Doing Business Out of State & Foreign Qualification

There are many reasons a company will expand its business to a different state. Whether it’s for tax or government concerns or your business is selling products or services outside of the state it was formed, you should familiarize yourself with the process of registering your company in a different state – known as foreign qualification.

What is foreign qualification?
Foreign qualification is the process of registering your company to do business in a state different from the place your corporation or LLC was formed. Typically, where you formed your business is the place where you do most of your business transactions. However, if you do business outside of that state, your business should consider a foreign qualification in those other regions.

What is considered a foreign transacting business?
If you are considering filing your business for foreign qualification, you should ask yourself the following questions:

• Do you have a physical location (office, retail space, etc.) in that state?
• Did you apply for a business license in that state?
• Do you conduct in-person meetings in that state on a regular basis?
• Does a large portion of your business’s income derive from revenue in that state?
• Do you have employees working in that state?
• Do you accept orders in the state?

If you’ve answered “yes” to these questions, then you may need to register your company for foreign qualification.

Understanding foreign qualification is especially important for tax concerns. When you register for a “Certificate of Authority” in the state where your LLC or corporation will be doing business, you pay the required state fees and perhaps even income taxes on revenue derived from that state.

When it comes to expanding your business or forming your business in a state different from where you are completing transactions for your business, it’s important to remember that your company may be required to submit ongoing fees and taxes in the states where you formed your company and the state(s) of foreign qualification.

When you don’t need foreign qualification:
Not every company who does business out of the state its LLC or corporation is registered in will need foreign qualification. An example of this would be if you are a consultant or an online business that primarily handles your work on the internet for clients in multiple states.

Even though you may be making revenue from clients in other states, this does not mean you are transacting business there and therefore may not need to register for foreign qualification in those states.
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Nevertheless, it’s important to consult an attorney and/or accountant when it comes to filing for foreign qualification.

Penalties for failing to register for foreign qualification:
It’s important to understand the consequences and penalties for neglecting to follow state law. Disregarding foreign qualification could take away the right for you to bring lawsuits in that state court – meaning you may not be able to enforce a contract or recover damages – or, your company could be fined for penalties and/or back taxes for the length of time your company has done or was doing business transactions within that state.

Before you file, it’s important to make sure your business is up-to-date on all of its taxes and fees, because many states will require proof that your company is in good standing in the state where your LLC or corporation was formed.

If you need further assistance or clarification on foreign qualification, then please contact us.

DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney.