Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
While owning a business can be overwhelming and complicated, plenty of help is available. This article will walk you through the steps to filing a foreign entity, including the documents you may need before you file, maintaining your certificate of authority, and ways to make the process smooth.
This article will also cover what a foreign entity and qualification are, if and when you need to file a foreign qualification, why it’s important, and the risks of not filing.
What is a Foreign Entity?
“Foreign,” in this context, refers to a state other than your business’ domestic state, or the state you originally formed your business in – not another country. In turn, “entity” is just another name for your business. For example, if you form an entity in Georgia, your business is a foreign entity to every state besides Georgia.
On the other hand, your foreign qualification is paperwork that allows you to conduct business outside of your domestic state.
The terms for foreign qualification, and many of the documents and certificates named in this article, may have a different name in another state. Other terms for a foreign entity registration include foreign qualification and certificate of authority. Terms such as foreign entity or foreign LLC refer to your business.
Who Needs to File a Foreign Qualification?
Any business owner conducting business in a state other than their domestic state needs to file for a foreign qualification. Before you begin conducting business in a foreign state, you should also file to protect yourself from legal trouble, such as being sued or paying steep fines. You also need to file a foreign qualification for each new foreign state.
The most confusing part of deciding if you need a foreign qualification is determining what “conducting business” means.
With many requirements in this article, each state may have different standards on what they consider conducting business. Additionally, not every business activity equals “conducting business.” To simplify a complicated set of standards, some examples of conducting business in most states include:
- A physical store location in another state
- Shipping from or operating warehouses in another state
- Offices, bank accounts, or employees in another state
- Frequent meetings with clients in another state
The above is not an exhaustive list. A non-example of conducting business would be fulfilling an online order from a customer across state lines. If you are confused about individual state regulations and standards, research your target state or contact its Secretary of State.
Why is it Important?
Just as it is important to register legally in your domestic state, it’s equally important to register for a foreign qualification. In basic terms, obtaining a foreign qualification gives you the right to legally conduct business within that state.
States mostly require you to file your foreign entity so that it can be taxed and regulated the same as that state’s domestic businesses. This limits any unfair advantages for foreign entities. If you’re caught illegally conducting foreign business, the fines and other consequences could far surpass the time and money to go the legal route.
Not only does filing your foreign entity guards you against being subjected to fines, but it also gives you access to that state’s court system. In other words, if you don’t have a foreign qualification, if you face a lawsuit, you may be unable to defend yourself.
Additionally, you could be unable to sue customers for failure to pay, such as the case of Drake Manufacturing Company INC. vs. Polyflow INC. While Drake Manufacturing was initially allowed to sue, the decision was later overturned; they could not sue Polyflow for non-payment and lost over $300,000.
Before you File
Before filing for your foreign registration, first, there are crucial steps to take. This article will go in-depth regarding rights to your business’ name, obtaining a registered agent, your certificate of good standing, and formation documents.
Your Business’ Name
While your business name was available in your domestic state, that may not be true for your foreign state. First, search for availability in your target foreign state. You can most likely find this information on the Secretary of State’s website. If it’s available – great! Your next step would be to reserve your name, similar to what you did in your business’ domestic state.
Unfortunately, another business may already have rights to your desired name. In this case, you’ll need to use a new name for that state and repeat the above steps. This new name will be on your Certificate of Authority application. Either way, you’ll need to fill out forms and most likely pay a small fee to register your name.
Your next step is assigning a registered agent for your foreign entity. If you’re a current business owner, you already set this up in your domestic state, but you’ll need one for each new state.
A registered agent is a person or entity that receives certain documents – service of process documents, legal notices, tax forms, subpoenas, etc.) on behalf of your business. This person is appointed by you and can be anyone that meets the state’s standards.
Additionally, you can hire a service to act as your registered agent. Hiring an outside person or service takes away some of the burden owning a business entails.
Certificate of Good Standing
A certificate of good standing applies to your domestic state. It is also referred to as a certificate of status. It’s a document that proves your company legally exists within that state and complies with state law. It’s administered by the Secretary of State and is required for several actions, including:
- Obtaining a line of credit or bank account
- Doing business with some companies
- Obtaining a foreign qualification
Like many documents in this article, you’ll be paying a fee. Depending on your state or entity type, it will cost you a minimum of $5 and a maximum of $100.
Maintaining your Certificate of Good Standing
There are specific actions you need to take to stay in good standing, such as:
- Paying taxes
- Filing annual reports on time
Maintaining your good standing is important, even if you’re not filing a foreign entity. You’ll be subject to fines and fees if you fail to maintain. Additionally, you could lose certain legal protections.
Formation documents, like your certificate of good standing, apply to your domestic state. You should already have these if you’re a business owner. Other names for formation documents include articles of organization and certificate of organization.
The steps to have gotten these documents are similar to filing a foreign entity, including registering a name and hiring a registered agent. The information included in your formation documents would be the entity’s name, your registered agent, information about the entity’s owner, the entity’s address, date of formation, and more.
So, you’ve got your name registered, your registered agent hired, and formation and good standing documents ready to be sent out – great!
Your next step is to send this information to the foreign state agency, which may differ state by state. Along with this comes more fees and waiting times; both also vary by state. Additional documents you need may include a copy of your corporate bylaws and your operating agreement.
Just as you can hire a registered agent, you can also hire an outside foreign qualification service to get everything lined up for you.
Maintaining your Certificate of Authority
Your certificate of authority is just another fancy name for a foreign qualification. The document shows you are permitted to conduct business in that foreign state. Since each state has different regulations, there are varying actions you must take to maintain your foreign qualification depending on where you’re located. You’ll have to meet these state requirements annually.
State by State
As repeated throughout this article, each state has its own rules and regulations regarding foreign entities. Some states may have different names for the same document or require completely different documents to obtain your certificate of authority.
When confused, your safest and most reliable option is to either contact the Secretary of State or visit the website.
Just as with different document requirements, states also have varying fees for services and certificates. Fees for filing your foreign entity can cost anywhere from $100 to $500, depending on the state and your entity type. You can file online in some states but may have to mail in hard copies instead.
The Last Word
While the process of filing a foreign entity has many steps with confusing terminology and fees, it’s worth the trouble to learn it for the sake of your company. The fees and time spent here will save you even more money and trouble if you don’t register your foreign entity. Filing helps you avoid fines, fees, and potential lawsuits and rights to the state’s legal system.
You can hire an outside service to take some burden away from you for many of the steps.
Filed under: Advice Columns