Starting a new business is an exciting time for any entrepreneur, but what’s even more exciting is watching that fledgling business grow and expand its reach into new markets.
If you’re ready to expand your business into new states, congratulations on achieving this major milestone in the growth of your company. However, there are a few requirements you’ll need to meet as part of that process, including obtaining a foreign qualification in each new state your business operates in.
Not sure what that means? Don’t worry ― this guide covers everything you need to know about foreign qualifications.
Use the guide below to acquire a foreign qualification and properly do business in another state. We'll walk through the important details and what needs to be done.
What Is a Foreign Qualification?
Simply put, a foreign qualification is a registration required for businesses that were formed outside of the state they operate in. Don’t let the word “foreign” confuse you, as it does not mean a business that was incorporated in another country, but rather one that was originally registered in another state.
A foreign qualification allows a business to operate in multiple states, not just its formation state. It’s also commonly referred to as a foreign registration, and sometimes you’ll even hear the term “foreign LLC” or “foreign corporation” to refer to these businesses.
When Do I Need a Foreign Qualification?
You need to obtain a foreign registration whenever your company is doing business in a state that’s different from your state of formation. “Doing business” is the key term here, and it’s not always the easiest phrase to define.
Each state has its own definition of doing business, so it’s important to consult the Secretary of State for each state to learn its standards. That said, most states have similar definitions of doing business in their jurisdiction: if you have some sort of physical presence in their state, you need a foreign registration.
For this reason, there are some occasions when you’ll have business activities in a state that does not classify as doing business there.
For example, let’s say you have an LLC that’s domestic to Kentucky, but you also maintain an online store, where a customer from Wisconsin makes a purchase. You don’t actually have to register as a foreign LLC in Wisconsin just from one online sale, but if you had a store located in Wisconsin, that would be another story.
You need a foreign registration when you have a physical presence in the state, such as a store, an office, or a distribution center. Similarly, if you maintain a bank account or have employees based in that state, you’ll need to register as well. The registration requirement also often applies when you have regular meetings with your clients in a given state, or a significant stream of revenue flows from that state.
For a full definition of what doing business means in a particular state, we recommend that you consult that state’s Secretary of State office.
How Do I Get a Foreign Qualification?
Getting a foreign qualification for your corporation or LLC is usually fairly simple, and typically just involves acquiring a certificate of authority in that state. It’s a little like a permission slip from the state, granting you the rights and privileges of conducting business there.
First, you need to be in good standing with your state of formation. This might seem like a no-brainer, but most states will not accept the registration of a foreign LLC or corporation if it is non-compliant in its home state. Many states may also require you to get a certificate of good standing from your home state or a copy of your original formation documents.
You also need to check that your business name is available in the state where you’re foreign qualifying. While it’s unlikely, another business could already have the rights to your business name (or one similar to it) in your new state. If that’s the case, you’ll have to apply for a different assumed name.
While you’re at it, you should also appoint a registered agent in each new state where you want to operate. If you’ve already formed your business, you already have an agent for your home state, but you need to have a registered agent located in each state where you operate your business.
Once you have these components, you can apply for a certificate of authority in each new state. As part of the process, be prepared to provide any documents the new state might request. This could include your formation documents, your operating agreement or corporate bylaws, a certificate of good standing, and more.
The exact information required to file a foreign qualification varies by state. In general, you’ll need to include the name of your business, its entity type, the jurisdiction where it was originally formed, the name and address of the company’s registered agent, the principal business address, the mailing address (if different), phone number, a list of the company’s members or managers (for LLCs) or its officers and directors (for corporations), and a description of the nature of the business.
Each state has its own filing fees and turnaround times for foreign qualification documents. In some states, foreign qualifications are relatively inexpensive, costing $100 or less. In others, you’ll need to pay in excess of $500 to qualify your foreign business entity. Similarly, some states have online portals that can process these documents almost immediately, while others require you to deliver hard copies, a process that can take weeks to complete in some states.
After you’ve been granted a certificate of authority for the new state, you can maintain that registration by meeting the annual requirements of that state. That usually entails filing an annual report, getting local licenses, and paying any required fees.
Why Is Foreign Registration Necessary?
Registering a foreign LLC or corporation is important because it’s legally required to operate as a compliant business, but beyond that, getting your foreign qualification grants you certain rights within the new state. The specifics vary from state to state but generally speaking, failing to foreign qualify your business could have grave consequences.
For one, if you’ve received authority to conduct business, you also have access to the state court system. If you ever needed to sue someone within the state (or defend yourself from someone suing you), you would be able to do so. The courts in a given state are often closed to businesses that have not registered to do business in that state.
Furthermore, some states will revoke the personal asset protection from a company’s ownership if they don’t foreign qualify the business, which means that if someone sues your company, they would be able to pursue your personal assets in addition to your business assets.
Registering your business also helps you to avoid the fines and penalties that are levied on non-compliant businesses. In most states, the fees for failing to foreign qualify a business are significantly more expensive than the cost of acquiring a foreign qualification to begin with, so there’s really no reason to avoid this process.
Hiring a Foreign Qualification Service
Does this process sound like a hassle? Would you rather pay someone else to foreign qualify your business while you focus on actually growing your company? Fortunately, there are plenty of reputable business formation services out there that can provide professional assistance with foreign qualifications for a mere fraction of a lawyer’s fees.
There are dozens of different companies that offer foreign qualification services these days, and it can be difficult to discern which of them is your best option. Unfortunately, a couple of our favorite options for business formations (including our top choice, ZenBusiness) don’t actually offer foreign qualifications. With that in mind, let’s run down a few of the best companies that do offer foreign qualification services.
- MyCompanyWorks ($99): MyCompanyWorks failed to crack our top five for incorporation services, but they’re our number-one pick for foreign qualifications. Why is that? First off, MyCompanyWorks’ $99 price point is highly competitive — we’re actually not aware of any companies that can beat this rate.
MyCompanyWorks has tremendous customer feedback, with nearly 4,000 reviews online and only a very small selection of negative reviews. This company also has some of the most receptive customer support representatives in the industry. MyCompanyWorks typically returns calls and emails within 20 minutes, while some competitors will make you wait for days.
- SunDoc Filings ($99): Interestingly, our second pick for foreign qualifications was also left off of our “best incorporation services” list. However, SunDoc Filings is the only other company we know of that offers foreign qualifications for under $100. In addition, this company has some distinct advantages that make it a great option.
SunDoc Filings has nearly the exact same customer satisfaction reputation as MyCompanyWorks, with an overwhelmingly high percentage of positive feedback in its 3,000+ online reviews. It also offers a 100% satisfaction guarantee, which is a great safety net for your purchase. Also, if you happen to be foreign qualifying in California, this company offers the fastest turnaround times in the industry.
- Northwest Registered Agent ($150): Northwest has long been one of our favorite companies in the business services industry, and they have an excellent offer for foreign qualifications. Northwest has the best customer support of any company in this market, with highly trained representatives that go above and beyond what most companies offer with a typical call center setup.
Northwest is also a great option if you take your privacy seriously. This company writes its own code and runs its own servers specifically so it doesn’t have to share your info with any third-party contractors. Northwest’s pricing may be higher than the other options we’ve discussed, but we think they make it worth your money.
When Is the Best Time to Foreign Qualify My Business?
It’s hard to answer this without knowing the specifics of your business, but in general, you should foreign qualify your company before you start transacting business in that state. In other words, if you plan to sell significant amounts of products or services, having employees, owning property, entering into contracts, or maintaining an office in that state, you should first foreign qualify.
This is especially important considering how vague the concepts of “commercial activity” and “transacting business” are. Interpretations of what could constitute commercial activity can vary by state, and different judges and courts could have different interpretations as well. That’s why we always recommend that our readers leave nothing to chance and simply foreign qualify as soon as you’re confident in your company’s expansion to another state.
Frequently Asked Questions About Foreign Qualifications
How long does it take to foreign qualify a business?
The answer to this question varies considerably based on the state you’re expanding to. There are some states that have online portals where you can foreign qualify almost immediately. Meanwhile, some states require you to mail in paper forms that can take a matter of weeks.
Additionally, many states offer some sort of expedited service that can dramatically speed up your foreign qualification process. For more details, ask your LLC formation service or your state’s Secretary of State office.
Should I use an online foreign qualification service, hire an attorney, or foreign qualify my own business?
All three of these options have their own advantages and disadvantages, depending on your priorities. Foreign qualifying on your own will always be the cheapest option, although it doesn’t involve any professional assistance.
On the other end of the spectrum, hiring an attorney can be prohibitively expensive for many businesses, although the expert advice you’ll get can make it worthwhile. Finally, an online foreign registration service splits the difference, providing professional help while charging a fraction of an attorney’s fees.
Do I need to designate a registered agent for each state I qualify my business in?
Yes. Some business owners think they can get one registered agent in their home state and call it a day, but that isn’t the case. You will need a registered agent for each state in which your business operates. This is one of the reasons we appreciate registered agent services so much. Most of them operate in all 50 states, so expanding to another state is a breeze. All you would need to do is inform them of your foreign qualification and pay them an additional fee to cover the new state.
My business recently fulfilled an online order from a customer in another state. Do I need to foreign qualify?
While it’s hard to give any concrete answers without knowing the specifics, the answer to this question is usually no. Unless a significant portion of your sales starts flowing through the state, you won’t need a foreign qualification just to execute a few online sales.
My company opened a physical office in another state, but we’re not doing much business there yet. Do I need to foreign qualify?
This is a situation where you should foreign qualify your business. Even if you’re not transacting much business in the state, you have established a physical presence, which is reason enough to foreign qualify.
Can I foreign qualify a business with a limited lifespan?
Yes, when you foreign qualify your business, you will have the option to designate a perpetual lifespan or a specified dissolution date.
How does limited liability protection work for a foreign qualified business?
Limited liability protection works the same way whether you’re operating in your home state or a state you’ve expanded to. The limited liability protections afforded by an LLC or corporation are often referred to as the “corporate veil.” This veil provides a layer of separation between your business and personal assets, preventing creditors from pursuing your house, car, personal bank accounts, and more while suing your business. Thanks to the corporate veil, only your business assets are at risk in a lawsuit.
However, if you fail to form or maintain your business entity in compliance with state laws, your corporate veil could be “pierced” and you will lose your limited liability protection.
When discussing foreign qualifications, the word “foreign” may seem like a misleading term at first, because this term usually indicates origins in another country, rather than a different state.
The main thing you need to keep in mind regarding the foreign qualification process is that if you establish any sort of physical presence in a state other than the one where your business has domestic status, you will need to foreign qualify that business.
By obtaining a foreign registration in each state where you are doing business, you can rest easy knowing that you operate a compliant, growing company.