Expanding Business into Other States: Domestic Yet Foreign Qualification

If you’re expanding your business into in other states, you may need to register to do business, or “foreign qualify,” in those states.

In everyday conversation, “foreign” usually means somewhere outside the United States as a whole, but in business entity compliance, “foreign” includes a different U.S. state. Your LLC or corporation is “domestic” in the state where you formed your LLC or corporation (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. Ever other state will call your business a foreign corporation. 

When you foreign qualify with a state, you obtain authority to do business in that state as a qualified foreign company. Foreign qualification is the procedure by which a business entity, like an LLC or corporation, receives authority to transact business in a state other than its formation state. 

CT Tip: If you form your company in Delaware but live and do business in a different state, you’ll need to foreign 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? 

In many ways, foreign qualification is similar to incorporating or forming an LLC. You must file a document with the state that provides basic information about your company and you 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

Penalties for failing to foreign qualify. If a business should qualify with a state but doesn’t, the state could impose monetary fines or penalties on the business 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 most states, you will not be able to bring a lawsuit and, in rare cases, you will be barred from using certain defenses. 

What Information Do I Need to Foreign Qualify? 

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

  • Formation information 
  • Principal officer information
  • Registered agent information for that state

States usually charge a fee to foreign qualify, as they do for domestic incorporations, and fees vary by state. 

States also generally ask for documentation, such as a certificate of existence or certificate of good standing, from your formation state. 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 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.

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