Like many legal matters that affect your business, foreign qualifications are a minor matter that can have major ramifications. While “foreign qualifications” sounds like something you don’t have to worry about until your company begins import/export operations or opens a branch in Seoul, the term “foreign” actually refers to another state in the union. For example, if you aren’t registered to transact business in Delaware and most of your transactions occur there, you could wind up in hot water.
How to foreign qualify
Foreign qualifying is a complicated phrase that essentially means registering your company to do business in another state. For instance, if you formed your business in Ohio but are opening another location in Illinois, you need to foreign qualify. The process involves registering your business for a Certificate of Authority in the state where you will be conducting business and paying the required fees, but that isn’t all: foreign qualification means that your business will be subject to the reporting rules, fees, and taxes of the new state in addition to the rules of the state it was formed in.
Unfortunately, the how of foreign qualification is the easy part. Whether or not you should register your company to do business in another state or pursue alternative options is a little more complicated. From BizFilings.com:
“There are many factors used in determining the need to foreign qualify. While different states have different criteria for transacting business, consider the following:
- Does your company have a physical presence in the state?
- Does your company have employees in the state?
- Does your company accept orders in the state?
- Does your company have a bank account in the state?”
Should I foreign qualify or incorporate in every state?
If you answered yes to any of these previous questions, you will likely need to foreign qualify your business in the state. If you’re still not sure if you need to foreign qualify, then it’s time to speak with an attorney. Indeed, while there are many circumstances that make foreign qualifying the smart move, it can be advantageous to incorporate or form an LLC in multiple states. This option creates separate legal entities and affords different protections. The best path, however, must be determined on a case-by-case basis.
Alex Gertsburg is a managing partner at Gertsburg Licata. He may be reached at (216) 573-6000 or at [email protected].
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
