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 know 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.
Foreign Qualification: Business in Another State
“Doing Business” in Another State
If your company is conducting business in any other states 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.
Questions to ask to see if you need to file a foreign qualification for a state:
- 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.
Examples of Foreign Qualifications
Here are some examples of common situations when you need to foreign qualify and when you don’t.
1) Let’s say you operate a restaurant in North Carolina and want to expand into South Carolina. You’ll need to file a foreign qualification in South Carolina.
2) You incorporated your business in Nevada, but you are physically located in California. You need to foreign qualify in California.
3) You live in Massachusetts and your business partner lives in California. The company is incorporated in Massachusetts, but lately your partner has been bringing in the bulk of your company’s clients and meeting with them in California. You need to foreign qualify the business in California.
4) You are a freelancer who formed an LLC for your business in Florida. You perform the majority of your work online, and have clients all over the country. In this case, you don’t need to file a foreign qualification, since you’re not frequently physically meeting in another state. Just because you are bringing in revenue from customers in other states doesn’t mean you are transacting business there according to the law.
If you have any questions about whether or not your business needs to foreign qualify, you should check with your attorney or accountant.
How to Foreign Qualify
If you have determined that you need to register your business in another state, you will need to submit an application with 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 service 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.
The Bottom Line
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.
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