Understanding Foreign Qualification

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Because corporations in the US are considered domestic only in their state of incorporation, a company doing business in a state other than its state of incorporation must apply for a foreign qualification. This will allow them to be legally registered in a state where they would have otherwise been considered foreign.

What does it mean to be “doing business” in a certain state?

Each state has their own meaning of doing business. In general a company is “doing business” if any of the following apply:

  • It has a physical presence in the state such as maintaining an office or owning/renting a physical property
  • There are employees or a sales person in that state

Requirement and procedures for foreign qualification vary from state to state. Most states require foreign corporation to register with their Secretary of State and pay state registration fees. The documents needed to qualify are articles of incorporation and a certificate of good standing from the foreign business’ state of formation. The state may also require the foreign business to have a registered agent. This ensures they will receive legal documents from the state on the corporation’s behalf.

What does it mean when you qualify as a foreign corporation in other states?

A corporation qualifying in a state other than its incorporation state is subject to that state’s laws. The corporation must file and pay all taxes and licenses required to do business in that state.

What are the consequences of failing to qualify?

Failure to qualify in a state where a corporation is “doing business” could result in additional taxes, fees and penalties. If legal complications arise, it may limit a corporation’s legal recourse. This is because most states require a foreign business to qualify before they can bring suits in that state.

When a corporation wants to expand its business outside its state of formation, it should seek assistance from an attorney or accountant. Foreign qualification may seem complicated with additional compliance to think about. Regardless, in order to avoid wasting time and incurring additional costs, owners must follow this mandate.

Author Bio
David McKeegan
David McKeegan, the founder of Cleer.Tax is both an MBA and Enrolled Agent. As an entrepreneur and small business owner himself, he really understands the pain points that company owners and founders have in regards to tax compliance and having clean financial statements. What really differentiates David is his ability to distill complicated tax matters into layman’s terms, making the advice actionable and accessible to all.
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