To Qualify or Not to Qualify … A Three-Part Analysis

After an extensive look at when a company is obligated to qualify to do business under New York and California law, we developed a three-part analysis to determine whether a company must qualify.

First, is someone requesting evidence that the company is qualified to do business in the state? As a practical matter, if a company wants to sign a lease, obtain a film tax credit, open a bank account, etc., then there’s no further inquiry if the landlord, bank, state film commission, etc., is requesting (or insisting) that the company qualify.

Second, in California and in New York, there are safe harbors that tell us what activities do not obligate a company to qualify to do business.  If the company’s activities fall squarely into the safe harbors, there’s no further inquiry (and no obligation to qualify).

The laundry list of activities in California include:

• maintaining or defending a legal, administrative, or arbitration proceeding;
• holding meetings of the company’s shareholders or board of directors;
• maintaining bank accounts (rarely helpful because of Patriot Act requirements);
• maintaining offices or agencies for the transfer, exchange, and registration of its securities;
• making sales through independent contractors;
• soliciting or procuring orders that require acceptance outside of California to become binding contracts;
• creating evidence of debt or mortgages, liens, or security interests on real or personal property; and
• conducting an isolated transaction that is completed within a period of 180 days and is not in the course of a number of similar and repeated transaction

In New York, the “safe harbor” activities include:

• maintaining or defending a legal, administrative, or arbitration proceeding;
• holding meetings of the company’s shareholders or directors;
• maintaining bank accounts (rarely helpful because of Patriot Act requirements); and
• maintaining offices or agencies for the transfer, exchange, and registration of the company’s securities^.

The third part of the analysis is a detailed factual analysis of the activities of the company. In California, a foreign corporation must be qualified in order to “transact intrastate business,” which means, “entering into repeated and successive transactions of its business in [California]”. In New York, the corporation must be engaged in a “regular and continuous course of conduct in the state”. This is the toughest part of the analysis, because it requires a close look at what the company is doing in the state.

Read our analysis of California law by clicking here.

Read our analysis of New York law by clicking here.

Read more about what it means to qualify to do business by clicking here.