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Foreign Corporations and LLCs: Registering to do Business and Use of Tennessee Courts

A “foreign” corporation or “foreign” limited liability company (“LLC”) is one that is organized under the laws of a state other than Tennessee.  A foreign corporation or foreign LLC does not have to obtain a certificate of authority from the Tennessee Secretary of State (i.e., register to do business) to engage in certain types of business activities within Tennessee: For other types of business activities, a foreign corporation or foreign LLC must obtain a certificate of authority.

Significantly, foreign corporations and foreign LLCs which were required to register to do business in Tennessee, but did not, cannot use Tennessee courts until they have registered.  See, T.C.A §48-25-102 and T.C.A §48-246-601. Federal courts in Tennessee have held that the same statutes apply to lawsuits in Tennessee federal courts.  The rule in these statutes applies only when an unregistered foreign corporation or LLC asserts a claim in a Tennessee court. It does not apply to prevent another party from bringing a lawsuit against an unregistered foreign corporation or LLC in a state or federal court located in Tennessee.

Any time a lawsuit is filed in a Tennessee court by a foreign corporation or LLC, at the outset, the lawyer for the defendant, or defendants, should check to determine if the foreign entity obtained a certificate of authority from the Tennessee Secretary of State. This can be done on-line via the Tennessee Secretary of State’s website and takes just a few minutes. If the foreign entity was required to obtain a certificate of authority, but did not, defense counsel should file a motion to dismiss or to stay the action.  In my experience, courts always elect to stay the proceedings to give the foreign entity a chance to register.  (In one case our firm had in federal court, the action was stayed for several months while the plaintiff foreign LLC went through the steps to obtain its certificate of authority.)

Sometimes, a motion to stay a proceeding because the foreign entity did not register in Tennessee will end the proceeding because of the expense of obtaining a certificate of authority.  Under Tennessee law, the penalties for doing business in Tennessee without registering are steep. When a foreign corporation has transacted business in Tennessee without a certificate of authority, to obtain a certificate of authority, it must pay triple the amount of fees, penalties, and taxes and interest on the same, for all the years it transacted business in Tennessee without being registered. See, T.C.A. §48-25-102. A foreign LLC which was required to register to do business in Tennessee, but did not, “shall be fined and shall pay the secretary of state three (3) times the otherwise required filing fee for each year or part thereof” during which it transacted business in Tennessee.

So, when is a foreign corporation or foreign LLC deemed not to be transacting business in Tennessee such that it is not required to register to do business in Tennessee? The answers are set forth in two identical statutes: T.C.A. §48-25-101 (for foreign corporations) and T.C.A. §48-246-102 (for foreign LLCs). Importantly, both statutes provide that the list of activities that do not constitute transacting business in Tennessee is not exhaustive (which provision is curious and could make for an interesting and novel legal argument.)

Those statutes provide that “transacting business in interstate commerce” does not constitute the type of business activity that requires a foreign entity to register to do business in Tennessee. In a 1926 case, the Court of Appeals of Tennessee held that the interstate commerce exception applied to a foreign corporation which maintained a warehouse in Tennessee from which it shipped some goods to Tennessee customers, but where most of the goods were shipped to out of state customers. See, R.M. Hollingshead Co. v. Baker.

Those statutes also provide that selling through independent contractors or engaging in an “isolated transaction that is completed in one (1) month and that is not in the course of repeated transactions” are not the type of business activities which constitute transacting business in Tennessee within the meaning of the registration statutes.

There are several other important exceptions in the statutes that delineate what does not constitute the transaction of business in Tennessee which could apply to your case.  Lastly and importantly for business lawyers, the fact that a foreign corporation or foreign LLC has improperly transacted business in Tennessee without obtaining a certificate of authority does not mean that the acts of the corporation or LLC are invalid or subject its officers, directors, members, or shareholders to personal liability.

 

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