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 for 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 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” 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 in question 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 foreign qualification for your 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 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 articles of organization.
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 as an LLC, 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 articles of organization, your operating agreement, a certificate of good standing, and more.
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 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 an LLC’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 an LLC 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.
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 LLC has domestic status, you will need to foreign qualify that LLC.
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.