While expanding your business into a neighboring state can be exciting, it can also come with legal complications if you aren’t careful. If you want to do business in another state as an LLC or corporation, you need to become foreign qualified. The term “foreign” doesn’t refer to a business outside of the country but rather a corporation or LLC that chooses to operate outside of its state of incorporation.
For example, if you incorporated or formed an LLC in Florida and open a new store or otherwise do business in Georgia, you will be considered a foreign company in Georgia.
Foreign qualification is a process through which you register to do business in another state. Your corporation or LLC is only domestic in your state of incorporation.
Foreign qualifying your business means you need to register with the state(s) in which you will do business and pay certain fees. When you register, you will give notice to the state that you will be doing business in its borders. From then on, you will be subject to several fees, taxes, and requirements in your home state and any other states in which you do business.
When You Need to Foreign Qualify
When it’s time to form an LLC or incorporate, you may give some thought to incorporating in another state. You may have heard about the benefits of a Delaware LLC, for example. While forming your LLC in Delaware may come with lower fees than your home state, you probably still need to foreign qualify in your home state anyway.
Each state has its own rules for when foreign qualification is necessary. In general, you will need to do it if you:
• Have a business bank account in the state
• Accept orders in the state
• Have employees in the state
• Have a physical presence in the state (such as an office or retail location)
You may want to consider these factors when you choose your state of incorporation, when possible.
The Consequences for Not Qualifying
Don’t think you can get around the rule of foreign qualifying. If you fail to do it when necessary — whether you think you can avoid getting caught or you’re just ignorant of the requirement — you may face consequences. You may lose access to that state’s court system because you won’t be recognized as being allowed to do business in the state. This means that you will be completely unable to defend yourself in court if you’re sued. You can also face stiff back taxes and penalties.
As you can see, it’s a good idea to learn about foreign qualification before expanding your business.
The Alternative: Forming Separate Entities
You do have one way to avoid foreign qualification: you can form an LLC or incorporate in every state in which you do business. This means forming a legal separate entity in each state. Of course, this comes with additional costs and you will be expanding your need for keeping records and filing documents with the states.
Before expanding your business, always discuss your plans with your attorney or a corporate services company like USA Corporate Services Inc. to make sure you understand your responsibilities and the penalties for making mistakes.