Happy February! With winter now in full swing, we will be talking about a way to get away from the cold with Foreign Qualifying! This month, we discuss the opportunities of Foreign Qualification into another state and what the requirements are for those states.
Q: What is foreign qualification?
A: A corporation or LLC transacting business in a state(s) outside of their state of incorporation is typically required to foreign qualify in those other states.
Q: What constitutes transacting business in another state and when do I need to foreign qualify?
A: As examples, your company is considered to be transacting business in an additional state if…
You have a physical presence in the state
You have employees in the state
You accept orders in the state
You have a bank account in the state
State rules vary and this isn’t a complete list. If you have any questions about whether you need to foreign qualify in a state, you can speak with an attorney.
Q: If I incorporated in Delaware or Nevada (but don’t live/work there), does this mean I need to foreign qualify in my own state?
A: Delaware is often chosen as the state of incorporation, especially by larger companies, because it has the most developed and flexible corporate statutes in the country and is considered pro-business. Nevada has also become popular because of its lack of state corporate income tax, franchise tax and personal income tax. It also has relatively low fees.
However, if you incorporate out-of-state, such as in Delaware or in Nevada, but do much of your business in your home state, you will most likely need to foreign qualify in your own state. You will then be subject to the same fees, taxes and regulations as if you had incorporated there in the first place, and you will have paid filing fees (and, perhaps franchise taxes) to more than one state.
Example: If you have a small business and are going to be conducting a substantial amount of your business in California, it will likely be beneficial to incorporate in the state of California. If you incorporate out-of-state, such as in Delaware or in Nevada, but do much of your business in California, you will have to foreign qualify in the state of California. You will then be subject to the same fees, taxes and regulations as if you had incorporated in the California in the first place, and you will have paid state filing fees (and, perhaps franchise taxes) not only in the state of California but also to the state of Delaware or Nevada as well.
Q: What is the process to foreign qualify?
A: You will need to file a Certificate of Authority, which grants a foreign corporation/LLC permission to transact business in a state. In most cases, you will need to show a Certificate of Good Standing from your state of incorporation/formation in order to get a Certificate of Authority.