Foreign Qualification is the process of applying for permission to do business in a state that is not the home of your company Charter. A Delaware Corporation or Delaware LLC is considered a “foreign” company in other US states and is considered a “domestic” company inside Delaware.
How do I know if I need to Qualify in a state I do business in?
The answer is not cut-and-dry, but as a general rule, if you employ W-2 wage earning employees within a state, or if you have an office, home office, store or other business presence within a state, it is most likely that you will be required to Qualify your company to transact business as a "foreign corporation" or "foreign LLC" within that state. There are exceptions: if your only "business presence" within a state is sales through independent distributors, manufacturer’s representatives, wholesalers, or retailers; or internet order or mail order; this may be exempt under the laws of the state. Likewise, if your activity within a state is only occasional, and incidental to your interstate or international business, you may not be required to Qualify in that state.
The Commerce Clause of the U.S. Constitution prohibits US States from regulating Corporations involved in interstate commerce. “Inter-state” means between parties located in two or more states. “Intra-state” means within one state. Much of today’s internet driven business activity is interstate or international commerce. In the case of a multiple step business process in which one stage in the process consistently occurs within a particular state, a company must determine if it needs to register in that state. In determining if the business being transacted is interstate or intrastate, the court would typically consider the frequency of the business being transacted, and the level of involvement.
The laws vary by state, but most states provide a list of activities which do not require Qualification. The following list is not intended to be complete or comprehensive, and is not intended to replace the advice of an attorney, but for your general information, most states would not require Qualification for the following activities:
Some states do require Qualification for some of these activities, so it is necessary to review on a case-by-case basis.
- Engaging in Litigation
- Holding Board Meetings and other Internal Corporate Activities
- Maintaining Bank Accounts
- Maintaining Offices for the Transfer of Securities
- Selling through Independent Contractors
- Soliciting Orders by Mail or other Channels
- Creating or Acquiring Indebtedness and Securing or Collecting Debts
- Owning Real or Personal Property
- and Isolated Transactions.
In most cases, a company would not be required to register as a foreign entity in a state solely because an owner or investor lives within that state, if that owner or investor is not transacting business with parties within that state.
For example: "ABC Cotton, LLC" has two Members (owners). Bob owns a 60% membership interest in the company. Bob lives in
Mississippi and directs the operation of the company within
Mississippi and nationwide. Jane owns a 40% share and is a silent partner living in
Florida. Jane contributed start-up capital to the LLC but is not involved in directing the operation of the company and she does not transact any business of the company. "ABC Cotton, LLC" does not have any employees or offices in
Florida. Any sales to customers in
Florida are handled by Bob from
Mississippi. In this scenario, the business transactions described are INTER-STATE commerce, and as such, would not require ABC Cotton, LLC to register in
Florida as a foreign LLC.
What is the procedure to Qualify in an additional state?
If you need to qualify your Delaware company in an additional state, DBI can help you with the process at the same time the new Delaware company is formed, or later as the need arises. The procedure usually consists of completing an application form and filing proof of existence in the home state, by submitting either a Certified Copy or a Certificate of Good Standing. DBI will obtain these documents for you and complete them as part of the process.
For Example: If a Delaware LLC wanted permission to transact business as a foreign LLC in New York State it would submit an Application for a Certificate of Authority to Transact Business in the State of New York from the Division of Corporations of the New York Department of State together with a Certificate of Good Standing from the Delaware Secretary of State.
The authority who grants permission for foreign companies to do business within that state varies by state; typically it is the Secretary of State’s office but other possible authorities include: Commissioner of Commerce, Corporate Commission, Superintendent of Corporations, State Department of Assessments and Taxation, Secretary of The Commonwealth, Department of The Treasury, Department of Revenue, State Corporation Commission or Corporation Commissioner.
For some states the process will require DBI to collect additional information regarding your company and will require the signature of an officer on the application form; for other states DBI is able to complete the entire process without anything additional from you. The cost of qualification varies by state. Contact an Incorporation Specialist for a quote.
What happens after my company is Qualified in an additional state?
Most states will require you to maintain a Registered Agent in the state and most will require you to pay an annual tax and/or file an Annual Report. Some states will also require the publication of a notice regarding your company’s new authority to transact business in the state. DBI will inform you what is required for the state you are applying in. If you fail to meet the annual requirements you can loose your permission to do business in the state and may also be fined; if this occurs it may be necessary to file for reinstatement, which DBI can assist with.
Q: I sell my products or services over the internet and don’t really have a physical location. Do I have to qualify my company in every state? Do I have to qualify my company in any state? A: No; it is unlikely that your company would need to qualify in every state because most of your internet business activity will consist of transactions between parties in two different states and will therefore be exempt under the Interstate Commerce protections of the US Constitution. As to qualifying in any state: If you pay wages to an employee you will most likely need to qualify your business in the state where the employee works. If you regularly transact business with customers located in the same state where your business is located, you will most likely be required to register in that state because these transactions are not protected by the Interstate Commerce clause. If you run an internet business and you do not have an office, your home is usually considered your business location. If your business is located and operated entirely outside the US, it is unlikely that you would need to Qualify your Delaware company in any other US States.
Q: My bank says they can’t open an account for my company until I provide a Certificate of Authority. Can you provide this document to me? A: The truth is, most state laws do not require a company to Qualify for a Certificate of Authority to just to open a bank account; but many banks request one anyway. Banks make their own policies regarding what documentation is required to open a company account. If you are living in the same state you are banking in, you may need to Qualify your business in that state because you will be completing frequent business transactions there in addition to banking. If you will not have routine business transactions other than banking in that state, you may inquire with another bank to see if they will allow you to open a bank account without providing a Certificate of Authority. If you do need to satisfy this requirement for your bank, DBI can provide you a quote on the cost of applying for a Certificate of Authority (aka Qualifying) and an estimate of the time required to complete the process.
Disclaimer: This article is intended to provide general information about Qualification as a Foreign Corporation or Foreign LLC and is intended for informational purposes only. It is not intended to replace the advice of an attorney or tax accountant and does not constitute individualized legal advice, legal service, or tax advice. No representations or warranties, express or implied, are given regarding the legal, tax or other consequences resulting from the use of our services, including but not limited to information and/or forms. The information supplied by DBI is supplied only with the understanding that DBI and its employees, agents and/or representatives are not engaged in rendering legal services, legal advice, or tax advice. DBI expressly disclaims any liability, loss or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this information.