Foreign Qualifications: How can my business operate in another state?

Growing your business outside your home state can be an exciting time for your company. Expansion into multiple states, though, can also present additional challenges and compliance responsibilities.

Here are some of the areas you'll need to be familiar with when doing business in multiple states that will be discussed in this article:

What does "foreign qualification" mean?

Which businesses need to file foreign qualifications

Steps to file foreign qualifications

At the end of the article, we'll answer some frequently asked questions about foreign qualifications.

What are foreign qualifications?

Don't mistake the word "foreign" for international. When talking about the operation of your business within the United States, "foreign" simply means "out-of-state." The term foreign qualification refers to registering your business in a state other than the state in which your business was formed.

In general, any business that crosses state lines to do business in a state other than the one in which it was incorporated must go through the foreign qualification process.

There are several reasons why foreign qualification is extremely important and should be viewed as more than just filling out paperwork and paying a fee when figuring out how to do business in another state:

Protects your company and employees. Qualifying as a foreign entity is the first step towards ensuring that your company will satisfy all required compliance obligations, including filing income taxes, sales and use taxes, employment taxes, workman’s compensation, etc. Meeting your compliance obligations will help legally protect both you as the business owner, as well as your employees.

Fines and penalties. You may be subject to fines and penalties for each day you conduct business as an unregistered entity.

Court representation. A business without foreign qualifications may have limited or no rights when settling legal disputes in some states’ courts.

Who needs to file foreign qualifications?

LLCs and corporations must file foreign qualifications when expanding into a new state.

Sole proprietorships, on the other hand, usually don’t have to file foreign qualifications when expanding. (If you’re currently a sole proprietorship considering an expansion into a new state, consider discussing with your team of trusted advisors if it’s the right time to become an LLC or a corporation.).

So what constitutes as doing business in a state? Here are some of the most common reasons why your business would need to qualify as a foreign entity before doing business in a new state:

Establishing a physical presence such as an office building, retail store, or warehouse

Have one or more employees

Earning a substantial portion of your revenue

Conducting in-person meetings with clients

Purchasing property

There are several situations that typically don’t require you to obtain foreign qualification. These scenarios include:

Activities and/or transactions with a limited scope, usually less than 30 days

Conducting research activities within a state to determine whether your business should expand into that state

Certain internal business activities such as maintaining books or records

Having an active bank account in a particular state

If your business has a typical relationship with a wholesaler that doesn’t direct the day-to-day activities of that wholesaler

Steps to file foreign qualifications for your LLC or Corporation

After creating a new legal entity for your business, you’re now ready to begin the foreign qualification process.

Here are five steps on how to register an existing business in another state and satisfy the foreign qualification requirements.

Step 1: Name availability

Conduct a name search in the state for which you want to establish foreign qualification to ensure the name is not already being used by another company or that the name is extremely close to another business operating in that state.

Step 2: Get a registered agent

A registered agent is an individual or a company that acts on your behalf to receive important communications from the Secretary of State and other legal documents. It is recommended that your business hire a professional registered agent who can timely communicate important matters, such as if a lawsuit is served against your company.

Step 3: Apply for a certificate of good standing

Also known as a certificate of existence or certificate of status, a certificate of good standing shows that your business has met all necessary foreign qualification requirements for that particular state. The most common reason a business falls out of good standing is by not filing annual information reports and/or not paying the required annual fee, which is usually nominal in most states.

Step 4: Register for certificate of authority

After completing the first 3 steps, your business will be ready to file an application for a certificate of authority. While the name of this certificate may vary slightly by state or by industry, the end result is the same: your business will be officially permitted to conduct business within that particular state.

Step 5: Pay applicable state fees

Having a business that crosses state lines will always involve some sort of fee. To initially file a certificate of authority can vary from $100 to $500 depending on the state.

Foreign Qualification FAQs

Do online businesses need to file foreign qualifications?

Most e-commerce companies that conduct business online do not have to foreign qualify. There may be situations where you may want to qualify, for example, if most of your sales originate from one particular state. Consult your legal advisor to discuss your particular situation.

Which states do not require businesses to file foreign qualifications?

All 50 states and the District of Columbia require foreign qualification filings.

What are the penalties for not foreign qualifying? 

Penalties for not foreign qualifying are wide and varying. A state could impose a monetary fine as well as pursue fees and back taxes (in addition to interest penalties) on the money the business would have owed had it been properly foreign qualified.

Which states are exempt from foreign qualifications?

Currently, there are no states that are exempt from foreign qualifications.

Do I have to get a new EIN if I expand my business to another state? 

An Employee Identification Number (EIN) is a federal number that stays with the same business from state to state. A business keeps the same EIN for the entire life of the business. Some states issue a separate state-issued identification for use in that state.

Work with 1-800Accountant  to help navigate the foreign qualification process

As the owner of a business that crosses state lines, it’s your responsibility to understand the steps needed to qualify as a foreign entity in the state(s) into which your company is expanding. Remember that foreign qualification is important to protect both you as the owner and your employees, helps you avoid fines and penalties, and permits your business to have legal standing in that state.

While there are many moving pieces of the foreign qualification puzzle that can sometimes get complicated, remember that help is just an email or phone call away.

Working with a 1-800Accountant small business expert, you can rest easy knowing that you’ll have a helping hand to properly navigate the foreign qualification process for every state in the U.S.