Doing Business in Another State: What Does It Take?

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When you want to expand your operations beyond your home state of incorporation, one of the first steps you’ll need to complete is registering as an out-of-state or “foreign” entity, a process called foreign qualification. Generally, this involves registering your organization with the secretary of state’s corporations division. Once your application is approved, the corporations division will issue a certificate of authority allowing you to conduct operations in the new state.

We asked Compliance Specialist James Gilmer to answer some of the most common questions clients ask about the process of foreign qualification.

What types of activities require foreign qualification?

James: Foreign qualification generally means gaining authority to do business in a new state, which can encompass a variety of activities. Hiring employees who live or work in another state may require you to qualify. Acquiring assets for your organization such as offices or other facilities may trigger requirements. Bidding for contracts or work in another state, or advertising your services there, may also require foreign qualification.

Are nonprofits required to foreign qualify?

James: Nonprofits would generally have the same requirements for those sorts of activities. Whenever an organization launches any sort of “boots on the ground” presence in a new state, you’re potentially subject to foreign qualification requirements. I would definitely research requirements or seek expert guidance in any of those scenarios, for nonprofits and businesses alike.

Eight states require nonprofits to foreign qualify if they solicit donations from their residents. This requirement is in addition to the charitable solicitation registration process, which is required in 41 states. The states that require foreign qualification in addition to charitable solicitation registration are Colorado, District of Columbia, Illinois, Michigan, Nevada, North Dakota, and Oregon. California, Florida and Georgia strongly encourage, but do not require, foreign qualification.

What if I have remote employees in other states? Do I have to qualify there?

James: The requirements will vary by state, but generally employees are employed in the state where they physically work, so anytime you employ a remote worker, you’ll need to research the requirements in their state of residence and potentially foreign qualify there.

If I have clients in a state, but I don’t have offices or employees there, do I need to foreign qualify?

James: This will depend on factors such as the amount of business you’re doing in the state, the types of activities you’re engaged in, the frequency of activities, and a host of other considerations. I would recommend that anyone in this situation contact a compliance specialist for more specific guidance and assistance.

What if I have an internet company?

Generally, it makes sense to incorporate an online business in the state where the owner lives and works. Incorporation can limit your personal liability, save you money on taxes, and set the stage for more complex ownership arrangements and hiring employees. Unless you’re involved in other activities that require foreign qualification such as offices or employees in other states, offering products and services over the internet alone generally doesn’t require foreign qualification. I would recommend getting professional advice if you are in that situation.

What does foreign qualification involve?

James: The process itself is not terribly time-consuming or expensive. First, you’ll need to appoint a registered agent who is located in the state to receive legal notices and other important documents for your organization. Then, you’ll file the application for the certificate of authority with the secretary of state. This generally requires submitting a certificate of good standing and formation documents from your home state, along with other information about your organization.

In addition to foreign qualification, you may need to fulfill state tax registration and license requirements. Foreign qualification is just one step toward achieving good standing in a new state. You’ll also have to maintain your good standing year after year by filing annual reports and fulfilling other periodic requirements.

How much does it cost to qualify?

James: State fees are generally quite reasonable, averaging around $200 for businesses. For nonprofits, it’s even less, roughly half, on average. That’s why is definitely pays to check the requirements if you’re in doubt and go ahead and register wherever required. It’s more economical to foreign qualify proactively and err on the side of caution, since penalties for failing to register where required can be substantial.

Is it a lengthy process?

James: Approval times vary by state, from a matter of days to as long as five weeks. Most states offer expedited processing for a fee. Our compliance specialists can tell you more precisely how long you can expect to wait in your particular state and whether it would pay you to expedite.

What if I’m already working in a state where I haven’t qualified? Should I qualify late, or will that just get me in trouble?

James: It’s always less expensive to step forward and address any omissions you discover as early as possible. State authorities tend to be far more lenient with organizations that reach out proactively to address a lapse rather than waiting for penalties. By the time penalties are assessed, the organization is not in a good position.

Have Questions of Your Own?

Foreign qualification is an important aspect of compliance for growing businesses and nonprofits. It’s not always easy to tell when and where you need to register. Our 50-State Guide to getting a certificate of authority for your business or nonprofit is a great place to start. Our guide provides a detailed breakdown of state fees and processing times as well as links to all relevant state authorities.

If you have other questions about foreign qualification, feel free to give us a call at 1-888-995-5895, or set up a free consultation with one of our compliance specialists here.