When it comes to your business, geographical lines can easily be blurred these days. Numerous small business owners collaborate with virtual teams, partners, clients, and customers they have never met in person.
This new reality can make it even more difficult to understand if you do business in multiple states. Are you inadvertently violating state law by operating without registering? In this section, we’ll go over when you need to register your business in another state and when you don’t.
Foreign Qualification: Business in Another State
“Doing Business” in Another State
If your company does business in states other than the one in which it was incorporated (or formed an LLC), you must register your company in those new states. This is commonly referred to as “foreign qualification.”
So, what exactly is “conducting business”? Is it true that if a customer in Oklahoma purchases your product or service and you are based in Nevada, you are operating in Oklahoma? The answer is no in this case.
Questions to ask to determine whether or not you need to file a foreign qualification for a state:
- Is your LLC or corporation physically present in the state (for example, an office, restaurant, or retail store)?
- Do you frequently meet with clients in-person in the state?
- Is the state responsible for a sizable portion of your company’s revenue?
- Do you have any employees who work in the state? Do you have to pay state payroll taxes?
- Did you apply for a state business license?
If you answered yes to any of these questions, your company may be required to file a foreign qualification in that state.
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Examples of Foreign Qualifications
Here are some examples of common situations in which you may or may not need to foreign qualify.
1) Assume you own a restaurant in North Carolina and would like to expand into South Carolina. In South Carolina, you must file a foreign qualification.
2) Your company was incorporated in Nevada, but you are physically located in California. In California, you must be foreign qualified.
3) You are from Massachusetts, and your business partner is from California. Although the company is incorporated in Massachusetts, your partner has recently been bringing in the majority of your company’s clients and meeting with them in California. In California, you must foreign qualify the business.
4) You are a freelancer who established an LLC in Florida for your business. You do most of your work online and have clients from all over the country. Because you are not frequently physically meeting in another state, you do not need to file a foreign qualification in this case. Just because you generate revenue from customers in other states doesn’t mean you’re doing business there legally.
If you have any questions about whether your company needs to be foreign qualified, consult with your attorney or accountant.
How to Foreign Qualify
If you have determined that you need to register your business in another state, you must file an application with the Secretary of State’s office in that state. This is known as a Certificate of Authority in some states, and the Statement & Designation by a Foreign Corporation in others.
You can either contact the Secretary of State’s office yourself or have the service that incorporated your company does it for you.
The paperwork is simple, but keep in mind that some states will require you to have a certificate of good standing from the state where your LLC/corporation is registered. That means you’ll have to keep up with your state taxes and filings.
In conclusion
If you are legally required to foreign qualify, make certain that you fulfill this obligation. Otherwise, you will be required to pay fines, interest, and back taxes for any time you were not properly registered.
Furthermore, you lose the ability to sue in a state where you are not qualified as a foreign national (and you should be). Don’t ignore this legal requirement. In the long run, it could end up costing you much more.
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