This article will discuss the qualification of foreign corporations to do business in
Virginia and the consequences of failing to qualify.
Failure to qualify can have serious consequences
It is relatively simple for a foreign corporation to obtain a Certificate of
Authority to Transact Business in Virginia, but failure to qualify can have dire consequences.
I once encountered a situation where a foreign corporation, which had been hired as a subcontractor on a major construction project by the general contractor, had failed to qualify to transact business in Virginia. The state agency overseeing the project audited the project and discovered the subcontractor's omission. The state agency immediately stopped all work on the project until such time as the subcontractor qualified - at significant inconvenience and expense to the general contractor.
What constitutes doing business?
It is unlawful for a foreign corporation to transact business in Virginia without a
Certificate of Authority, and any person who violates this prohibition is guilty of a Class I Misdemeanor (Va Code §13.1-613).
What constitutes doing business by a foreign corporation has always been a difficult question. A former Virginia Code Commission has said, with reference to this phrase:
As in the present statute [§ 13-211 of a former statute], no effort is made to define the transaction of business in Virginia since no inclusive definition seems possible. This section is not intended to change existing rules of law in this regard. [Code Commission of Virginia, Report for Revision of the Laws Relating to Corporations, Comment on [§ 13.1-102 of a former statute] (1955)]
Va. Code § 13.1-757(B) provides a non-exhaustive laundry list of the types of activities which do not constitute transacting business, including:
- maintaining, defending, or settling any proceeding;
- maintaining bank accounts;
- soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this Commonwealth before they become contracts;
- creating or acquiring indebtedness, deeds of trust, and security interests in real or personal property;
- owning, without more, real or personal property; and
- conducting an isolated transaction that is completed within 30 days and that is not one in the course of repeated transactions of a like nature.
In determining whether a foreign corporation is "doing business" within Virginia, each case must be decided on its own facts. [Moore-McCormack Lines v. Bunge Corp., 307 F.2d 910 (4th Cir. 1962)]
Consequences of Transacting Business without Authority
The consequence of failing to qualify include:
The foreign corporation is prohibited from maintaining any proceeding in any court in Virginia until it obtains a Certificate of Authority [Va. Code § 13.1-758(A)].
Each officer, director and employee of the foreign corporation, who conducts business knowing that qualification is required, would be liable for penalties ranging from $500 to $5,000 per person [§ 13.1-758(D)].
The foreign corporation would be deemed to have appointed the Clerk of the Virginia State Corporation Commission as its agent for service of process [§ 13.1-758(F)].
Statute does not void corporate acts and allows retroactive cure
Fortunately for offenders in Virginia, failure of a foreign corporation to obtain a
Certificate of Authority does not impair the validity of its corporate acts or prevent it from defending any proceeding in Virginia [§13.1-758(E)].
Additionally, Virginia is a so-called "retroactive cure" state because once an offending foreign corporation proceeds to qualify and pays all penalties, fines and fees, any prohibitions against enforcement of its rights in the courts of Virginia would be eliminated.
Other Entities and Other States
Although this article has focused on corporations, other foreign entities such as
foreign limited partnerships and limited liability companies must similarly qualify to transact business in Virginia. Additionally, like Virginia, most states require Virginia corporations who "do business" in their state to qualify.
Again, what constitutes "doing business" must be determined under the statutes and case law of the foreign state and is not always easy to determine. Failure to qualify in certain states outside Virginia can have more serious consequences because certain states do not allow "retroactive cure" and provide more stringent penalties for failure to qualify.
This article is intended for information and educational purposes only and not as legal advice. Readers needing legal advice should retain competent legal counsel.