If you’re doing business in another state, you are required to register your corporation or LLC in that state. The process is referred to as “foreign qualification”.
In many states, the first step for a foreign LLC or corporation to obtain the legal right to operate in another state is to file for a Certificate of Authority.
Certificate of Authority: Definition
A Certificate of Authority shows that you are authorized to do business in a state other than your original formation state. A Certificate of Authority is a requirement in most states.
It’s important to note that the name of the document can vary from state to state. It may be known as an Application for Authority, Application for Registration, Application to Transact Business, Qualification Certificate, or another name.
To complicate matters further, the requirements and process for acquiring the certificate can vary by jurisdiction.
Did you know? A Certificate of Authority can mean different things in different states. In New York, a Certificate of Authority is issued by the New York Tax Department and contains your sales tax ID. With the certificate, your business is granted the right to collect sales tax and issue and accept most New York State sales tax exemption certificates.
When do I need a Certificate of Authority?
The answer depends on whether you meet a state’s criteria for “doing business”, which may not always be clear cut. State rules vary as to the amount and types of activity that trigger business registration. In fact, most states only list those activities that don’t constitute doing business in that state.
As a rule, meeting any of the following five criteria is an indication that you are “doing business” in that state and need to obtain a Certificate of Authority:
- You have or plan to have a physical location, such as an office, warehouse, store, or restaurant, in that state.
- You have employees in the state.
- You regularly enter into binding contracts in that state.
- You regularly meet with clients or customers to conduct business in that state. (Phone/teleconference meetings and email alone are less likely to be considered “doing business.”)
- Your business has a steady and significant revenue stream from activities in the state.
This is by no means a complete list. State statutes and courts have different criteria for what constitutes transacting business. To find out if your business needs to foreign qualify and obtain a Certificate of Authority in a particular state, it is best to seek the advice of an attorney.
If you operate your business as a sole proprietor, you are typically exempt from obtaining a Certificate of Authority since your business is tied to you as the owner and is not registered with any particular state as a domestic or foreign entity.
But keep in mind that each state’s laws can differ. Your Secretary of State or other business authority may require you to register your business with their office. You will also be subject to other regulatory obligations, such as applying for and managing state and local business licenses, permits, taxes, and more.
What are the penalties for not obtaining a Certificate of Authority?
The most serious consequence of failing to obtain a Certificate of Authority is that the foreign state may deny your company the right to bring or maintain a lawsuit or conduct other legal proceedings in their court system. For example, if a partner or customer violates a contract, you would not be able to sue to recover damages or enforce the contract (although you would be able to defend your business).
Another costly consequence is that states will assess fines, penalties, and back taxes for the time your company was transacting business without a Certificate of Authority. Some states may also fine individual officers or agents of your business.
What information is included on a Certificate of Authority?
The information can vary, although commonly required information includes the following:
- Company name
- Date and state of incorporation
- Name and address of a registered agent in the state of qualification
- Name and address of officers (for corporations)
- Number of authorized shares and a listing of the different classifications of stock (for corporations)
- Signature of a corporate officer (typically the president) or member/manager (for LLCs)
Some states also request the following additional information:
- Name and address of directors (for corporations) or members/managers (for LLCs)
- Duration of the corporation or LLC (usually perpetual)
- Number of issued shares of stock (for corporations)
- Financial information, including information on assets
- A specific business purpose clause outlining the type(s) of business the company will undertake in that state
How much does a Certificate of Authority cost?
Filing fees for a Certificate of Authority vary by state and entity type.
How to register for a Certificate of Authority
To file for a Certificate of Authority or similar form, refer to the instructions on the website of the Secretary of State in the location where you plan to do business. This information is usually found under the category of Foreign Corporation or Foreign LLC.
Be aware that there may be additional steps to completing the foreign qualification process before your company can do business in a state other than its home state. These typically include the following:
- Determine if the business name is available
- Appoint a registered agent in that state
- Order a certificate of existence or certificate of good standing from your home state
- File qualification documents
For more information on the foreign qualification process, read: Doing Business in Another State (Foreign Qualification).
Learn about BizFilings' Foreign Qualification Service.