Register Your Business in Additional State
These days, it’s easy for geographical lines to be blurred when it comes to your business. Countless small business owners work with virtual teams, partners, clients, and customers they’ve never actually met in person.
This new reality can make it even more confusing to understand if you’re conducting business in multiple states. Are you unknowingly running afoul of state law by operating without registering? Here, we’ll break down all the details about when you need to register your business in another state and when you don’t.
What is Foreign Qualification?
If your company is conducting business in any state other than the state where you incorporated (or formed an LLC), then you need to register your business in those new states. This is often called “foreign qualification”.
So, what exactly constitutes “conducting business?” If a customer in Oklahoma buys your product or service, and you’re based in Nevada, does that mean you are operating in Oklahoma? In this case, the answer is no.
- You have a restaurant in Florida and decide to expand into Georgia and South Carolina. Once you have locations open in those states, you’re doing business there and will need to file a foreign qualification in both Georgia and South Carolina.
- You incorporated your business as a Delaware LLC, but you’re physically located in New York. To to conduct business in New York, you’ll need to file a foreign qualification (For this reason, it’s often best for small companies with fewer than five shareholders to incorporate in their home state.)
How to qualify in a foreign state?
If you have determined that you need to register your business in another state, you will need to submit an application to that state’s Secretary of State office. In some states, this is called a Certificate of Authority. In others, it’s the Statement & Designation by a Foreign Corporation.
You can contact the Secretary of State’s office yourself or have the business that incorporated your company, handle the filing for you.
The paperwork itself is relatively straightforward, 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 will need to be up to date on your state taxes and filings.
How do I know whether my company needs to qualify in a foreign state?
To help determine if you might need to file for foreign qualification, ask yourself these questions:
- Does your LLC or corporation have a physical presence in the state (i.e., office, restaurant, or retail store)?
- Do you often conduct in-person meetings with clients in the state?
- Does a significant portion of your company’s revenue come from the state?
- Do any of your employees work in the state? Do you pay state payroll taxes?
- Did you apply for a business license in the state?
If you answered yes to any of these, your business may need to file a foreign qualification in that state.
Why is a foreign qualification important?
Foreign qualifying your company in states where you conduct business is your legal obligation. Failing to properly register your company could result in:
- Fines and interest for any time when you were not foreign qualified (in addition to paying the standard fees that should have been paid)
- Liability for back taxes for the time when you were not foreign qualified
- Inability to sue in a state where you are not registered
When Don’t I Need to File for Foreign Qualification?
Just because you’re providing services or products to customers in a state other than the one your business is registered in doesn’t mean you’ll need foreign qualification.
For example, if you’re a consultant who does the majority of your work online for clients in multiple states, you don’t need to file a foreign qualification. According to the law, just because you’re making money from clients in other states doesn’t mean you’re transacting business there.
Because the lines can easily become blurred in today’s virtual and mobile world, I advise getting insight from your attorney and accountant before assuming you do or do not need to obtain foreign qualification.
What Could Happen If You Need a Foreign Qualification But Don’t File for One?
A word of advice: Go through the process if you’re required to! If you don’t foreign qualify your company in the states where you conduct business, you’ll be operating illegally in those states.
The ramifications of failing to properly register your company include:
- Facing fines and interest for the time you were conducting business in the state and were not foreign qualified—that’s on top of being on the hook for the filing fees you should have paid.
- Paying back taxes for the time when you were doing business without being foreign qualified.
- Not having the ability to sue in the state—you can’t bring suit in a state where you aren’t registered.
If you are legally required to foreign qualify, make sure you follow through on this obligation. Otherwise, you will end up paying fines, interest, and back taxes for any time when you were not properly registered.
In addition, you lose the ability to sue in a state where you are not foreign qualified (and you should be). So don’t overlook this legal requirement. It could end up costing you much more in the long run.