As expected so far in 2021, many businesses are still operating virtually. Yes, stores and offices are gradually reopening, but that doesn’t mean employers and employees are willing to give up the flexibility of remote work. In the most recent Upwork Future Workforce Report, most companies (68%) believe remote work is now easier and going more smoothly than when the shift to remote working began at the start of the coronavirus pandemic. The report also found:
- 26.7% of workers will continue to work remotely even after they can return to the office
- By 2025, 36.2 million Americans will work remotely, an increase of 16.8 million from pre-pandemic rates
- Managers point to increased productivity and flexibility as the key benefits of remote work
In any case, the business world has most definitely embraced remote working and hiring. Hiring great talent from the best talent pool no longer means searching for workers close to your office. In a business with no boundaries, you could be working with employees all over the country (or the world). The challenge for employers is understanding the laws and compliance procedures involved in “foreign qualification,” which means conducting business in states other than the one where you started your business.
Foreign Qualification Does Not Mean “Out of the Country”
Don’t skip this article because you think you’re not doing business internationally, so it doesn’t pertain to your business. Foreign qualification is the legal process of registering a business in another state in order to conduct business. Having foreign qualification enables your business to legally engage in commerce across state borders without starting a new business in another state.
Crossing state lines to do business covers various activities, such as owning a warehouse or office space. Likewise, if you have any employees on your payroll that live or do a substantial amount of business in another state, you may have to apply for foreign qualification in the state. You must also register to pay payroll taxes in that state (more on that later).
Like most things, states vary on the conditions of what constitutes “conducting business” and whether or not your company requires foreign qualification. In general, the following activities would necessitate registration:
- Having a physical presence, such as office space, warehouse, or retail store in the state
- Purchasing property or a building in the state to use for business
- Having a business partner in another state
- Applying for a professional license (such as medical, accounting, etc.) in the state
- Any activity from a business structured as a limited liability company (LLC), corporation, or limited partnership (LP)
Fortunately, due to the pandemic, some regulations have changed. In the past, having full or part-time employees working and/or living in the state would automatically give you a nexus in that state. But not anymore. Having employees who work from home in another state does not necessitate having to foreign qualify.
However, if those employees working out of their homes generate revenue in the state where they live, you will have to foreign qualify.
LLCs and corporations are only considered “domestic” in the state where they were formed; therefore, these business entities must foreign qualify in any other state they conduct business in.
When Foreign Qualification is Not Necessary
Not all business transactions require foreign qualification. However, if you think you may want to conduct regular business in another state in the future, it’s not a bad idea to foreign qualify ahead of time. In most cases, e-commerce businesses only conducting business online do not have to foreign qualify. However, if most of your profits come from one state, you may want to foreign qualify just to be safe.
In most states, the following do not constitute transacting business in the state.
- Settling or defending a lawsuit
- Corporate or LLC board meetings
- Having a bank account in the state
- Using independent contractors
- Collecting debts
- Conducting a “one-off” transaction
How to Register for Foreign Qualification
The steps to foreign qualification registration typically start at the Secretary of State’s office in the state in which you want to conduct business. Your company will have to download and submit a Certificate of Authority application form and pay the required fees. If you are asked to provide a Certificate of Good Standing as part of the application process, you can obtain an official copy from the Secretary of State office in your home state.
The next step is conducting a name search in the desired state to make sure the business name is legally available—not used by another similar business. Part of the reason the state requires registration is to ensure a company located outside the state’s borders does not infringe on another pre-established business. If you find you cannot register the business under your original name, you’ll need to file paperwork for a “fictitious name” or Doing Business As (DBA) in the state.
The final step is for you to appoint a registered agent. Because your company’s headquarters are not located in the state, you are required to hire representation in that state, in other words, a registered agent. The responsibilities of a registered agent (may also be called a statutory agent) include handling in-state processes on behalf of the company, such as:
- Legal documents
- Federal and state communications
- Summons for data
- IRS and state tax notices
- Law proceedings
- Directives for court
- Corporate filing
To find representation, check the Secretary of State’s website of the state for a professional registered agent. You want to hire someone (or usually it’s a company) that understands and is familiar with the typical issues and process that occur with foreign qualification.
If you fail to follow the process for foreign qualification, you may face financial penalties, and you won’t have standing in the state to protect your business from potential lawsuits.
Whether or not having hired employees in another state was the impetus for your company to file for foreign qualification, having an employee who lives in another state means you’ll also need to register to withhold and pay the appropriate payroll taxes in that state. Every state has its own state payroll tax requirements, and many have local taxes you are also responsible for paying or withholding. To withhold the correct payroll taxes for out-of-state employees, you need to register with the state’s Department of Revenue (or equivalent office).
Unemployment Insurance Tax (UI) is a federally-mandated, state-run program paid for by employers, not employees. Typically managed by the state’s Department of Labor, you are required to register, file quarterly reports, and pay the appropriate tax rate. Depending on the state, there may be other funds you are required to contribute to, so make sure you are well-informed of your responsibilities.