Foreign Qualification: Doing Business in Another State
As a business owner, you would want your business to stay profitable and continue to grow over time.
You can do this by either improving your current products, introducing new ones, or even expanding your business.
But what if you’ve done everything you can but you have reached the cap of your business’ growth?
Then you’d want to expand your business activities to another state.
Doing so may increase your customer base, which will result in more profits!
So, you have decided to do business in another state.
However, doing business in another state isn’t as simple as you building a branch or gathering customers over there.
There are certain steps that you need to take before you can do so, the first one is to get a foreign qualification for your business.
Foreign Qualification: what is it?
Sounds like an international concept right?
When you think foreign, you’d normally think of things outside of the United States.
But a foreign qualification isn’t like that.
Rather, the ‘foreign’ here refers to a state other than an entity’s home state.
For example, a corporation that is formed/incorporated in the state of Idaho is considered a foreign corporation in the state of Illinois.
Corporations, Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Limited Partnerships (LPs) are only legally allowed to operate or transact business in the state that they were incorporated in (referred to as home state).
These entities cannot just go and do business in a state other than their home state without having to take the proper steps first.
For example, if a corporation is incorporated in the state of Texas, it can only legally transact in the state of Texas.
It cannot transact in another state unless it is qualified to do so.
This qualification is what we call a foreign qualification.
Why apply for a Foreign Qualification?
Just as the aforementioned business entities need to qualify in their home state to transact their business there (via incorporation), they also need to qualify in the other states they want to transact business in (via a foreign qualification).
Not doing so may result in unnecessary fees, penalties, and other severe consequences.
From point of view of the state, it would want the general public to have access to basic information about any business entity doing business in their jurisdiction.
Basic information includes a business’s legal name, its business address, and the name and address of its registered agent.
A business entity would have to provide such basic information in the process of applying for a foreign qualification.
Foreign qualifications also serve the purpose of preventing foreign entities from getting an unfair advantage over a state’s domestic entities, which pay taxes and file annual reports among other things.
By requiring foreign entities to apply for a foreign qualification, they can also be subject to some, if not all of the filing requirements of a domestic entity.
When is a business entity required to apply for a foreign qualification?
The short answer: when a business entity is doing or planning to do business in a state other than its home state.
But what constitutes “doing business”?
Sadly, there is no one way to answer this question.
Only a few statutes define it, while most include a list of activities that are not considered as “doing business” (e.g. having a bank account).
Thankfully, there’s a set of ‘yes or no’ questions that can help you determine whether a business entity is “doing business” or not:
- Does the business entity have a physical presence in the state? (e.g. a store, office building)
- Does the business entity accept orders in the state? Does it have a liability to collect sales tax?
- Did the business entity apply for a business license in the state?
- Does the business entity have any employees working in the state? Is it paying payroll taxes in the state?
- Are face-to-face meetings with the business entity’s clients conducted in the state?
- Is a sizeable amount of revenue of the business entity coming from the state?
If the answer to any of the above questions is YES, then the business entity is “doing business”, and if it does so in a state other than its home state, then it will have to apply for a foreign qualification.
Do note that states may consider other activities as “doing business”.
It is recommended to consult an attorney or accountant.
Here are some examples of a business entity “doing business” in a state other than its home state:
- A corporation that is incorporated in the state of Delaware but is physically located in the state of Iowa.
- An LLC that is registered in the state of Kentucky and with retail stores in both the states of Kentucky and Louisiana. This LLC is considered to be doing business in both states and would need to apply for a foreign qualification in the state of Louisiana
- A limited partnership (LP) that is formed in the state of Kansas. One of its partners lives in the state of Virginia and transacts with a sizeable amount of the LP’s clients there. The LP then is considered to be doing business in the state of Virginia and will need to apply for a foreign qualification there
- A corporation that is incorporated in the state of Georgia and has employees working in the state of Massachusetts
Are there consequences if a business entity does not apply for a foreign qualification?
Yes, there are consequences and not just financial consequences, there are legal consequences as well.
If a business entity fails to foreign qualify in a state that it is required to, it can be imposed with hefty fines and hard penalties, not only for the business entity itself but also its officers and directors.
Penalties could range from late-qualification fees, to per day penalties for each day of unauthorized business transactions.
And if the business entity has already been doing business without foreign qualification in a state that it is required to for a very long time, the penalties will definitely make a dent in its financial standing.
However, the most severe consequence is the denial of the right to bring or maintain a lawsuit or any legal proceeding in a state’s court system.
Should a business entity suffer damages and would want to recover from such damages via a legal proceeding, it would most likely lose the case.
Also, the business entity cannot enforce a contract should the other party fail to honor it.
For example, there is this certain company that sued a customer for failure to pay a sizeable amount of goods.
This customer didn’t deny that s/he didn’t pay, nor did s/he claim that the goods were damaged or defective.
Seems like a strong case for the company right? Well, the customer argued that the company had no right to sue because the company isn’t even qualified to do business in the state.
Who do you think will likely win the case?
If you answered the customer, you’re right.
It is what happened with the Drake Manufacturing Company, Inc. v. Polyflow, Inc. case that was filed in the Superior Court of Pennsylvania (https://caselaw.findlaw.com/pa-superior-court/1690390.html).
This can be “cured” by foreign qualifying in the state before filing a lawsuit.
Some courts even give unregistered business entities a chance to qualify during proceedings.
However, not all state courts allow this. So it is always better to apply for a foreign qualification before things get out of hand.
What are the steps to take in applying for a foreign qualification?
While the foreign qualification process may vary from state to state, there are basic steps that a business entity needs to take before it can be authorized to do business in a state other than its home state.
These steps are:
Verify if the business entity’s name is available
While a business entity may already have its legal name, it’s still possible for a business entity in another state to have the same or a deceptively similar name.
That’s why it’s important to verify if your business entity’s name is available in the state that you’re applying in.
If the name is available, it is recommended that you reserve it.
Doing so will make sure that no other business entities can claim it while you’re still processing your application for a foreign qualification.
Otherwise, should the name be no longer available, the business entity will be required to qualify under a new name (commonly referred to as “fictitious name”).
It can be as simple as noting the name the business entity will be using on its Certificate of Authority application.
In some states, a certified resolution adopting the new name may be required.
Appoint a registered agent
Just as a business entity is required to appoint a registered agent in its home state, it is also required to appoint a registered agent in the state that it is foreign qualifying in.
A registered agent can either be an individual or a company whose main purpose/function is to receive important documents (e.g. service of process, court documents) on behalf of the business entity.
The registered agent also receives important communications and notices from the Secretary of State.
The location of the registered agent is referred to as the registered office.
While a business entity can appoint its employees or even one of its owners to act as its registered agent, it is often recommended to appoint a professional registered agent company.
The reason is that professional registered agents have the necessary know-how in handling important documents and they know that it’s important to promptly forward them to people who can represent and take action on behalf of the business entity.
Also, with a professional registered against, you can rest assured that there will always be someone to receive the documents at the registered office during office hours.
Be sure to appoint a competent registered agent! Individuals and organizations who want to sue a business entity will often serve process to the registered agent as it helps them ensure proper service.
If your registered agent is not competent enough, there is the risk of not knowing of the lawsuit filed against the business entity.
The business entity might only know of such lawsuits when it is required to pay due to a default judgment.
Secure a Certificate of Existence or Certificate of Good Standing from the business entity’s home state
A foreign state would want to make sure that a business entity is really existing and if it is in good standing in its home state.
That’s why most states require a certificate of existence or certificate of good standing from a business entity’s home state before they can grant approval for the certificate of authority.
This grants them confidence that the business entity is compliant with all of the necessary filing and other requirements imposed by its home state.
Some states require other documents (e.g. Articles of Incorporation) in addition to the Certificate of Existence while others don’t require it at all and instead have other ways to verify a business entity.
File the business entity’s qualification documents
With a legal name, an appointed registered agent, and a certificate of existence, the business entity can finally apply for a certificate of authority in the state that it plans to do business in.
Fill up the appropriate foreign qualification form and file it along with the other documents required for filing.
Additionally, there will be state fees that the business entity will have to pay, so prepare for that as well.
The fees to be paid will vary from state to state.
Refer to the below table for the filing fees of each state:
|Alaska||$350.00 for corpotations and LLCs; $150.00 for LLPs and LPs; $50 for non-profits|
|Arizona||$175 for corporations; $150 for LLCs; $3.00 Filing Fee plus $10.00 Authority to|
Transact Business plus $3.00 per page for LLPs and LPs
|Connecticut||$385 for corporations; $40 for non-profit corporations; $120 for LLCs|
|Delaware||$245 for corporations; $200 for LLCs and LPs; $200 per partner for LLPs|
|Florida||$70 for corporations; $100 plus $25 designation of registered agent for LLCs|
|Georgia||$235 for corporations, LLCs, and LPs; $210 for LLPs|
|Indiana||$125 for for-profit entities; $250 for LLCs; $75 for non-profit corporations|
|Iowa||$100 for corporations, LLC, and LPs; $50 for LLPs; $25 for non-profit corporations|
|Kansas||S115 for corporations; $165 for LLCs, LLPs, and LPs|
|Louisiana||$125 for corporations; $150 for LLCs|
|Maine||$250; $45 for non-profit corporations|
|Massachusetts||$400 for corporations; $500 for LLCs; $200 for LPs|
|Michigan||$60 for corporations; $50 for LLCs; $10 for LPs; $20 for non-profit corporations|
|Minnesota||$200 for corporations; $185 for LLCs; $100 for LPs; $135 for LLPs; $50 for non-profit corporations|
|Mississippi||$500 for corporations; $250 for LLCs, LPs, and LLPs; $100 for non-profit corporations|
|Missouri||$155 for corporations; $105 for LLCs and LPs; $25 for non-profit corporations; for LLPs $55 for two partners, $80 for three partners, or $105 for four or more partners|
|Nebraska||$110 (In-Office) / $100 (Online)|
|Nevada||Varied (see https://www.nvsilverflume.gov/startBusiness)|
|New Mexico||$200 – $1000 for corporations; $25 for non-profit corporations; $100 for LLCs and LPs; $50 for LLPs|
|North Carolina||$250 for corporations and LLCs; $125 for LLPs and non-profit corporations; $50 for LPs|
|North Dakota||$145 for corporations; $135 for LLCs; $110 for LPs; $60 for LLPs; $50 for non-profit corporations|
|Oregon||$275 ; $50 for non-profit corporations|
|Rhode Island||$310 for corporations; $150 for LLCs; $100 for LPs; $1,000 for LLPs|
|South Carolina||$110 for corporations and LLCs; $10 for non-profit corporations and LPs; $100 for LLPs|
|South Dakota||$750 for corporations and LLCs; $125 for LPs, LLPs, and non-profit corporations|
|Tennessee||$600 for corporations and LPs; $50 per member for LLCs ($300 – $3,000) and LLPs ($250 – $2,500)|
|Texas||$750; $25 for non-profits|
|Utah||$70 for corporations, LLCs, and LPs; $30 for non-profit corporations; $22 for LPs|
|Virginia||$100 for LLCs, LPs, and LLPs; $75 for non-profit corporations; a minimum fee of $75 and a maximum fee of $2,525 for corporations|
|Washington||$180; $30 for non-profits|
|West Virginia||$100 for corporations; $150 for LLCs and LPs; $500 for LLPs; $50 for non-profits|
|Wisconsin||$100 minimum for corporations; $100 for LLCs and LLPs; $75 for LPs; $45 for non-profit corporations|
|Wyoming||$150; $50 for non-profits|
|Washington DC||$220; $80 for non-profits|
The information required to be included in the form will differ from state to state. However, there are common required ones such as:
- Name of the business entity (also fictitious name if required)
- Incorporation date; state where the business entity is incorporated
- Business entity address in the state
- Principal address of the business entity
- Name and address of appointed registered agent in the state the business entity is qualifying in
- Names and addresses of officers (corporations) or members (LLCs)
- For corporations, number of authorized shares and listing of the different classes of stocks they issue
- For LLCs, type of management
- Signature of authorized signatory (e.g. president for corporations, member or manager for LLCs, general partner for LPs or LLPs)
Application for foreign qualification can be done either online or via mail. Depending on the state that the business entity is applying for, either or only one of the options could be available.
Don’t want to apply for a foreign qualification? There’s an alternative!
If, for whatever reason, you or your co-owners don’t want your company to apply for a foreign qualification, then the alternative is to incorporate your business in that state.
Basically, instead of becoming a foreign business entity in states other than the home state, you form a domestic business entity in each of the states that your company wants to do business in.
The plus side of forming a domestic entity state is the separation of their liabilities.
Since each domestic entity is a legal entity of its own, they are not liable for the liabilities of another.
In most cases, the assets of a domestic entity in one state cannot be used to pay for the liabilities of a domestic entity in another state.
However, do note that domestic entities have more filing requirements than foreign entities.
For example, you’d have to draft and file for articles of incorporation and by-laws for each domestic entity, while foreign entities are not required to do so (they may be required to file their original or amended articles of incorporation in some states for verification though).
Weigh your options and see which is the better one for you.
Just make your that you’re legally authorized to operate in whichever state your company is doing business in.