What is Foreign Qualification?
Foreign qualification is registering your company in a state that is not your state of incorporation. Entities are "domestic" within their state of incorporation, but they are considered "foreign" in any other state. If you intend to do business in additional states, you may need to file for foreign qualification.
Why would I need to foreign qualify?
There are different criteria in each state to determine whether a company is "transacting business in that state," but there are some primary qualifications that are common.
1. The company has an employee in the state
2. The company has a physical location in the state.
3. The company accepts purchases or orders from within the state.
4. And, whether the company has a bank account within the state.
However, before trying to apply this criteria to your organization, we suggest you consult with a professional about the qualifications that are specific to the state you are considering.
HOW DO YOU FOREIGN QUALIFY?
Foreign qualifying is the process of doing the necessary filing and paperwork to ensure that your business is legally able to do business within a "foreign" state. For your business to be foreign qualified, you'll need to:
- Request and receive a Certificate of Good Standing from your domestic state. It confirms that your business is in good standing.
- Apply for a Certificate of Authority in the "foreign" state you would like to do business.
- Pay all necessary fees and licensing costs.
- Each year, you'll also need to file the appropriate paperwork and pay necessary taxes and fees.
Why foreign qualification is important
Foreign qualifying your company in states where you transact business is not optional. It is a legal requirement. Failure to qualify a foreign LLC or corporation when you’ve been transacting business could result in:
- Fines and penalties for the time you were transacting business but were not qualified.
- Liability for back taxes for the time you were transacting business but were not qualified.
- Loss of access to that state’s court system, meaning that if you were sued in that state, you would not be able to defend the suit.
Keep in Mind
Companies are required to have a registered agent not only in the state of incorporation but also in any/all states of foreign qualification. Additionally, foreign LLCs or corporations may be subject to additional criteria in the foreign state.