still good and, more importantly, if your corporation gets sued or it is involved in a proceeding brought against it, the fact that it is not authorized will not prevent your foreign corporation from defending yourself.
10-1502(F). The attorney general or any other person may bring and maintain an action to enjoin any foreign corporation from transacting business in this state without authority. On a foreign corporation obtaining authority, the action shall be dismissed, but the plaintiff shall recover its costs and reasonable attorney fees. A determination by a court of competent jurisdiction in this state that a party to the action is a foreign corporation that was required but failed to qualify as a foreign corporation under chapters 1 through 17 of this title is prima facie evidence against the foreign corporation in any other action brought by or against it by any other person of the requirement to and failure to qualify.
Translation: This is the subpart where, if I am advising corporate clients who are formed elsewhere, I tell them that it is really not worth taking the risk of not obtaining authority. This statute effectively gives the Arizona Attorney General the right to stop your unregistered businesses from doing further business in the State. Ask yourself if you think your business could afford to be shut down for the few weeks or longer that it might take you to obtain corporate authority from the ACC? For many businesses, a shutdown of that length could be crippling, if not ultimately fatal. However, the problems would not end there; this part of the statute allows the AAG to recover “its costs and reasonable attorneys fees” for having brought the action against your foreign business in the first place. Now ask yourself if the AAG’s costs and attorneys fees (reasonable or not) would be less or more than the filing fee and the bit of paperwork it would take you to get your foreign corporation authorized to transact business in Arizona? (Hint: The filing fee is only $175 one-time ($210 if expedited)).
Now Do You See Why You Should Apply for Authority to Transact Business in Arizona?
Based on the above, hopefully you (whether as an officer, director, or sole shareholder of a foreign corporation) can see why I almost always recommend to my foreign corporation clients looking to relocate or open an office here in Arizona that they just apply for authorization to transact business as a foreign corporation. Simply put, for about $200 bucks, you eliminate the legal uncertainty, as well as the regulatory risk of possible shut down of the business while and until corporate authority is later obtained. Better to head it all of at the beginning, and register your foreign corporation rather than regretting not having completed what is essentially a ministerial and relatively inexpensive process later.
Our firm routinely assists foreign-based startups and more mature corporations obtain authority to transact business in Arizona through the Corporation Commission. For more information, or to discuss your foreign corporation’s standing in the state, feel free to contact us at the phone number or e-mail address below or use the contact form to the right.
Image courtesy of Nick Youngson, Alpha Stock Images – http://alphastockimages.com/
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions. Ben can be reached at (602) 222-5542 or by e-mail at email@example.com