The words foreign qualification may be slightly confusing to some people, especially business owners. It is logical to think of those words referring to a place, thing or person who is not in the United States. In the business world, however, it takes on a new meaning. There are U.S. corporations and also limited liability companies, also referred to as LLCs. The word foreign can be used in a whole different way.

The phrase foreign qualifying only means registering a business or company so that it may operate in additional states besides the state that it was first started in. An LLC or a corporation is thought of to be domestic only while it is being built. If your business started in Connecticut, for example, that would be the only state that it would be considered domestic in. Once that business starts transacting outside of the state of Connecticut, it will be considered a foreign corporation in those other states, and subject to that states rules and regulations.

There are rules to foreign qualifying a business. First, the business has to register for a certificate of authority in whatever other state or states that your company will be doing business in, including any and all transactions. The company must pay all required state fees. By doing so, you are notifying the state that a foreign corporation or an LLC is going to be doing business within their specific state. It is important to note that your business will always be responsible for reporting any fees, requirements and taxes in every state that they operate and do business in. Make sure to consider all the pros and cons of the new fees you will be acquiring if you expand your business to other states.

Determining a Business Transaction

To determine if you do indeed need to foreign qualify your business, first look at the criteria that needs to be met for a company in this matter. The following list is not complete and different states will have different criteria.

Some of these factors looked at are if a company...

• Keeps employees in the state
• Takes orders in the state
• Opens and operates a bank account in the state
• Keeps a physical existence in the state

Do you Have To Foreign Qualify Your Company?

It may sound like an easy out to just not foreign qualify your company in the other states you are doing business in. You may think that there are too many good reasons not to foreign qualify, such as too many upfront fees and ongoing fees associated with foreign qualifying; however, state laws require all companies that are doing business within their state to foreign qualify themselves.

Not following these laws may have worse consequences than you may think. If you do not foreign qualify, you will not have any access to the state's courts that you are doing business in. If you are in another state, and a customer sues your company, it would not be permitted for you to defend yourself in that state's court system, as you would not be recognized as a legitimate business. Other consequences may be fines, penalties and the owing of back taxes for whenever you operated a business without being foreign qualified in that state. It makes much more sense to spend the time and effort to foreign qualify your company, and avoid the hassles and penalties of not doing so.

Foreign Qualification vs. Incorporating

To get around foreign qualifying your business you can incorporate your business or form your LLC in other states. What is the difference? Mainly, incorporating or forming your LLC in multiple states forms a domestic company in each of the states, which creates separate entities.

There is a downside for corporations who do this, which is a larger corporate formality that is produced when separate domestic corporations are formed. You will have to adopt bylaws, issue stocks and then record the details of the transfers, set up and hold a meeting with both directors and shareholders of the company, and then provide annual meetings, taking notes of the discussions in these meetings, which are also known as minutes. All of these formalities are not as necessary to LLCs as they are to a corporation.

Separate corporations in different states will need to have their own private stock and shareholders, and well as directors and officers. They may be the same for each corporation; however, all the special formalities will still have to be followed for each of them. The downfall of this will be the increase of record keeping that must be performed. Deciding to foreign qualify your company means that there is only need for one LLC or one corporation. It does not matter the number of states a company has foreign qualifications in. They will only need one set of bylaws, as well as stock, shareholders, directors and officers. Bylaws will be adopted only one time. The initial and annual meetings between the shareholders and the directors will only be required to happen once each.

Forming a new corporation or an LLC in each state you do your business in does have a perk, however. This would be the separation of liabilities. For example, if one company in one state happens to go bankrupt, your other company's assets would not be used to pay off the debt of your bankruptcy. For those who choose foreign qualification, the separation of liabilities will not apply to your situation, should any arise.

It is important to have a Registered Agent

A Registered Agent is required whether or not you foreign qualify your company or if you opt for incorporating. One must be named for each state you are doing business transactions in. Almost every state will require the registration of a registered agent. Those who are a registered agent must live in that state or at least be able to provide a physical address for that state. They must be able to be reached and available during normal business hours. What a registered agent does is take the responsibility of receiving any important tax and legal company documents. These documents are allowed to include mail from that state; any tax documents form the state's department of taxation, and any forms of documents or papers that may initiate a lawsuit. These may also be called a Notice of Litigation. A professional registered agent may be employed if finding one with a physical address in the state is not possible. There are many companies, such as BizFilings that can serve as a registered agent in all 50 states. This may be perfect for those who do not have anyone in the other states they or operating in or if they are operating in many states at the same time.

For more information on forming a corporation or LLC for your business or for complete details on other helpful business and personal legal services, please do not hesitate to email us at info@adanaslaw.com, call us toll-free at 877-420-4600, or contact us online. Be sure to request your FREE Informative Newsletter and Business Start Up Check List!