Doing business in other states is known as a foreign qualification. It can actually be quite confusing. It may sound like an international concept, but “foreign” doesn’t mean anything outside of the United States when it comes to U.S. corporations and limited liability companies (LLCs). It’s really about operating domestically in the U.S., but outside of the state in which you incorporated your business.
What is a Foreign Qualification?
Foreign qualifying is simply the registration of doing business in a state other than the one in which you incorporated. That’s because companies and LLCs are considered domestic only in their state of incorporation.
Foreign Qualification Process and Requirements
When you foreign qualify a business, you register for a Certificate of Authority in the state(s) where your company will do business and pay compulsory state fees. This informs the state that your company is conducting business within its limitations. If your business enlarges into new states and you need to foreign qualify, these initial and ongoing fees should be considered a required part of doing business.
Do you need to foreign qualify?
If you are presently evaluating whether to incorporate in a state other than the one where you are located (your home state), you should consider whether you may need to foreign qualify in your home state. There are many factors used in determining the needs of foreign qualify. While different states have different criteria for conducting business, consider the following:
1. Does your company have a physical presence in the state?
2. Does your company have workers in the state?
3. Does your company receive orders within the state?
4. Does your company have a bank account in the state?
If you answered yes to any of these statements, you will most likely need to foreign qualify your business in the state. If you’re still not sure if you need to foreign qualify, you may want to get the advice of a lawyer.
Consequences of not foreign qualifying
State laws require foreign corporations and LLCs doing business within their borders to foreign qualify and the penalties for not doing so outweigh the costs:
o You may lose access to that state’s court system
o You may face fines, penalties, and back taxes
Foreign qualified or incorporate in every state?
An alternative to foreign qualifying is to incorporate your business or form your LLC in the other state(s) in which you plan to do business. The primary difference is that when you incorporate or form your LLC in multiple states, your company becomes domestic in each of those states, thus creating separate entities. Consider the following in making your decision:
a) Increased corporate formalities: For corporations, the increase in corporate formalities is a big hindrance. Corporate procedures include drafting and maintaining regulations, issuing stock, and recording all stock transfers. Also holding initial and then annual meetings of directors and shareholders in addition to keeping minutes of all director and shareholder meetings with the corporate records. LLCs do not face the widespread regulations imposed on corporations.
b) Separate owners and management: When you create a distinct corporation in each state, each has its own stock, shareholders, directors, and officers. Even if they are the same people for each, the formalities apply for each domestic corporation, greatly increasing the annual record-keeping requirements.
c) One company versus separate companies: When you foreign qualify, only one corporation or LLC exists. For corporations, irrespective of the number of states in which it foreign qualifies, it needs only one set of statutes, stock, shareholders, directors, and officers. Bookkeeping for initial and annual meetings of directors and shareholders happens only once.
d) Separation of liability between businesses. Forming a new corporation or LLC in each state provides liability separation. If you have foreign qualified in each state, only one corporation or LLC exists, so there is no separation of liabilities.
Although each foreign qualification comes with filing and/or annual fees, additional laws to become familiar with, and added paperwork, you should never overlook your business’s legal obligation to foreign qualify.
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