Doing business in other states is known as a foreign qualification. Please don’t get confused by the wording; it can be misleading. You may think it sounds like an international idea but it’s not. In this case, the phrase “foreign” doesn’t mean outside the United States. It’s simply about operating in the U.S. but outside the state where you incorporated your business.
What is a Foreign Qualification?
Foreign qualifying is simply registering a business in a state other than the one you incorporated. Companies and LLCs are considered domestic only in their state of incorporation.
Foreign Qualification Process and Requirements
When you foreign qualify your company, you are essentially registering for a Certificate of Authority in the state(s) where your company will be conducting business and also paying the required state fees. This informs the state that your company is conducting business within its limitations. If your business expands into new states and requires foreign qualification, you should consider these initial and ongoing fees as a necessary part of doing business.
Do you Need to Foreign Qualify?
If you are currently considering incorporating in a state other than your home state, you should consider whether you need to foreign qualify in your home state. There are many factors to consider when determining the need for foreign qualifications. While different states have different criteria for conducting business, consider the following:
- Does your company have a physical presence in the state?
- Do you have workers in the state?
- How does your company receive orders within the state?
- Do you have a company bank account in the state?
If you answered yes to these statements, you will likely need to foreign-qualify your business in the state. If you’re still unsure if you need to get foreign qualifications, you may want to seek the advice of a lawyer.
Consequences of Not Foreign Qualifying
State laws mandate that foreign corporations and LLCs conducting business within their borders must obtain qualification, and the penalties for failing to do so far exceed the associated costs:
- You may lose access to the court system in that state
- May face fines, penalties, and back taxes
Foreign Qualified or Incorporated in Each State?
A practical alternative to foreign qualification is to incorporate your business or form your LLC in the other state(s) where you plan to do business. By incorporating or forming your LLC in multiple states, your company gains a crucial advantage. It becomes domestic in each state, establishing distinct entities and expanding its reach. Consider the following in making your decision:
Increased corporate formalities: The increase in corporate formalities significantly hinders corporations. Corporate procedures include drafting and maintaining regulations, issuing stock, and recording all stock transfers. In addition, they hold initial and annual meetings for directors and shareholders, carefully documenting minutes for all meetings in the corporate records. Unlike corporations, LLCs are not subject to as many regulatory requirements.
Separate owners and management: Establishing a separate corporation in each state means each will have its own stock, shareholders, directors, and officers. Even if the same individuals are involved in each corporation, it’s vital to adhere to the formalities for each domestic corporation, which significantly increases the annual record-keeping requirements.
One company versus separate companies: When you foreign qualify, only one corporation or LLC exists. Corporations, irrespective of the number of states in which they foreign qualify, need only one set of statutes: stock, shareholders, directors, and officers. The bookkeeping for initial and annual meetings of directors and shareholders only occurs once.
Separation of liability between businesses. Creating a new corporation or LLC in each state allows for liability separation. However, if you are foreign qualified in each state, only one corporation or LLC exists, meaning there is no separation of liabilities.
Conclusion
Foreign qualification is the important process of officially registering a business to operate in a state other than its original state of formation. This typically involves completing and submitting an application along with paying a fee to the Secretary of State or a similar governing body in the new state. Additionally, once a business is foreign qualified, it must comply with the ongoing requirements of that state, such as annual report filings, additional tax obligations, and other regulatory requirements. While this can involve additional paperwork and fees, it is essential for businesses to prioritize foreign qualifications in order to ensure compliance with the legal obligations of conducting business in multiple states.
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