If you’re an Arizona startup that is actually incorporated in another state (e.g., Delaware), chances are by now you’ve heard that you may have to register to do business here in the State, even though you are already incorporated in a different state. In this post, we examine whether and when you must register your out-of-state corporation in Arizona.
Operating in Arizona but incorporated elsewhere?
This question is far more common than it might seem in our Phoenix startup law practice.
For example, earlier this month I met with representatives of a middleware outfit that had originally formed as a corporation in a state back East. However, their U.S., Canada, and Mexico operations had just recently relocated to the metro Phoenix area.
During our meeting, I asked if they had already registered to transact business here in Arizona. After a puzzled stare, they admitted amongst themselves that they hadn’t.
While I’ve had this occur before, what made their case so shocking was that they were actually a large and quite successful SaaS company.
In an earlier post, I dealt with this issue in the context of foreign Limited Liability Companies (LLCs), i.e., those formed outside of but operating within Arizona, so if you’re conducting business as an LLC, you might want to check that post out.
However, in the case of a foreign corporation’s need to obtain authority to transact business here in Arizona, the answer is a nearly identical “Yes”!
Foreign Corporations and Arizona’s Corporation Code
Arizona’s Corporation Code, found in Title 10 of the Arizona Revised Statutes, specifically addresses the requirement of an out-of-state (aka “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)).
Now §10-1501(B) does carve out a number of scenarios under which a foreign corporation will not be considered “transacting business” and so won’t fall under the requirement to first obtain authority in Arizona.
The exception that is most often applicable to my startup clients (particularly the e-commerce and online services ones) is “transacting business in interstate commerce” (A.R.S. §10-1501(B)(11)). So…case closed, we’re all good, right?
Not exactly. There are a number of reasons I usually advise my foreign entity clients with anything more than a fleeting presence here in Arizona just go ahead and register with the Arizona Corporation Commission (ACC) for the authority to transact business here.
Why Your Out-of-State Corporation Should Really Consider Registering
You might think that the “interstate commerce” exception mentioned above applies to your foreign corporation, but the fact of the matter is that the only way to be certain is only by going to court—either against someone who’s suing you, that you’re seeking to sue, or possibly with the Arizona Attorney General’s office (see below).
In other words, lots of uncertainty. Most businesses—particularly the kind looking to withstand the scrutiny of the next series of early-stage investors or VCs—aren’t fans of uncertainty or at least don’t need any more than is necessary.
What Could Happen if You Don’t Register Your Foreign Corporation?
A.R.S. §10-1502 tells us the consequences of transacting business without authority, as well as the possible penalties to foreign corporations who fail to register first.
What follows are some potential consequences. Keep in mind, this is not an exhaustive list, merely the ones I think are the major 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, at least in an Arizona court. If you and your business are not the litigious type, then this is probably not a big deal. However, this limitation could be huge to a less established company if a client decides to stiff you for a large amount or, for example, your landlord suddenly decides (without legal justification) 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, but even as an “expedited” filing with the ACC, this process could take several weeks as a best case scenario.
In the meantime, if your business needs to file for that emergency injunction against an infringer of your IP or a former manager who’s misappropriating your trade secrets, a delay of that length could prove inconvenient at best and highly costly at worst.
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 on your foreign corporation for not being authorized to transact business here, the last part of paragraph D also provides for a fine of up to $1,000.
Before you scoff at getting dinged for up to $1,000, please 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 its involved in a proceeding brought against it, the fact that it is not registered will not prevent your company 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 I tell my foreign corporation startup clients that it’s 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, could your business 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 also 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)).
Why You Should Apply for Authority to Transact Business in Arizona
Hopefully by now you (whether as an officer, director, or sole shareholder of a foreign corporation) can see why I almost always recommend my foreign corporation clients who are headquartered or have any aspect of their operation in Arizona that they just go on and apply for authorization to transact business as a foreign corporation.
For about $200 bucks in filing fees, you can drastically reduce the legal uncertainty and regulatory risk of a possible shut down of the business. Better to head it off at the beginning and register rather than regretting not having completed what is essentially a ministerial (and relatively inexpensive!) process later.
BHANDLAW routinely assists foreign-based startups that have relocated or have operations here in Arizona with their registration to transact business in Arizona. For more information, or to discuss your foreign corporation’s legal position 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 startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Company Startup practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.