An entrepreneur who chooses to form a company has to decide which state to organize the business. Contrary to what some people may think, it does not necessarily have to be the place of residence of the company owner. It is also possible to do business in multiple states as long as you have a foreign limited liability company.
Understanding Home State and Foreign Qualification
The place where the company was originally organized will be its home state. For some companies, operating in that area alone is enough. However, there are instances when a company chooses to have business operations or brick-and-mortar locations in multiple states. When that happens, the company may need to register as a foreign entity.
In this case, foreign does not refer to a company originating from a different country. The reason for the terminology is because each state has its laws governing out-of-state businesses. So, if an LLC formed in one state wants to register in another, it will be considered a foreign limited liability company.
For instance, an LLC organized in Delaware that wants to do business in Nevada will be a foreign limited liability company in Nevada. However, not all activities require this registration.
Advantages of Being A Foreign Limited Liability Company
Foreign qualification comes with a lot of benefits. Here are some of them:
- The Legitimacy Of The Business – Once a company foreign qualifies, its business operations in the state will be registered. Aside from preventing any issues, that can also help build the credibility of the company. Consumers may be more willing to transact with an out-of-state company if it is authorized by the state.
- Taxation – Being a foreign LLC can help a company get its tax expenses under control, which is beneficial particularly for startups and small businesses. Additionally, tax requirements and rates vary per state.Some investors may also require registration in other states for tax purposes. They may be more willing to invest if they know that all of the company’s business activities are legal in all the states where it operates.
- Business Laws – Some companies choose to foreign qualify because of the possibility of doing business in states with well-regulated business processes and business-friendly environments.
- Investments – Companies that want to attract outside investments from various types of investors may have to foreign qualify in states that are known for offering better environments for raising capital. Many investors also look into the legal system of the state before they agree to invest.
- State Support – Some states acknowledge entrepreneurs by offering support to companies, especially startups and small-sized ventures. With a foreign qualification, it may be possible for a company to gain access to certain incentives and programs.
- Business Operations – While expansion comes with opportunities, it may also bring challenges. There may be an increase in expenses. Most business entities would love to find ways to save money. One way of doing that is through foreign qualification.Among the considerations of most entrepreneurs when choosing where to register and do certain business operations are lower taxes and access to resources for their operational and infrastructural needs. Access to a skilled workforce is also something LLCs need to consider.
Why a Company Needs Foreign Qualification
But, the big question is “when is foreign qualification necessary?”
The simple answer is that if an out-of-state company transacts business in a state, it will have to do so. Here are some common factors that can help determine whether an LLC is doing business in a certain state:
- The company has a physical presence, such as a store or factory, in the state.
- The LLC employs workers in the state.
- The business entity accepts orders in the state or is selling products that require the collection of sales taxes.
States require the foreign qualification of an LLC to make sure that the public can access certain information about a company that they will be dealing with. That often includes the name of the LLC, office address, and the name and address of the registered agent.
Additionally, registration is necessary to ensure that foreign business entities will not have an unfair advantage over domestic companies. Because of the qualification, states can impose similar tax and reporting requirements. It also makes it possible to facilitate service of process since foreign LLCs have to maintain a registered agent that the state can easily locate.
Companies that transact business in a state without foreign qualification will face penalties. Some state laws also impose fines on business owners. Additionally, failure to register will prevent a company from bringing a lawsuit or proceeding in state courts.
How To Foreign Qualify
Companies that think registering as a foreign LLC is advantageous for their business will have to go through a process. The steps will depend on state laws. But, typically, it involves the filing of formal paperwork and paying the corresponding fees.
The process is similar to forming an LLC in the home state. It requires compliance with naming regulations. For instance, a proper designator is necessary. It can be the phrase “Limited Liability Company” or any of its abbreviations.
The company name should also be distinguishable. The business entity may have to use a different one if another entity in the state is already using it.
Companies also need to appoint a registered agent. It can be an individual or a third-party organization. Read this article to find out what makes a good registered agent.
Most states may also require the submission of a Certificate of Good Standing or Existence from the home state of the company. Make sure to understand the requirements of the target state because there may be restrictions as to the validity of the certificate.
Business entities that find the process a bit overwhelming can get help from a reliable third-party organization like DoMyLLC. Contact us now to find out how your company can benefit from our services.