Expanding your business or doing business in a new state? Foreign qualification protects your rights

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.

CT Corporation Publications Attorney Sandra Feldman explains what business owners need to know before expanding operations to another state.

What information do I need to foreign qualify?

States vary in the precise information they require when you qualify. Typically, they ask for the name of your business, along with

• The date and state of formation
• The principal place of business, wherever located
• The business address in the foreign state
• Principal officer information
• Registered agent information for that state

If the name of your corporation or LLC is already on record with the foreign state as belonging to another company you will probably have to choose a “fictitious” name that is not already taken and qualify and do business under that “fictitious” name.

States also generally ask for documentation, such as a certificate of existence or certificate of good standing, from your formation state. This document typically has to be filed along with the application for authority. This is to confirm that you did properly form your business and you’ve kept up with compliance.

How do I know if my corporation or LLC needs to foreign qualify?

So, in this murky realm of case law, are there any warning signs that you may have a significant connection to a state and a need to register (or foreign qualify)?

Yes, there are some indications that you've crossed the compliance border in another state.

Consider these five signs:

• Physical location. You have a physical location, such as a warehouse, office, store or restaurant, in the state. (But, simply owning real property, or holding mortgages on real property, generally isn’t considered doing business.)
• Employees. You have employees in the state. (Many states don’t consider using independent contractors in the state an activity that constitutes doing business.)
• Regular binding contracts. You regularly enter into binding contracts in the state. (Entering into contracts that must be approved by an office located outside of the state before becoming binding is often listed as an activity that is not considered "doing business.")
• Regular client or customer meetings. You regularly meet with clients or customers to conduct business with them in the state. (Phone meetings and email alone are less likely to rise to the level of doing business.)
• Significant revenue stream. You have a steady and significant revenue stream from activities in the state. (Isolated transactions generally are not considered doing business.)

Did you answer "yes" to any of these questions? It doesn’t necessarily mean your corporation or LLC is doing business but you may want to consult with an advisor regarding the need for foreign qualification.

These decisions are made on a case-by-case basis — on the unique facts of your situation — and the answer may vary by state.

Conclusion:

The benefits of conducting business activities across state lines are numerous for many businesses but compliance obligations increase when expanding across state lines. Foreign qualifying a corporation, LLC, or LP involves a number of steps. If you need help with checking or reserving a business name, appointing a registered agent, obtaining a certificate of good standing, or filing the qualification documents, contact CT Corporation.

Related Resources:

• Understanding why companies have to register to do business in another state
• What constitutes doing business
• LLC compliance smart chart: Activities by foreign LLCs that do not constitute doing business under state LLC laws
• Five steps when doing business in a new state (foreign qualification)