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Doing Business in Other States? Get Familiar with Foreign Qualification
Published on Feb 27, 2012
Read 'Doing Business in Other States? Get Familiar with Foreign Qualification' at 'Time to Start Up,' the small business blog by BizFilings.
There’s nothing foreign about Foreign Qualification — although the name often gives the wrong impression to small business owners.
What is Foreign Qualification?
It may sound like an international concept, but in this case “foreign” has nothing to do with a business that resides outside of the United States. When a small business decides to expand out of the state they’re currently doing business in (referred to as their home state, or their domestic state), they’ll need to gain approval from each additional state they’re planning on doing business in.
Any state outside of a small business’ home state is considered foreign — hence the name Foreign Qualification. When you Foreign Qualify, you are essentially registering for a Certificate of Authority in the state(s) where your company will do business. This notifies the state that your company is conducting business within its borders. Your business will be subject to ongoing reporting requirements, fees and taxes in both your state of incorporation and state of qualification.
Do You Need to Foreign Qualify?
Although each state has different contingencies and fees, there are some core factors used to determine whether a small business needs to Foreign Qualify. They include:
Whether the company has a physical presence in the state
Whether the company has employees in the state
Whether the company accepts orders in the state
Whether the company has a bank account in the state
If you are uncertain whether your particular business needs to foreign qualify, or register to transact business in another state, it’s best to seek the advice of an attorney or accountant.
Failing to Foreign Qualify
Foreign Qualification in states where you transact business is a legal requirement. Failure to do so could result in negative consequences like:
You may face fines, penalties and back taxes for the time in which your company did business within a state without being Foreign Qualified there
Liability for back taxes for the time you were transacting business but were not qualified
Loss of access to that state’s court system, meaning that if you were sued in that state, you would not be able to defend the suit
How to Foreign Qualify
To foreign qualify your business, you may need to:
Register for a Certificate of Authority in the state(s) where you want to do business
Apply for a Certificate of Good Standing from your state of incorporation, showing that your company is in existence and has met all state requirements
Pay applicable state filing fees when you submit the Certificate of Authority filing
File annual reports, pay taxes and annual report fees in the state(s) where your small business has undergone foreign qualification