Key Takeaways:
- Corporations and LLCs that expand their business into “foreign” states may have to “qualify” or apply for authority first. This is done through a statutory process called foreign qualification or foreign registration.
- Whether a corporation or LLC has to qualify can be hard to determine.
- It’s important to qualify if required because there are penalties for doing business in a state without authority.
Are you expanding your business into a new state? If your business is owned and operated by a corporation or LLC, and not by you directly, then that expansion may mean your corporation or LLC will have to obtain the new state’s authority to transact business there.
A corporation or LLC gets authority to transact business in any state other than its state of formation through a statutory procedure called “foreign qualification”, or “foreign registration”.
A corporation or LLC that transacts business in a state without the state’s authority, when that authority was required, is subject to penalties that you will want to avoid. So if you’ve decided that your corporation or LLC will transact business in new states, please read on to see what that entails.
What is foreign qualification and why is it called that?
When you hear the terms “foreign qualification” or “foreign registration” you may think it’s a requirement the states have for corporations and LLCs formed outside of the United States. But in business entity parlance, “foreign” means every U.S. state other than the corporation or LLC’s state of formation (as well as every foreign country).
To put it another way:
- Every corporation or LLC is domestic in one state – the state where its formation document was filed.
- For example, if you filed your LLC’s certificate of formation with the Delaware Secretary of State, your LLC is a Delaware domestic LLC. As a Delaware domestic LLC, it’s governed by the Delaware LLC law.
- In our example, every state other than Delaware is a foreign state and the LLC is a foreign LLC in every state other than Delaware.
What constitutes “doing business” in another state and why does it matter?
If your corporation or LLC is transacting (or doing business) in a foreign state, it will have to qualify (or register – the terms are synonymous in this context) with the Secretary of State or equivalent office first.
Unfortunately, it’s not always easy to figure out if a corporation or LLC is doing business in a foreign state to the extent that it must qualify first. Among the reasons are the following:
- States vary on the amount and types of activity that trigger this requirement.
- A corporation or LLC may be “doing business” to the extent that it’s subject to taxation by the state, or the personal jurisdiction of the state’s courts, or for some other compliance obligation, but that doesn’t mean it has to qualify. The standards are different, making it even more confusing.
- Most state laws list only those activities that don't constitute doing business — leaving courts to decide what does constitute doing business on a case-by-case basis, based on all the facts and circumstances.
What are the penalties for failing to foreign qualify?
Generally speaking, failing to comply with any law will bring penalties. And the foreign qualification laws are no different. The states will penalize foreign corporations that transact business in the state without authority. The exact penalties depend on the state, but can include the following:
- Monetary fines or penalties for the corporation or LLC
- Monetary fines or penalties for the individuals running it or doing business on its behalf
- Inability to maintain a lawsuit or proceeding in the state’s courts, like a breach of contract lawsuit or a suit for defective workmanship, until it’s properly authorized to do business
How do I know if my corporation or LLC needs to foreign qualify?
It’s hard to know exactly - which is why you may want to consult with an attorney if you’re not sure. But there are some activities that should give you pause to carefully think about whether it’s time to file that application for authority. Here are some of them:
- Physical location. The business has a physical location, like a warehouse, office, store or restaurant, in the state. (But simply owning real property, or holding mortgages on real property, generally isn’t considered doing business.)
- Employees. The corporation or LLC has employees located in the state – including remote workers.
- Regular binding contracts. Your corporation or LLC regularly enters into binding contracts in the state. (Entering into contracts that must be approved by an office located outside of the state before becoming binding is often listed as an activity that is not considered "doing business.")
- Regular client or customer meetings. You regularly meet with clients or customers to conduct business with them in the state. (Phone meetings and email alone are less likely to rise to the level of doing business.)
- Significant revenue stream. You have a steady and significant revenue stream from activities in the state. (Isolated transactions generally are not considered doing business.)
If your corporation or LLC is engaging in one or more of those activities it doesn’t necessarily mean it’s transacting business and needs to qualify. But it might be a sign that you should consider consulting with a legal advisor before you expand your operations into that state. And remember, these decisions are made on a case-by-case basis on the unique facts of your company’s situation — and the answer may vary by state.
How do I foreign qualify with a state?
If your corporation or LLC has to qualify in a foreign state, you’ll need to follow the procedure outlined in that state’s corporation or LLC law. Although the state laws differ, in general you’ll have to do the following:
- File a document with the Secretary of State (or equivalent office) that provides basic information about your company. This document may be called an Application for Authority, an Application for Certificate of Authority, an Application for Registration, or another name.
- If your corporation or LLC’s name is already on record with the foreign state as belonging to another company you will probably have to choose a “fictitious” name that is not already taken and qualify and do business under that “fictitious” name.
- You might have to order a certificate of good standing from the domestic state. Many states require one to be included with the application for authority.
- You’ll need to decide who you want to be your registered agent in the state. You need to decide before you file the application for authority because you have to include the registered agent’s name and address in the application. The registered agent is the agent appointed to receive service of process and official communications on behalf of the corporation or LLC. (Choose wisely. It’s a crucial role.)
Once the application for authority has been accepted you should receive a Certificate of Authority (or similar document) from the state. This shows that the corporation or LLC is authorized to do business there.
What information do I need to foreign qualify?
You’ll need to give the states some basic information about your corporation or LLC in the application for authority. States differ in the information they want but in general they want the following:
- The legal name (that’s the name on its current formation document)
- If its legal name is unavailable and it has to qualify under a fictitious name, the fictitious name
- The date and jurisdiction of formation
- The principal place of business, wherever located
- The business address in the foreign state
- The name and address of the registered agent required to be appointed and maintained in the state.
What does my corporation or LLC have to do once it’s qualified with a state?
Although corporations and LLCs mostly have to worry about complying with the business entity law of their domestic state, foreign states are allowed to, and do, require qualified foreign corporations and LLCs to do certain things too. For example:
- File Annual Reports (or biennial reports in some states).
- Update the states when important information changes like the corporation or LLC’s name or registered agent. This might require filing an amendment to the certificate of authority or a change of name/registered agent form.
- If the corporation or LLC’s existence terminates it needs to let foreign states know. If it stops doing business in the state, but continues to exist as an entity, it may not necessarily have to cancel its registration (also known as withdrawing from a state) but it’s to the corporation or LLC’s advantage to do so. Otherwise, it’s still subject to the foreign state’s compliance requirements (and its penalties for not complying).
Conclusion:
There are many benefits to expanding your business into new states. Just don’t forget that if you’ve decided to take advantage of all the benefits of conducting the business through a corporation or LLC, you need to comply with the laws of the states where your company was formed and where it’s transacting business. If you need help with qualifying contact CT Corporation.
Related Resources:
Understanding why companies have to register to do business in another state
What constitutes doing business
LLC compliance smart chart: Activities by foreign LLCs that do not constitute doing business under state LLC laws
What are the requirements for operating a business in multiple states? (Foreign qualification)
