If you have clients who want to do business in another state or multiple states, they may need to file for "foreign qualification" (sometimes called “Certificate of Authority”).
Let’s take a moment to explore how this can affect them from legal and tax standpoints — and what they need to do to become foreign qualified in a state.
When must a company foreign-qualify?
If a company will conduct business in any states beyond where it has incorporated or formed an LLC, it must foreign-qualify the business in those new states. Otherwise, it cannot operate in them legally.
Keep in mind that selling products or services to customers in another state doesn’t necessarily mean a company must foreign-qualify. For example, a freelance web designer who formed an LLC for her business in North Carolina probably would not need to file a foreign qualification in other states where she is providing her services. This assumes she is performing most of her work online from her home state and does not frequently meet clients in the states where they are located. In this scenario, getting revenue from other states doesn’t mean the business is operating in those states.
Questions clients should ask themselves
If your clients answer “yes” to any of the questions below, they may be required to file a foreign qualification with a state:
- Does my LLC or corporation have a physical presence (e.g., an office or retail location) in the state?
- Do I or someone who works for my company regularly conduct in-person meetings with customers in the state?
- Does a large portion of my company’s revenue come from the state?
- Did I apply for a business license in the state?
- Do any of my employees work in the state?
- Do I have a bank account in the state?
Examples of when businesses need foreign qualification
- A restaurant registered and operating in Pennsylvania wants to expand into Ohio. (The company must foreign-qualify the business in Ohio.)
- A company incorporated in Wyoming but is physically located in Oregon. (The company must foreign-qualify the business in Oregon.)
- A company is incorporated in Texas. One business partner lives in Texas, and the other partner lives in Florida. Recently, the partner in Florida has been acquiring most of the company's clients, meeting with them in that state. (The company must foreign-qualify the business in Florida).
Note that the above questions serve as a great starting point and the examples I’ve shared shed some light on the subject. But sometimes It can get tricky to determine when a business must pursue foreign qualification. Your clients should seek the guidance of an attorney to make sure they know for certain.
How foreign qualification affects business compliance and taxes
Businesses that foreign-qualify in a state must fulfill the reporting and filing requirements that the state requires of foreign-qualified companies. For example, the company will need to designate a registered agent in the states where it has foreign-qualified. Still, foreign qualification is simpler to maintain than the alternative of forming a new domestic corporation or LLC in every state where the company wants to conduct business. For example, rather than writing bylaws and appointing a board of directors in each state, what is in place in the business’s home state covers the company in the states where it is foreign-qualified.
A foreign-qualified business must pay state or local income taxes, franchise tax, sales tax and possibly other fees according to each state’s laws.
How to foreign qualify
Businesses that must foreign-qualify in a state need to file an application with that state's Secretary of State office. Usually, they can find the forms online and either complete them on their own, have an attorney prepare them, or, to ensure accuracy and keep costs down, ask an online document filing service to handle the filing.
Where can clients find more information?
Each state provides information about their foreign qualification requirements on their Secretary of State’s (or comparable organization’s) website. An attorney can help your clients determine whether they need to foreign qualify and explain the compliance requirements for each state. And of course, you can help your clients understand the tax implications. You might even consider taking your ability to assist clients one step further by expanding your services to include preparing and submitting online business filings.
The bottom line: By doing their homework and getting expert advice, your clients can rest assured they're foreign-qualified where needed and feel confident they've handled the process correctly.
