232 Planning and Forecasting
OUT OF STATE OPERATION OF
CORPORATIONS, LIMITED PARTNERSHIPS,
AND LIMITED LIABILITY COMPANIES
Things are different, however, with corporations, limited partnerships, and
LLCs. As creations of the individual states, they are not automatically entitled
to recognition elsewhere. All states require (and routinely grant) qualification
as a foreign corporation, limited partnership, or LLC to nondomestic entities
doing business within their borders. This procedure normally requires the
completion of a form very similar to a corporate charter, limited partnership
certificate, or LLC charter, and the payment of an initial and annual fee simi-
lar in amount to the fees paid by domestic entities. This requirement, inciden-
tally, is one reason not to form a corporation in Delaware if it will operate
principally outside that state. Much litigation has occurred over what consti-
tutes “doing business” within a state for the purpose of requiring qualification.
Similar issues arise over the obligation to pay income tax, collect sales tax, or
accept personal jurisdiction in the courts of a state. Generally these cases turn
on the individualized facts of the particular situation, but courts generally look
for offices or warehouses, company employees, widespread advertising, or
negotiation and execution of contracts within the state.
Perhaps more interesting may be the penalty for failure to qualify. Most
states will impose liability for back fees, taxes, interest, and penalties. More
important, many states will bar a nonqualified foreign entity from access to its
courts and, thus, from the ability to enforce obligations against its residents.
In most of these cases, the entity can regain access to the courts merely by pay-
ing the state the back fees and penalties it owes, but in a few states access will
then be granted only to enforce obligations incurred after qualification was
achieved, leaving all prior obligations unenforceable.
RECOGNITION OF SOLE PROPRIETORSHIPS
AS A LEGAL ENTITY
By now it probably goes without saying that the law does not recognize a sole
proprietorship as a legal entity separate from its owner. If Phil, our computer
entrepreneur, were to choose this form, he would own all the company’s assets;
he would be the plaintiff in any suits it brought, and he would be the defendant
in any suits brought against it. There would be no difference between Phil, the
individual, and Phil, the business.
RECOGNITION OF PARTNERSHIPS AS A LEGAL ENTITY
A general partnership raises more difficult issues. Although most states allow
partnerships to bring suit, be sued, and own property in the partnership name,
this does not mean that the partnership exists for most purposes separately from