A foreign qualification refers to the process by which you register your company to legally do business in another state. We’ll tell you when and how to do so.
What is a foreign qualification?
A “foreign corporation” or “foreign LLC” is one that’s registered in another state. If you form a corporation or limited liability company (LLC) in your state, it’s considered a domestic corporation. When you want to do business in a different state, your company becomes a foreign corporation in that other state. For example, if your LLC was founded in California, it’s a domestic California LLC. In any other state where you do business, you’re a foreign LLC.
To do business in any state other than the one in which your company was formed, you must register as a foreign entity. Your California corporation must register as a foreign corporation in Texas to do business there. That registration process is called foreign qualification.
When does my business need a foreign qualification?
If you want your corporation or LLC to do business in another state, you need a foreign qualification. “Doing business,” however, can mean different things in different states. You need to check the specific requirements for a foreign qualification in the state in which you want to do business.
If you can answer “yes” to the following questions, chances are good that you need to file for a foreign qualification.
- Will you conduct in-person meetings with clients in the “foreign” state?
- Do you plan to purchase property in that state?
- Will you have any other physical presence in that state, such as a retail store or office space?
- Are your employees going to work in that state? Are any of your employees residents of the “foreign” state? And will you pay state payroll taxes in the state?
- Will you offer products or services in that state or ship products from the state?
- Do you expect to bid on contracts in that state?
- Are you going to apply for business licenses or permits in the state?
- Will a significant amount of your corporation’s or LLC’s revenue come from that state?
- Is your business required to collect sales tax in the state?
Do internet-based businesses need a foreign qualification?
Internet-based businesses sometimes fall into a gray area where foreign qualification is concerned. Your online business may be registered in one state — yet it may sell products across the country.
Take the details of your unique situation to an attorney to determine whether a foreign qualification is necessary.
When does my business not need a foreign qualification?
You may do business in other states without requiring any foreign qualification. For example, you may be firmly based in New York but have clients in other states. The location of those clients doesn’t necessarily mean you’re doing business in their states.
Here are few situations in which foreign qualification is generally not required:
- The activities your company transacts in other states are secondary activities, such as maintaining corporate records or evaluating business prospects.
- Your company is part of a joint venture or partnership with a business entity in another state.
- You’re a wholesaler with dealers in foreign states but with little involvement in those dealers’ activities.
- Your company has a bank account in another state.
- You conduct isolated, short-term activities in another state.
Foreign qualification requirements vary greatly from state to state. There’s no clear test for foreign qualification, with decisions made based on your unique circumstances. Therefore, you should discuss the issue with your accountant and attorney to make sure you stay on the right side of the law.
How do I get a foreign qualification?
If you determine that you need foreign qualification, you have to follow a few simple steps before doing business in another state.
Get a Certificate of Good Standing from your state of origin
A Certificate of Good Standing verifies that your corporation or LLC is authorized to conduct business in your home state. It also confirms that you’re in compliance with your domestic state’s laws. Only your home state can issue a Certificate of Good Standing. If you need help acquiring one, ZenBusiness can help.
Foreign states typically require a Certificate of Good Standing before they allow your business to obtain foreign qualification. Some states have different names for the Certificate of Good Standing. Your home state may call this important document a Certification of Authorization, Certificate of Existence, or Certificate of Status.
Make sure the business name you want is available in the foreign state
Your business already has a name. But when you formed your corporation or LLC, you probably only checked for name availability in your home state. Now you need to conduct a similar search in the foreign states you want to do business in.
You can conduct that search on the website of the Secretary of State for the states you’re interested in. Your company’s name must be unique from any other business in the foreign state. The rules of each state, however, vary as to just how different your name must be.
Sometimes you may find that your company’s name is very similar to another entity already doing business in that state. In this case, you’ll need to significantly change your business name for that state. Read the section on how to name your LLC to find out how to secure your business name. You may have to file a secondary, or “fictitious,” name to do business in the new state. If you need to take this step, ZenBusiness may be able to help you handle the process through our DBA service.
You should also check with the U.S. Patent and Trademark Office for any duplication. If you plan to do business online, a domain name search is also important.
Conducting a name search is an important step. Once you find one, we can help you with our name reservation service so no one else can snap it up during the foreign qualification process. We also make domain name registration easy to help you establish your online presence.
Get a registered agent for the new state
As an existing corporation or LLC, you already have a registered agent in your domestic state. As you expand into other states, you’re required to have a registered agent in each state where you do business.
Your registered agent is a person or company that receives legal documents on behalf of your business. The agent also receives documents from the Secretary of State’s office, or the business entity formation agency in the state.
Your registered agent in each state is required to be at a registered place of business during standard business hours. Because of this, you may want to contract with a registered agent service in all foreign states for reliability and ease of communication. ZenBusiness offers a registered agent service designed to make sure your documents are handled correctly in every state.
File an application for a Certificate of Authority
Filing for foreign qualification is called filing an application for a Certificate of Authority. This document is sometimes also called a foreign registration statement. It confirms your right to do business in the foreign state, also known as the state of qualification.
The process for applying for a Certificate of Authority is similar to what you went through when filing your original Articles of Incorporation/Articles of Organization. While each state asks for slightly different information, many require the following:
- Your company name
- The company’s fictitious name under which it will do business, if needed
- Your company’s address in the foreign state
- The state in which the company was originally organized or incorporated and the date of founding
- Its principal address
- The name and address of the registered agent in the foreign state
- The duration of the company
- The purpose of the business and the types of activities you intend to undertake
In addition, corporations and LLCs each typically have a few other pieces of information to disclose in their application for foreign qualification.
Corporations generally have to list the number of authorized shares in the company and the different classifications of stock. In addition, they may be asked to include the names and contact information for their officers and members of their board of directors. A corporation’s application for a Certificate of Authority should be signed by a corporate officer, usually the president of the corporation.
LLCs, on the other hand, must often include the names and contact information of the company’s members. They usually must provide information about the type of management the company uses. The application for an LLC’s Certificate of Authority is typically signed by a member or manager of the company.
File your application for a Certificate of Authority with the Secretary of State’s office. Once you’ve done this and paid the fee, you should receive your Certificate of Authority. This document shows you’ve qualified to do business in the foreign state.
Filing fees cover a wide range, averaging $190 for an LLC and $230 for a corporation. On the low end are Hawaii, Michigan, and Missouri at $50 and California, Montana, and Utah at $70. At the top of the range are Texas and South Dakota at $750 and $765, respectively. Tennessee is a bit of an outlier, charging LLCs per member rather than imposing a set fee. The state’s fees can range from $300 to $3,000 as a result.
Stay compliant with the state
Once you’ve achieved foreign qualification in a new state, you have to remain compliant with the foreign state’s requirements. In most states, you have to file annual or biennial reports and pay accompanying fees. In many states, foreign business entities have to pay higher fees than domestic corporations or LLCs.
You may also have to acquire licenses and permits in the foreign state. Many local counties or cities may require you to take out licenses as well.
In addition, you have to pay state income tax on the income you generate in the foreign state. In some cases, your home state may let you deduct those foreign taxes from your domestic tax return.
Compliance requirements vary significantly from state to state, and keeping up with them can be a burden. Check out ZenBusiness’s worry-free compliance services to take this task off your plate so you can focus on growing your multistate business.
Getting your corporation or LLC a foreign qualification is key to expanding into other states. ZenBusiness is ready to help answer questions and prepare paperwork at every step along the way. Contact us to see how we can help your company grow.
Foreign Qualification FAQ
Why does a company have to get a foreign qualification?
Your company needs a foreign qualification to do business in any state other than its home state. States require foreign corporations and LLCs to qualify so that people in the state can get information about the companies they’re doing business with. They also want to make sure foreign business entities are paying the appropriate taxes. That requirement can protect the state’s domestic businesses from being taken advantage of.
Do I have to get a new EIN if I expand my business to another state?
You don’t need a new EIN (employer identification number) when you establish your business in a new state. That’s because you’re not creating a new business. The IRS considers your business a single entity regardless of how many states you operate in.
Are there penalties for not getting a foreign qualification?
Yes. If your company doesn’t comply with foreign states’ requirements regarding foreign qualification, you can lose rights or suffer penalties. If you aren’t compliant with foreign qualification requirements, you lose the right to bring a lawsuit in the foreign state’s courts. That means you can’t sue to enforce contracts or recover damages in that state.
You’re also likely to incur fines and penalties for failure to qualify. You’ll probably owe back taxes for income earned while doing business in the state illegally, as well as penalties and interest on those taxes. In some states, your company’s officers may also be subject to fines.
Will I have to file annual reports in the state where I get a foreign qualification?
It depends on what state you’re in. Most states do want annual or biennial reports from foreign businesses.
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