How hard is it to expand a business into another state? A business wanting to do business in a different state than where they are incorporated must go through a foreign qualification process. This involves legal steps to notify the new state that the company will be doing business in that state. It also asks the state to give the company a legal entity status. In short, this process is asking the new state to allow the company to conduct business within its state borders.
What does the Term Foreign Qualification Mean?
The term foreign qualification may sound like an international thing, but the term foreign refers to a company or an entity’s origination state or jurisdiction if it is different than the state it wishes to form a new business in. An entity can be a United States Corporation, a limited liability company (LLC), a limited liability partnership, or a limited partnership.
Foreign qualification is actually a process for registering a company or entity to do business in a new state. For instance, if a company originated in Illinois and wants to open a branch office or an additional retail store in Minnesota, it will need to ask the state of Minnesota for permission to transact business there. An entity is only considered domestic in its state of origin. Other states will consider it foreign.
There is another option for companies that want to operate in more than one state. They can incorporate in each state, becoming separate business entities in each state.
Why Do Businesses Have to Foreign Qualify in the Other States They Do Business In?
Businesses can’t transact business in other states than the one they are incorporated in or their home state. They need the new state or states’ permission to transact business in the new location.
The states want to protect their citizens and domestic businesses against unfair business practices and advantages. They want their citizens to have access to new businesses’ basic information. This can include its legal name, the business address, and the information on the company’s registered agent in case of a need for a service process. This is also needed to ensure the “foreign” company does not have an unfair advantage with tax or reporting demands over domestic businesses.
If a business will be transacting or doing business in a new state and will be considered a “foreign entity,” It will need to go through the process of foreign qualification.
Three instances that will require foreign qualification include:
- The business is registered or incorporated in one state but the business has locations in a different state.
- The company applied for a business license in the new state.
- The business will have a brick-and-mortar presence in the state such as an office, a retail outlet, or a factory.
- The entity will employ workers in the new state. The company will owe payroll taxes in the new state.
- The business will be accepting orders or have the liability to collect sales tax within the state. A considerable part of the company revenue will come from this state. Will there be face-to-face meetings with clients in the new state?
- States may have statutes with additional criteria for businesses from other states needing to foreign qualify.
What Are the Risks for Not Foreign Qualifying?
Since this process involves paperwork, various fees, and reporting requirements, it may be tempting not to foreign qualify. But, for companies wanting to expand into additional states, these costs and obligations should be considered necessary costs for doing business. State laws often require foreign entities doing business within their borders to register, and there can be costly penalties for those businesses failing to comply.
In addition, if a company is non-compliant, the host state may deny them the right to bring lawsuits or other legal problems to the state court system. That could be expensive if the business can’t sue to enforce a contract or to recover damages. An example would be trying to recover losses from the non-payment by a state customer.
Another financial risk is the penalties, back taxes, fines, interest, and other costs a state can assess for companies and entities that fail to qualify before doing business in their state. They can also fine individual company officers and agents.
Talk to an attorney before expanding into another state to be safe. A law firm with experience in multi-state business operations can save businesses money and headaches, as legal compliance issues can be confusing and costly.
The Foreign Qualification Process
Get qualified help and advice when undertaking the foreign qualification. It will save time and money. There are four basic steps in this process.
- Find out if the company name is available as part of a foreign qualification. Being available means that the new state does not already have a company registered with that name. If the company name is available, make sure to reserve it at the beginning of the process. A name availability type of search will need to be conducted.
- A registered agent for the company will need to be appointed for each new state the company wants to be located in. This person will need to be available to receive important documents from the state, courts, etc. Then, that person needs to be able to forward those documents to the home corporation person qualified to act on the documents.
- Request a certificate of existence and good standing from the business home state. This document stats that the business meets all the requirements imposed for businesses in that state. Being in good standing normally means that taxes are paid on time and up to date. If a company is not in good standing, they must rectify that before the process can continue.
- The final step is to file all of the qualification documents including the name, the registered agent form, and the proof of good standing certificates. Along with them, the company will need to fill out the application for a state of authority in the new state. Each state will have their own certificates to fill out and rules to follow.
It is always better to get legal help to file business registration materials with the state. Mistakes can be costly in money and time. Each state has its own set of regulations to follow, and compliance can be confusing.