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Expanding Your Business? Foreign Qualification Protects Your Rights in a New State

Expanding Business into Other States: Domestic Yet Foreign Qualification

If you’re expanding your business into other states, you may need to register to do business in those states. This is done through a procedure usually called “foreign qualification”, or just “qualification”.

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 business a domestic corporation. Every other state will call your business 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 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 can 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. If a corporation or LLC does business in a state without having qualified, the state could impose monetary fines or penalties on the company or, in some cases, 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, the corporation or LLC will probably not be able to bring a lawsuit in that foreign state until it has qualified.

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. 

When Is a Company Doing Business in a State?

A common question is "How much activity in a state is enough to be considered “doing business?” Unfortunately, there often isn't a clear test of how much or what types of activity trigger the need for foreign qualification. Usually, a brief isolated transaction does not rise to the level of doing business. Some types of activities that typically require a business to foreign qualify include a physical location in the state or employees on the payroll in the state. 

If you’d like to know if your business has to foreign qualify, consult your lawyer. These decisions are made on a case-by-case basis – on the unique facts of your situation – and the answer may vary by state.

This article has been updated.  It originally published October 2016.

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