Whether you’re looking to expand your company’s physical presence or intending to secure the most favorable business tax and legal environment for your company, you may be considering doing business in a different state.
It can get a little confusing as you try to make heads or tails of what requirements apply to you. I field a lot of questions on the topic from plenty of business owners!
If you’ve been considering expanding your LLC or corporation into a state beyond the one your company is incorporated in, you may likely need to register your business in that state—a process known as “foreign qualification.”
I’ve listed a few hypothetical situations below to help illustrate when foreign qualification is required:
- Your business is physically located in Pennsylvania, but you incorporated your company as an LLC in Delaware. To conduct business in Pennsylvania, you’ll need a foreign qualification.
- Your business is registered—and you have a retail store—in Virginia. You decide to expand into West Virginia and Georgia. You’re considered to be “doing business” in those foreign states as soon as you’ve opened locations there, and you’ll need to file for foreign qualification in both of those states.
- You live in Illinois and your business partner lives in Louisiana. You’ve incorporated your business in Illinois. Recently, your partner started working with the majority of your clients near his home in Louisiana. Under those circumstances, you’ll probably need to file a foreign qualification in your partner’s state.
Keep in mind, these examples are meant to give you some sense of when the requirement of foreign qualification might apply to you. They do not cover all situations or locations.
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When Do I Need to File for Foreign Qualification?
To help determine if you might need to file for foreign qualification, ask yourself these questions:
- Do I have a physical presence (e.g., office space or retail store) in the state?
- Did I apply for a business license in the state?
- Do I often conduct face-to-face (not just email/phone/Skype) meetings with clients in the state?
- Does a substantial chunk of my company’s revenue come from the state?
- Are any of my employees working in the state? Am I paying state payroll taxes there?
Did you answer “yes” to any of those questions? If you did, your business may need to file a foreign qualification.
When Don’t I Need to File for Foreign Qualification?
Just because you’re providing services or products to customers in a state other than the one your business is registered in doesn’t mean you’ll need foreign qualification.
For example, if you’re a consultant who does the majority of your work online for clients in multiple states, you don’t need to file a foreign qualification. According to the law, just because you’re making money from clients in other states doesn’t mean you’re transacting business there.
Because the lines can easily become blurred in today’s virtual and mobile world, I advise getting insight from your attorney and accountant before assuming you do or do not need to obtain foreign qualification.
Next Steps: What to Do If You Need a Foreign Qualification
If you need to file a foreign qualification, you will have to register in the state(s) by submitting a Certificate of Authority application (sometimes called “Statement & Designation by a Foreign Corporation”) with the particular state’s Secretary of State office. The Secretary of State’s website should have the form available for download or you can ask your attorney/incorporating company to submit the filing for you.
Before filing, make sure you’re up-to-date on your state taxes, fees, and other obligations; some states will require you have a certificate of good standing from the state where your LLC or corporation was formed.
What Could Happen If You Need a Foreign Qualification But Don’t File for One?
A word of advice: Go through the process if you’re required to! If you don’t foreign qualify your company in the states where you conduct business, you’ll be operating illegally in those states.
The ramifications of failing to properly register your company include:
- Facing fines and interest for the time you were conducting business in the state and were not foreign qualified—that’s on top of being on the hook for the filing fees you should have paid.
- Paying back taxes for the time when you were doing business without being foreign qualified.
- Not having the ability to sue in the state—you can’t bring suit in a state where you aren’t registered.
Final Thoughts on Foreign Qualification
Although each foreign qualification comes with filing and/or annual fees, additional laws to become familiar with, and added paperwork, you should never overlook your business’s legal obligation to foreign qualify. That could end up costing you much more in terms of money, time, effort, and energy. And remember, if you’re doing or planning to do business outside of the state you’re company is currently registered in, talk with your attorney and accountant about the potential foreign qualifications requirements.
Read all of Nellie Akalp’s articles on AllBusiness.com.
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