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Introduction to foreign qualification

Foreign qualification is a term generally used for those business entities that are registered in one state and want to operate their business in another state or jurisdiction. Each state has a specific set of requirements that businesses need to fulfill as a part of the foreign qualification process. The process and requirements are governed by state business laws and hence can be difficult to understand. Hence, we have created this guide to provide you with the information necessary to aid in this qualification process

Foreign Qualification

If you are planning to expand the physical presence of your company into another state or jurisdiction or into multiple states then foreign qualification is an important process that your business needs to apply for. There are many reasons for doing business in a new state like wanting a favorable tax climate or a business friendly legal environment. Hence, it is important to understand what the process involves when you actually need it.

What is a foreign qualification?

In the simplest of words, a foreign qualification is a process that helps business entities apply for a permission to conduct business in any state that is not their home state or where the business was incorporated. It is important to understand that the foreign qualification process may vary from one state to another and is also different for different forms of business entities. For example, the process for business registration of a foreign LLC is different from that of a foreign corporation.

When does my business need to file for foreign qualification?

When companies or small businesses plan expansion of their operations across the state lines they will be subject to the registration requirements of the new state, which is also known as “foreign qualification”. This is an important aspect to consider especially for business owners, members, advisors, and managers as non-compliance of this requirement may lead to penalties in the new state. The question is when does a business need to file for the foreign qualification process?

In order to understand when your business needs to file for foreign registration, let’s look at the following questions:

  • Does your business corporation or LLC have any form of physical presence in another state apart from the state of formation? Physical presence can be in the form of an office, a warehouse, or even a retail store.
  • Are you conducting frequent meetings with clients from another state?
  • Does your business earn a significant amount of revenue from any other state apart from the incorporation state?
  • Do you have employees who work in another state?
  • Are you currently paying state payroll taxes?
  • Have you applied for a business license in another state?

If the answer to any or all of the above questions is ‘yes’, then you will need to apply for foreign qualification.

Let’s look at an example to understand this well. A retail thrift store business like ‘AdraiNs’ was formed in Delaware and due to their growth and success; they have opened another branch in Nevada. They are planning to expand in Nevada by adding a few more branches and will also be employing staff from the state. This also means that they will be generating revenue in both Delaware and Nevada. In such a scenario, ‘AdraiNs’ will be considered a domestic business in Delaware but a foreign business under the Nevada state laws and will be required to undergo the foreign qualification process in Nevada.

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Foreign Qualification Process

Any business entity planning expansion to other states apart from its home state will need to apply for foreign registration. Businesses are considered to be ‘domestic’ only in the state where they were formed or incorporated. There are several steps for foreign qualification that will vary from one state to another although the basic requirements are almost the same. Let us take a look at what this process entails and how you can go about registering your foreign business.

What is the process for obtaining foreign qualification?

There are several requirements for businesses applying for foreign registration. The process of foreign qualification may vary from one state to another as each state has its own foreign business registration laws and regulation. Let’s look at some of the general requirements and understand the steps for foreign qualification through an example.

If a business named ABC Inc., based in California wants to conduct its business in Nevada, it will have to fulfill the following requirements for foreign qualification. Since ABC Inc., is a business corporation the foreign business registration will be governed by NV Rev Stat § 80.010 (2014).

  • Check business name availability: One of the first steps in the foreign qualification process is to check for availability of the chosen business name. The Nevada state law has a “Restricted Word List” which simply means that you cannot use certain words in the business name. Hence, we have created a guide on how to choose the best company name for all the 50 states in the USA and this will help you with applying for the foreign registration process. You can also check for business name availability using Nevada’s online business portal – SilverFlume.

NOTE: It would be important for ABC Inc. to ensure they register the corporate name exactly as it appears in their incorporation documents issued by the Secretary of State in California or the domicile state.

  • Get the certificate of Good Standing from Domestic state: As a part of the foreign qualification process in Nevada, ABC Inc., will be required to submit a certificate of good standing. This is an essential document as it certifies that ABC Inc. is registered with the state of California and has been up to date with state registration requirements including annual fees, annual reports, business licenses etc. The certificate of good standing in Nevada has to be submitted when filing for foreign registration in Nevada. If your business requires the certificate of good standing then you can order it directly through IncParadise.
  • Appoint a registered agent: Since ABC Inc. was formed in California, they will have to maintain a registered agent in that state but if they are applying for foreign qualification in Nevada, will they be required to maintain a registered agent in Nevada as well? Yes. The corporate as well as LLC or other business entity laws in most of the states in the U.S including Nevada requires each and every business entity doing business in the new state, or being formed in the state to designate and maintain a registered agent in Nevada. As one of the top registered agents with services in all 50 states, IncParadise can help fulfill service processes in Nevada. IncParadise is a reputable registered agent and you can benefit from a variety of services. Some of the benefits include:
    • Assisting with incorporation or formation
    • Helping businesses to comply with state requirements and regulations
    • Receiving legal notices from the state
    • Receiving notices for filing annual lists or reports
  • Complete and submit the application and fees for filing: Since ABC Inc. was formed in California, they had to undergo a process for incorporation in that state but in Nevada it will be considered as a foreign entity and hence has to apply for foreign qualification. They will be required to submit the “Qualification to do Business in Nevada” form along with the filing fee for doing business in the new state. This form has to be filed with the office of the Secretary of State. The filing fee will vary according to the total number of authorized shares. For example shares valued at $75,000 or less will require a fee of $75 and if it is valued over $1,000,000 then for the first $1,000,000, the filing fee would be $375.

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What happens if My Business is Not Foreign Qualified?

Foreign qualification is one of the important aspects of the incorporation or formation process in any state apart from the domicile state of a business entity. If you are planning to form a business or have already expanded your business to another state, it is important to properly register your entity by following the steps for foreign qualification. Each state has its own laws and regulations and failure to comply with the foreign business laws can lead to penalties and even lawsuits; the various penalties that a business entity not foreign qualified may have to bear.

Penalty/Fine

If a business doesn’t go through the process of foreign registration and begins operations then they may be penalized. Different states penalize businesses monetarily and the amount in penalty will vary; from a few hundred dollars to more than $10,000. At the same time, many states cap the penalty amount. For example, Nevada’s cap is $10,000. This can be quite an expensive affair as in 2015, when the state of Connecticut collected $1.8 million from unregistered businesses. Some state statutes also indicate that penalties can be levied on owners, officers, and directors of companies that are doing business in a new state without registering.

Some of the other issues that businesses may encounter if they fail to apply for foreign registration include inability to initiate a lawsuit and difficulty in obtaining financing.

How IncParadise Can Help You With The Foreign Qualification Process?

Different states have different requirements for foreign registration and some states like Nevada also require businesses to submit their initial list as a part of the foreign business registration process. There are certain aspects and requirements of the foreign qualification process that may be difficult for businesses to understand and hence IncParadise provides services to make this process and compliance of requirements easier.

IncParadise is one of the most reputable registered agents in the country with a strong presence in all 50 states. We have assisted more than 10,000 businesses with formation or incorporation and a wide variety of state regulated annual compliance services. We can help your business to file proper documentation and application for foreign registration in any state in the USA. We can also be your registered agent and help you fulfill all state requirements for doing business in a new state. Our services will definitely ensure your business is able to maintain a good standing in the state you have chosen to register in.

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