December 22, 2014

Small Business 101: How To Properly Operate Out Of State

In today’s market, geographic boundaries don’t always mean much. With the web, companies sell and hire across time zones and continents. But if you’re expanding into a new state, you’ve got to make sure you have your legal ducks in a row. In some cases, this may entail registering your business as a ‘foreign corporation’ in the new state.

united states

If your business operates across state boundaries, or you’re considering expanding your reach, read on to learn if a foreign qualification is necessary.

What’s the definition of doing business in another state? 

Be aware that just having a client or selling to customers in another state doesn’t necessarily mean you’re operating in that state and must register as a foreign corporation (or LLC). While exact requirements vary state to state, operating in a state generally means:

  • Having a bank account in the state
  • Selling in the state through some party directly tied to your business (a distributor or sales rep)
  • Owning property in the state
  • Having offices, facilities, or holding regular meetings in the state

Let’s take a look at a few examples. Michael runs a small consulting business based in New York. His company serves clients outside New York, but at this point the company is most likely not considered to be operating out of state. However, once Michael opens a small office with an employee or two in California, he will probably be considered doing business in California and will have to file a Statement and Designation by Foreign Corporation form with California.

In another scenario, Jennifer launched a software business. She lives in California, but wanted to take advantage of Nevada’s lack of state income tax, so she incorporated her business in Nevada. Since her business is physically located in California ? that’s where her office and employees reside ? her business needs to file as a foreign corporation in California (and, her company will also be subject to all the regulatory and tax requirements of California too!)

What’s required to file a foreign corporation? 

Foreign Corporation paperwork is relatively similar for each state, although the names may differ. In some states, it’s called the Statement and Designation; in others it’s the Foreign Qualification application. Take a look at your state’s Forms and Fees page (generally part of the Secretary of State’s office) to determine what’s the correct form for your new state.

In essence, the foreign corporation paperwork will resemble the Articles of Incorporation document you first used to file your corporation. Some of the information will include: name of your corporation, your domestic state, stock information (how many shares authorized, etc), list of corporate officers, registered agent, and the principle office or location you’ll be using in your new state.

In most states, you’ll also be required to have a Certificate of Good Standing document. This document is produced by your domestic state (the state where you incorporated) and shows that your corporation is in active status. If your corporation does not currently have an active status, it’s most likely due to the fact that you didn’t file an Annual Report or some other required filing and can be easily remedied by filing a form and paying a fee.

How to file a foreign qualification

Just like other corporate filings, you have several options depending on your budget, available time, and level of comfort when dealing with legal forms. You can register your foreign corporation on your own, by going directly to the secretary of state’s office. If you aren’t certain about the requirements (and have the budget), you can hire a corporate attorney to register your foreign corporation for you. The third option is to use a legal document filing service. This is a good option is you’re fairly confident about what you need, would prefer to spend your cash on something other than attorney retainer fees, but would like some professional help in tracking down all the necessary paperwork and making sure all the i’s are dotted and t’s are crossed.

Whatever method you choose, be sure to take your legal obligations seriously when crossing state borders. Filing upfront will be simpler and far more affordable than having to deal with the ramifications of operating improperly.


United States Photo via Shutterstock

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Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

One Reaction

  1. Fortunately most web-based businesses don’t have to file as a foreign corporation. The burden on many small businesses would be far too great.

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