Pros and Cons of Setting Up an Out-Of-State Entity

Pros And Cons Of Setting Up An Out-Of-State Entity

If you are thinking of expanding your business, chances are you have been considering setting up your entity in another state. Doing this will help you reach new markets. However, it requires you to go through a process.

Understanding What Foreign Qualification Is

Unlike what some people may think, foreign qualification does not have to do with companies from other countries. The term foreign, in this case, refers to another state.

For example, your LLC wants to do business in a state different from where you formed it. You will have to register a foreign LLC. That is because all states have their own laws. They implement different regulations when it comes to companies. They also keep track of the businesses operating in the area to ensure that everything is legal and compliant with state requirements.

Doing this will also make sure that people can access information about the companies that they are dealing with. This includes the legal name of the business, its address, and its officers. Be sure to double check with the specific state to find out what is needed, due to different guidelines. It also provides access to the name and address of the LLC’s registered agent, which is necessary for the service of process.

Additionally, foreign qualification prevents out-of-state entities from having an unfair advantage over domestic companies when it comes to taxation and reporting obligations. Requiring registration allows the states to impose the said requirements on foreign entities too. 

When to Register a Foreign LLC

Generally, you have to register if you do business in a state. While there is no clear definition for doing business, there is a list of activities that you can consider as transacting business. You can also check with the appropriate state agency.

  • Your LLC has a physical presence in the state.
  • Your company has employees in the state.
  • You accept orders from customers in the state.
  • Your company holds assets in the state.

The Pros of Foreign Qualification for Your LLC

The main benefit of foreign qualification is that it allows your LLC to operate in the state legally. You can gain more customers and generate more profits.

Aside from those, your company can enjoy several benefits that include the following:

  • Your company will be able to maintain any legal proceeding or action in the court system of the state. That way, you can sue in the state to recover damages or ensure the enforcement of a contract.
  • You can avoid penalties or fines for fees that a local company has to pay in that state. 
  • You maintain the same owners to run the business even if it is in another state. However, you may hire local managers.
  • While you may be doing business in different states, your company remains a single entity. It has the same EIN and files only one federal tax return.
     
  • You can still enjoy the benefits of an LLC structure, including pass-through taxation and protection of personal assets.
  • You can open a bank account under the name of your LLC. Most banks require companies to have state registration before they can open bank accounts.
  • State registration will help you gain the trust of customers.

The Cons of Registering an Out-of-State Entity

While foreign qualification of business is advantageous, it also comes with a few cons. Here are some of them:

  • There is no generic process; it varies depending on the state. Each state has its regulations. Thus, the paperwork and the steps you need to complete will depend on where you want to do business. You may also need to obtain additional business licenses and permits. It may be overwhelming and stressful if you are thinking of expanding your operations in multiple states.
  • You will have to pay fees. When you register a foreign LLC, you also have to pay the corresponding filing fees. The amount will vary from state to state. Aside from this, you may have annual renewal fees, so you will have to include those in your budget.
  • You will have to comply with the state. Foreign LLCs have reporting obligations. In some cases, the state may also impose taxes.
  • The liabilities that your company has as a foreign LLC may affect your operations in your home state since you are running a single business entity.

If you want to foreign qualify, you need to weigh your company’s circumstances. Make sure it will be beneficial for the growth of your business. If you need help with the process, contact a reliable third-party organization like DoMyLLC.