If you’re expanding your business or “doing business” in other states, and you operate through an LLC or corporation, you may need to register your LLC or corporation in those states. This is done through a procedure usually referred to as “foreign qualification”, “qualification”, or “state registration”.
What is foreign qualification and why is it called that?
In everyday conversation, “foreign” usually means somewhere outside the United States. But in business entity compliance, “foreign” includes any U.S. state other than a business entity’s “domestic” state.
Your LLC or corporation is “domestic” in the state where you filed your formation document (also called your home state). In every other state, your LLC or corporation is a “foreign” company. For example, if you incorporate under the laws of Delaware, then Delaware calls your corporation a domestic corporation. Every other state will consider your corporation to be a foreign corporation.
When you qualify with a state, you obtain authority to do business in that state as a qualified foreign company.
CT Tip: If you form your company in Delaware but the company does business in a different state, you’ll need to qualify with the state where you’re doing business as soon as your company is formed.
What constitutes “doing business” in another state?
A common question is, "How much activity in a state is enough to be considered ‘doing business?’”
The rule is simple and uniform: If you are doing business in a state, you must follow the business registration rules. What is not simple is the definition of doing business for several reasons:
- States vary on the amount and types of activity that trigger business registration.
- Doing business is defined differently for entity qualification purposes and more, like whether the company is subject to the foreign state’s tax law or the personal jurisdiction of its courts, which makes things even more confusing.
- Most state laws list only those activities that don't constitute doing business — leaving courts to decide what does constitute doing business on a case-by-case basis, based on all the facts and circumstances.
What happens when I foreign qualify with a state?
The procedure for foreign qualification is similar to incorporating or forming an LLC in that both require the filing of a document with the state that provides basic information about your company. This document may be called an Application for Authority, an Application for Certificate of Authority, an Application for Registration, or another name. In order to qualify you also must appoint a registered agent that is located in that state. (And, of course, you must pay the state-imposed filing fees.)
Once you’ve qualified, you may expect to:
- Receive a Certificate of Authority (or similar document). This certificate from the foreign state shows you’re authorized to do business in the new state.
- File Annual Reports. States generally require both domestic and foreign corporations and LLCs to file annual reports.
- Update the States Upon Major Changes. States require foreign corporations and LLCs to make additional filings upon certain events such as a change of name or registered agent, or if it is involved in a merger, conversion or dissolution.
Penalties for failing to foreign qualify
A corporation or LLC is subject to fines and penalties for failure to foreign qualify when required to do so. In some cases, the state could impose monetary fines or penalties on its individual officers and agents. The state may also pursue fees and taxes (plus interest and penalties) the business would have owed if it had initially qualified when it should have.
In addition, you could be putting your limited liability at risk. What’s more, your company will be barred from bringing a lawsuit, such as a breach of contract lawsuit or a suit for defective workmanship, until it is properly authorized to do business in the state.