Construction companies’ increasing opportunities to perform work across state lines poses unique challenges and requirements, not the least of which are general business registrations and licensing requirements. While the exact requirements will vary from state-to-state, virtually every state requires some type of business registration and licensure. And while these requirements may seem like the proverbial “busywork” mandated by the controlling jurisdiction, severe penalties exist for contractors that fail to satisfy these requirements.
General Types of Registration and Licensure Requirements
Registration and licensing requirements fall into two broad categories: (1) General business registrations filed with the Secretary of State and municipality and (2) Construction specific licenses. General business registrations entail paying a fee for the right to do business in a state and must be paid annually. Most states also require a foreign company to provide a registered agent who is authorized to accept service of process. These general business requirements apply to all foreign companies doing business in the state, regardless of whether the company carries out any construction activities. The purpose of general business registration requirements is to provide revenue to the state or municipality. Failure of a company to comply with the business registration requirements generally results in a yearly fine and may preclude the company from pursuing affirmative legal actions against other entities in that state. As discussed more thoroughly in No Harm, No Foul? – Penalties for Noncompliance When Performing Construction in a Foreign Jurisdiction. Common Sense Contracting, December 2014, a company’s failure to properly register may result in a waiver of potential claims.
Companies have a variety of options when determining how to satisfy the business registration requirements. The simplest option is for the company to register as a foreign company doing business in the state. This generally requires the company to pay an annual fee and provide a registered agent. Where used, the foreign company continues operating all aspects of the business and remains liable for all debts incurred in the foreign jurisdiction. Another option is for the foreign company to create a new entity in the foreign jurisdiction. This entity can take a variety of forms, including a limited liability company or corporation. Each type of entity has advantages and disadvantages, depending on the overall purpose of the entity and the specific requirements and taxes of the jurisdiction. By creating a separate entity, the foreign company provides additional protection against losses incurred in the foreign jurisdiction. Registration requirements may often be found on the secretary of state’s webpage and, for municipalities, on the respective chamber of commerce websites.
States also require construction companies to comply with licensure requirements. These vary depending on the construction discipline, but almost always require the company (or a company employee) to obtain a certification by taking and passing a licensure examination. Licensing requirements apply not only to general contractors, but often to specialty contractors including electricians, plumbers, mechanical contractors, HVAC contractors, home repair contractors, architects, engineers, construction managers, surveyors, landscapers, and interior designers. The overarching purpose of licensure requirements is to assist in guarantying minimal standards of quality to help protect the public interest. The section below briefly addresses considerations when seeking registration.
Considerations When Seeking Construction-Related Licensure
There are hundreds, if not thousands, of various licensing requirements at the state and municipal levels, making it critical for a construction company to research not only state requirements, but also local municipality requirements as well. Further, many state agencies, most often the state Department of Transportation, require additional qualifications or licensure prior to a company bidding a job.
Setting aside the more obvious state licensing requirements, companies today must insure that they comply with the specific municipal requirements as well. These municipal registration requirements often take the form of an additional license fee. For instance, in John Fithian Contracting Co. v. City of Salem, No. 07 CO 33, 2008 WL 4416055 (Ohio Ct. App. Sept. 25, 2008), the Ohio Court of Appeals allowed enforcement of a municipal regulation requiring registration and licensure for an excavation subcontractor. The Court of Appeals upheld the regulation despite the fact that there were no statewide licensure or registration requirements applicable to the excavation subcontractor performing the work. Thus, the absence of any state statute requiring registration or licensure for a particular project or work should not be taken to mean that there are no other licensure or registration requirements, including those imposed by municipalities and agencies.
One area that frequently impacts construction companies doing business in foreign jurisdictions is reciprocity. Many states have reciprocity provisions allowing a company to avoid some, or sometimes all, licensure requirements if the company is licensed in another state. More often, however, states will allow the company to waive particular portions of the test but require the company to complete a test or certification on state specific requirements.
Companies should also examine exceptions to licensure requirements. Many states, such as Tennessee, provide licensure exceptions in certain situations. For instance, no license is required for construction management when the total project value is below $25,000. Similarly, no separate license is needed for masonry subcontractors where the total project value is below $100,000. It is important to check the specific requirements, as a state may require additional licensing for specific types of work that other states may include in a more generic general contractor’s license. While the specifics will vary from state to state, common examples include residential roof repair, residential plumbing, residential electrical, HVAC, and masonry.
Another option for companies seeking to do business in a foreign jurisdiction but that wish to avoid the hassle and expense of completing the licensure process is to partner with a licensed entity to carry out business using that entity’s license. Where permitted, this allows the foreign company to “rent” the license of the licensed contractor. This approach, while avoiding the testing requirements for licensure, also has additional considerations, including insurance, indemnification, disbursement, and liability concerns. Companies wishing to proceed using this partnership or joint venture model should memorialize the relationship in a partnership or joint venture agreement.
Companies are increasingly doing business across state lines, making an understanding of business registration and licensing requirements essential to a successful project. Increasingly states and municipalities are requiring multiple types of registration and licensure for foreign companies, particularly if the company is involved in the construction industry. The exact requirements will vary between states and municipalities, but general requirements include a foreign business registration as well as a contractor’s license. These should be obtained prior to bidding or performing any work in order to avoid both fines and penalties for non-compliance. Insuring compliance with registration and licensing requirements before beginning to operate in a foreign jurisdiction will avoid costly headaches later on.