By: Steve Masur
If your company plans on doing business out of the state of formation, then you must register to do so. This process is known as foreign qualification and it’s pretty straightforward, but nearly always requires filing documents and paying fees. When forming a corporation or LLC, many people are confused about the term foreign qualification. Most of us, when we hear the word “foreign,” think of international affairs; however, in the world of U.S. corporations and LLCs, foreign qualifying a company means that you are registering it to do business in a state other than your state of formation. When you are applying to foreign qualify a business, you have to register for a certificate of authority in the state where your company will be transacting business and pay the necessary state fees. After completing this, the state knows that a foreign corporation or LLC is conducting business within its borders.
When evaluating whether to form your business as a corporation or LLC in a state other than one where you are doing business, keep in mind that your business will be subject to ongoing reporting requirements, fees and taxes in both your state of formation and state of foreign qualification. If your business is expanding into new states and you need to qualify it as a part of this growth, these initial fees should be considered a necessary part of doing business. Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the criteria evaluated include whether a company has a physical presence in the state, has employees in the state, and accepts orders in the state.
Consequences of Avoiding Foreign Qualification
While you may think the extra fees and reporting requirements to be troublesome, the consequences of not foreign qualifying your business could be much worse. First of all, you might lose the right to bring a lawsuit in state court. Thus, you would not be able to sue to recover damages or to reinforce a contract. In most cases, you can foreign qualify and then bring the lawsuit, but you will lose valuable time before you can enforce your rights.
Also, your company could be subject to fines, penalties and back taxes for the period of time in which your company transacted business in that state.
The Foreign Qualification Process
As part of the foreign qualification process, a name availability search must be conducted in the state of qualification. This ensures that the name of your business is not already in use in that state by another domestic or foreign corporation or LLC, or that its name is not similar to another name already in use. Next, you’ll have to elect a registered agent to represent your entity in that state. The registered agent will serve as an in-state liaison for your out-of-state business. Then, you must register for a certificate of authority in that state. This process is similar to filing articles of incorporation or articles of organization. The appropriate documents must be prepared and filed, and the appropriate state fees paid.
Each state has different requirements for the information to be included in this document. Common information includes:
- Company name
- Date and state of incorporation
- Principal or legal address of the business
- Name and address of registered agent in the state of qualification
- Name and addresses of officers (for corporations) or members (for LLC’s)
- Number of authorized shares and a listing of the different classifications of stock (for corporations)
- Type of management (for LLCs)
- Signature of a corporate officer, often the president (for corporations), or of a member (for LLCs)
Before granting approval for the certificate of authority, many states want to make sure your company is in good standing within the state of formation. In order to do this, they require submission of a certificate of good standing which states that your company has met all the necessary requirements for corporations or LLCs. Failing to file your annual statements, or failing to pay your annual statement fees and franchise taxes could cause your company to be in bad standing with the state. Being in bad standing will most likely cause the indented state of qualification not to grant you a certificate of authority. The prepared certificate of authority, the certificate of good standing or certified copy of your formation documents must be submitted to the appropriate state agency and the necessary state filing fees paid. Turn-around time for receiving state approval for a foreign qualification should typically allow six to eight weeks. Most states will allow you to expedite the filing for an additional charge which will reduce the turn-around time to two to four weeks.