If you own a corporation or limited liability company (LLC), and you’d like to expand your business entity to an additional state, you might need to pursue a foreign qualification.
With a foreign qualification, you can conduct business with your LLC or corporation in a state other than your home state, while still operating in accordance with all relevant compliance standards. But how do you know whether you need a foreign qualification, or when you should acquire it?
The world of foreign LLCs and corporations can be a confusing one, so we decided to create this article to help answer any questions you might have about foreign qualifications. In this guide, we’ll discuss the details of the foreign qualification process, and along the way, we hope to help you figure out if you need one or not. Let’s get started!
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What Is a Foreign Qualification?
While it might sound like it has to do with businesses in other countries, a foreign qualification actually refers to an American business based in another state. When you form a limited liability company or corporation in your primary state, that’s known as your domestic business.
If you expand your company to do business in any other state, you’ll be required to obtain a foreign qualification.
As an example, if you form a domestic LLC in your home state of Arkansas, and you want to expand your operations to the state of Missouri, you can acquire a foreign qualification in Missouri to register your foreign LLC.
In order to obtain a foreign qualification in any state, you must first form a domestic business entity in your home state. Whether that’s an LLC or a corporation doesn’t matter ― both of these business structures require a domestic version first, then you can take aim at expanding your company into foreign states.
When Should You Acquire a Foreign Qualification?
We strongly recommend that you obtain a foreign qualification before you start conducting any business in your new state.
If your limited liability company or corporation isn’t already foreign qualified when your business begins its operations in any state other than your home state, you will not be operating in compliance with the regulations governing your business entity.
What Happens if You Operate a Business That Isn’t Foreign Qualified?
The repercussions for operating a limited liability company or corporation outside of its home state without registering a foreign entity vary depending on the state, but you can expect to face a hefty fine no matter what state it is. In general, it is much less expensive to obtain a foreign qualification than it is to pay the fine for failing to do so.
Quite a few states also will allow any vendor, customer, or other entity that you do business with to void their contract with your company if you don’t obtain foreign qualification.
Some states will prevent you from filing a lawsuit against any entity in that state, which opens you up to being taken advantage of in your business dealings. There’s also a good chance that your company’s owners will lose their personal asset protection, meaning that if there’s a lawsuit against your company, your creditors can pursue both your business assets and your personal assets.
Obviously, these possibilities have the potential to do much more damage to your company than paying a one-time fine, and all of these situations can be avoided by simply registering your foreign entity in each state you conduct business in.
How to Obtain a Foreign Qualification
The first step to registering a foreign qualification is to form a domestic entity in your home state. Once you’ve completed this requirement, you need to draft and file a document usually referred to as a certificate of authority, which is also known as a certificate of registration in some states.
In most states, you can find templates for the certificate of authority that you can simply fill out and submit to the Secretary of State. Like the articles of organization/incorporation to form a domestic LLC/corporation, the information required for a certificate of authority varies from state to state, but in general you’ll need the following elements:
- Name and street address of your domestic entity
- The industry your company operates in
- Name and street address of your registered agent
- Identities of your company’s owners
In addition, to obtain a foreign qualification, you’ll need to provide your new state with either a Certificate of Good Standing from your home state, or a certified copy of the articles of organization/incorporation that you submitted to form your domestic entity.
You’ll also have to pay a filing fee to finish registering your foreign entity, which is typically a bit more expensive than the fees to form a domestic entity.
Can You Hire Someone to Register Your Foreign Qualification?
Need Help With The Paperwork?
It’s usually not too much hassle to draft your own certificate of authority, but if you’d rather hire a professional service to take care of this for you, there are options available. One of those options is to hire a business lawyer to register your foreign qualification, which can be a good option if you have a large budget and you want the peace of mind that comes with an attorney’s expertise.
If you’re operating on a tight budget though, we tend to prefer using an online incorporation service instead of a lawyer. These companies usually offer foreign qualification service at much lower prices than an attorney’s fees, while still providing a high level of reliability and professionalism.
Conclusion
Whether you operate a limited liability company or a corporation, you will need a foreign qualification in order to conduct business in any state other than your own.
Once you’ve formed your domestic entity in any state, you can rather easily expand your operations to additional states using foreign qualifications.
Whether you choose to draft and file your certificate of authority yourself, or hire an online business services company to assist you with the process, we hope this article helped answer any questions you may have had regarding the role of the foreign qualification in the American business landscape.