When a corporation conducts business in a state other than its state of incorporation, the corporation is considered a foreign corporation in that state.
All states prescribe terms and conditions that a foreign corporation must adhere to before being allowed to transact business in that state. There are typically two main requirements that a foreign corporation must meet. It must obtain a certificate of authority and it must appoint and maintain a registered agent and registered office.
All states require foreign corporations to foreign qualify before they may transact business in their states. However, few states attempt to define what activities constitute transacting business. Most states do, however, list in their statutes various activities that they do not consider transacting or doing business in their states. These lists are not exhaustive and may only serve as a guide. Generally, these lists include activities such as engaging in litigation, conducting internal corporate affairs, maintaining bank accounts, selling through independent contractors, creating, acquiring, or collecting debts, engaging in a single or isolated transaction, and transacting business in interstate commerce.
Whether a foreign corporation must qualify is decided on a case by case basis. The same business activities or contacts with a state that subject a foreign corporation to taxation or to the jurisdiction of the state’s courts will not necessarily subject the corporation to the requirement of qualification.
Consequences of transacting business without qualifying
The question of whether a foreign corporation should be qualified often arises when the corporation brings an action in state court. All states prohibit unqualified foreign corporations doing business in the state from bringing actions in the state’s courts. Therefore, the defendant will allege that the unqualified foreign corporation was doing intrastate business and cannot bring the action against it.
In addition to losing access to state courts, a foreign corporation doing business in a state without qualifying may be subject to a monetary penalty or fine. In some states, officers or agents acting on behalf of the foreign corporation may be fined as well.
The theory behind the penalties to the corporation is that an unqualified foreign corporation should not be able to reap the same benefits and protections given a domestic corporation or a qualified foreign corporation, without having to pay for the privilege of doing business in that state.
Once the foreign corporation has qualified and any penalties due have been paid, it may enjoy the same rights, privileges and protections afforded any other domestic or qualified foreign corporation.
A corporation is not always able to qualify under the name in which it was incorporated. Most states require foreign corporations to meet the same name requirements as domestic corporations. Thus, if the state a corporation wishes to qualify in requires a corporate indicator in the name, and the corporation’s name does not contain one, the corporation will have to add such an indicator to its name in order to qualify in the state.
A corporation may also find its name unavailable for use in a foreign state if its name conflicts with a name already in use in the state. If a foreign corporation’s name is unavailable for use, most states will allow it to adopt and qualify under a fictitious name. The fictitious name chosen must be available for use in the state.
Qualification is a procedure whereby a foreign corporation files documents with the state and pays a prescribed fee. The state then gives the foreign corporation the authority to transact business in that state. Among the documents usually filed with the state are an application for a certificate of authority and a certificate from the state of incorporation stating that the corporation exists in its domestic state and is in good standing. Instead of the certificate of good standing, some states require the filing of the articles of incorporation and any amendments thereto. A few states require the filing of both the Certificate of Good Standing and Articles of Incorporation.
The application for Certificate of Authority generally must set forth such information as the corporation’s name, the place and date of incorporation, the period of duration, the principal office address, the registered office address, the registered agent’s name, and the name and address of directors and officers. Some states also want to know the corporation’s purposes, the number of its authorized and issued shares, and the estimated value of all of the corporation’s property and of its property located in the state.
A qualified foreign corporation is subject to the taxation and reporting requirements of the states where it has qualified. However, qualification does not affect a foreign corporation’s ability to conduct its internal affairs, such as the election of directors and shareholders’ meetings. This is governed by the laws of its state of incorporation.
Registered Agent and office
Almost all states require foreign corporations to maintain a registered agent and a registered office in the state. The registered agent acts as the agent to receive service of process on behalf of the foreign corporation. The registered office is the place where service can be made. A registered office and agent must be maintained so that a plaintiff may bring an action against a foreign corporation without having to serve process outside the state. If a foreign corporation fails to maintain a registered agent and office, the state will often revoke the corporation’s authority to transact business.
A qualified foreign corporation is required to make filings with the foreign state in some instances. For example, when a foreign corporation changes its name in its domestic state, each state where it has qualified will have to be notified. In most states, the corporation must file a certificate from its state of incorporation evidencing that a name change has occurred, together with an application for an amended certificate of authority and the statutory filing fee.
A foreign corporation may also be required to amend its certificate of authority upon making certain other changes. Each state’s corporation law sets forth which changes will require the corporation to amend its certificate of authority. Generally, an amended certificate of authority will also have to be obtained upon a change of purposes, period of duration, or state or country of incorporation.
In some states, a foreign corporation is required to file a copy of any amendment it makes to its articles of incorporation. Several states also require a foreign corporation that is involved in a merger to file evidence of the merger.
When a foreign corporation stops doing business in a state, it may withdraw and thereby remove itself from the state’s records. If the corporation does not withdraw, it will still be subject to annual reporting and franchise tax requirements.
Before a foreign corporation is permitted to withdraw, it may be required to obtain clearances from the state’s revenue department and—in some states—the employment or labor departments. These clearances can only be obtained if all taxes, fees and reports have been paid and filed.
In order to withdraw the foreign corporation files a document with the state. This document is generally known as a Certificate of Withdrawal or an application to surrender authority. When the papers are filed, the foreign corporation is no longer qualified and is not permitted to transact business in the state without requalifying.
Revocation of authority
The states require qualified foreign corporations to comply with statutory requirements concerning filing annual reports, paying franchise taxes, and maintaining a registered agent and office. When a foreign corporation fails to comply with these requirements, a state may revoke its certificate of authority.
The procedure for revocation usually involves sending a notice to the corporation. The notice informs the corporation of the deficiency and gives the foreign corporation a certain period of time to correct the problem. If the foreign corporation fails to correct the deficiency, the state will revoke the corporation’s authority to transact business in the state.
A foreign corporation is usually given a chance to appeal the revocation in state court. Also, many states allow the foreign corporation to seek reinstatement of its authority. This procedure involves correcting the deficiency and paying any fees and penalties due. The state may impose a time limit— typically between two to five years after revocation has occurred—in which a foreign corporation may be reinstated. If the foreign corporation cannot be reinstated, it would be required to requalify in order to transact business in the state.