When you foreign qualify a business, you register for a Certificate of Authority in the state(s) where your company will do business and pay required state fees. This notifies the state that your company is conducting business within its borders.
Remember: your business will be subject to ongoing reporting and publication requirements, fees and taxes in both your state of incorporation and state of qualification.
If your business expands into new states and you need to foreign qualify, these initial and ongoing fees should be considered a necessary part of doing business.
Once you are registered in a state, you must report and pay state income and sales taxes, as well as abide by state employment tax filings if you have sufficient payroll, property, and sales in the state.
As part of the process, you must also designate a registered agent — a person or company who resides in the state who agrees to accept legal papers on your behalf in the state.
We can serve as your registered agent in any state for $99 per year. You can order this together with the foreign qualification.
Additionally, you may be required to submit a certificate of good standing from your company’s home state. We will contact you if this is the case, and we can also obtain it for you for $49 + state fees.
While different states have different criteria for transacting business, consider the following:
Does your company have a physical presence in the state?
Does your company have employees in the state?
Does your company accept orders in the state?
Does your company have a bank account in the state?
If you answered yes to any of these statements, you will likely need to foreign qualify your business in the state.
If you are currently evaluating whether to incorporate in a state other than one where you are located (your home state) such as Delaware or Nevada, you should consider whether you may need to foreign qualify in your home state. There are many factors used in determining the need to foreign qualify.
Intrastate — must qualify. Your LLC or corporation must qualify to do business in any state where it is engaged in intrastatebusiness. This means that at least part of your business is conducted entirely within that state’s borders. For example, if your business has a warehouse in another state and you sell and ship from that warehouse to customers within that state, you are engaged in intrastate business in that state.
Interstate — do not have to qualify. On the other hand, a state can’t make you qualify or pay taxes in that state if you only engage in interstate business to other states — meaning that all of your business is conducted across state lines. For example, if you sell and ship merchandise from your home state to residents in other states, you are engaged in merely interstate business, which cannot be regulated by other states.
If you’re still not sure if you need to foreign qualify, you may want to get the advice of lawyer.
Since there are additional costs—including initial and ongoing fees from both your state of incorporation and state of qualification—you may wonder if the process is really necessary. But state laws require foreign corporations and LLCs doing business within their borders to foreign qualify, and the consequences of not doing so outweigh the costs.
You may lose access to that state’s court system. For example, if an employee or customer within a state in which you do business sues your company, you can’t defend the lawsuit in that state, because your company is not recognized as a business there.
You may face fines, penalties and back taxes for the time in which your company did business within a state without being foreign qualified there.
An alternative to foreign qualifying is to incorporate your business or form your LLC in the other state(s) in which you plan to do business. The primary difference is that when you incorporate or form your LLC in multiple states, your company becomes domestic in each of those states, thereby creating separate entities. Consider the following in making your decision:
Increased corporate formalities. For corporations, the increase in corporate formalities is a big disadvantage. Corporate formalities include drafting and maintaining bylaws; issuing stock and recording all stock transfers; holding initial and then annual meetings of directors and shareholders; and keeping minutes of all director and shareholder meetings with the corporate records. LLCs do not face the extensive formalities imposed on corporations.
Separate owners and management. When you create a separate corporation in each state, each has its own stock, shareholders, directors, and officers. Even if they are the same people for each, the formalities apply for each domestic corporation, greatly increasing the annual record-keeping requirements.
One company versus separate companies. When you foreign qualify, only one corporation or LLC exists. For corporations, regardless of the number of states in which it foreign qualifies; it needs only one set of bylaws, stock, shareholders, directors, and officers. Record keeping for initial and annual meetings of directors and shareholders happens only once.
Separation of liability between businesses. Forming a new corporation or LLC in each state provides liability separation. For example, if one of your companies is forced into bankruptcy in one state, company assets in the other states typically are not used to pay for the bankrupt business. If you have foreign qualified in each state, only one corporation or LLC exists, so there is no separation of liabilities.
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