What does it mean to "do business in state X" if you are an online service?

I am curious, when it comes to incorporating or forming an LLC, a lot of legalese harps on how you need to file papers in the state you're doing business in.

What if your startup
a) does not take in any money and
b) is a web-based service that does not necessarily base itself on any physical location?

If I live in California, what does it mean for my web-based startup to "do business" here?

In our experience with this issue, we've learned that you are technically doing business in any state that you have a physical presence in or have employees operating in. Physical presence can mean a retail store, an office, or even a warehouse that you distribute products from (even if you don't own the warehouse). Employees in other states can mean regional sales reps etc. To avoid the later we had out of state reps treated as independent contractors.

In most states the "physical presence" of the business is the determining factor. This is traditionally understood to be an office or a storefront. If you are in a state and collect or earn money from customers while you are in the state, or pay employees in that state, I believe that counts as doing business in the state.

If your web-based startup has employees or earns money in the state, it is most likely considered to be doing business in the state.

In CA, doing business means "entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce".

This issue is discussed at greater length in "Doing Business in CA? Be Sure to Register".

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.