There are many reasons why someone that has a business in one state may want to open up a business in a different state. And as odd as this may sound, this move is actually considered doing business in a “foreign” state! To do so, a business owner will need to apply for foreign qualification.
Now let’s take it a step further where a non-resident living in another country — in other words, a "foreigner" with a definition that’s more apropos) — would like to start their businesses by forming an LLC in the U.S. This would represent another process of creating an LLC, which is complicated even further considering that the business owner is not a U.S. citizen or resident. In this case, we are talking about a foreign-owned business.
Though it’s not impossible for someone from a different state or living in a different country to start an LLC, there are several hurdles and requirements. Let’s break it down a little further to better understand the differences between a foreign qualification compared to the steps required to create and run a foreign-owned business.
Foreign Qualification vs. Foreign-Owned Business
If you are a U.S. resident business owner within the United States and you want to expand and open your business in another state, you need to apply for a foreign qualification. This phrase may sound like it involves conducting business from another country, but that’s not the case. The term would make more sense if it was called an "Out-of-State" Qualification since that is what it really is. A foreign qualification is required if an LLC or corporation wants to conduct business in that different (AKA “foreign”) state.
When it comes to establishing a foreign-owned business, foreign persons can own an LLC (Limited Liability Company) in the U.S., even if they do not reside in the U.S. There are no requirements for owners of an LLC to be citizens or residents of the U.S. But, that’s not to say that restrictions and special requirements don't exist (more on further down).
Another important piece of information: LLCs can also be owned by other corporate entities. So if you are a foreign person who already owns a business, you can create an LLC in the U.S. that serves as part of your overall "family" of companies.
However, if you are a foreign national who does not reside in the U.S. and does not have legal status to work in the U.S., you don’t have to be the sole owner of your LLC. You might want to partner with a U.S. citizen or legal resident of the U.S. (or another LLC owned by a U.S. citizen/legal resident) in order to share legal ownership of your U.S.-based LLC. Luckily, the LLC gives great flexibility for ownership structure, even for foreign owners.
Whether you're a U.S. resident looking to do business in a new state, or a non-U.S. resident looking to form an LLC, we have all the details on how to start your business.
Part I: Opening a Business in Another State — Foreign Qualification
When you form a business in a state, that state is considered your “domestic” state. Most small business owners form their LLC in the state where they reside. But that doesn’t necessarily need to be the case as many business owners cross state lines and commute beyond state borders to go to work. Still, your “domestic” state is the location where you operate your business. This can include a brick-and-mortar store, office, or warehouse.
A state that is other than your domestic state is regarded as a "foreign" state. This is because it is outside the jurisdiction of your home/domestic state where you formed and registered your business.
If you want to move your business to another state or expand to a different state, you’ll need to apply for a Foreign Qualification. This is accomplished by visiting the “foreign” state's Secretary of State website and learning about requirements of “doing business” beyond your home state.
How to File a Foreign Business Registration
Since 2004, Incfile has supported business owners looking to expand into another state or multiple states and can help make this plan a reality. If you're wondering what a business needs to “qualify” as a foreign entity in another state, our Foreign Qualification service will break take care of all the steps for you. If you’re not ready to make the move yet and want to learn more, just check out the list below.
For foreign qualification, you will need the following:
- Make sure that your business is in good standing within your home state. Being a business in "good standing" means that you have followed all the registration requirements for your business, paid all the required fees, and are legally conducting business in the state. If your business has failed to keep up with annual filing requirements, make payments or you are dealing with legal matters, odds are you’ll be denied a foreign qualification in another state until these are addressed and resolved.
- Conduct a name search to ensure that your business name is available. Pick the right name and make sure it's not already used by another business in a similar sector. If your name is taken, then you’ll need to apply for a DBA.
- Designate a Registered Agent for your foreign state. All 50 states have this as a requirement!
- Apply for a Certificate of Authority, which would include your Certificate of Good Standing.
- File for a foreign qualification. The paperwork will likely be found on the state's Secretary of State website.
The filing process may take as long as 2-3 months to complete, but once approval is received, you can start conducting business in your foreign state.
How to Know If You Need to File for Foreign Qualification
Whether or not you need to apply for a foreign qualification will all depend. Fact is, not all businesses need one to operate legally. If you own a brick-and-mortar business in your home state, but now want to expand into ecommerce, then you will likely not need to apply for foreign qualification — as long as you do not have a store or warehouse in a different state. Freelancers also do not have to worry about applying for foreign qualification, especially since most freelancers have clients in multiple states.
Now that we established who doesn’t need a foreign qualification, let’s look at who does need one. Here’s a breakdown covering when you should apply for your foreign qualification:
What Happens If You Don’t File for Foreign Qualification?
Conducting business in a state outside your domestic state without taking the necessary steps and completing your foreign qualification can put your business in jeopardy. Without the foreign state’s approval and acceptance of qualification, you are operating as an illegal entity within that foreign state.
To put it plainly, by not having completed the foreign qualification process, you are essentially running your business illegally and without state approval. This can come with significant risks and consequences, including:
- Being barred from using the state’s court system, effectively losing legal protection, including the inability to file a lawsuit within the foreign state
- Monetary penalties, including fees and fines that will vary by state
- Owing back taxes for business conducted during the time you operated as an illegal entity in the foreign state
- Losing access to bank lending/funding and the inability to apply for loans with other financing institutions
- Losing your limited liability status and Certificate of Good Standing
- Dissolution of your business
To avoid the consequences listed above, steps must be taken to ensure that your LLC is in good standing in your new, foreign state. The first important step is to gain foreign qualification approval. Once that’s accomplished, you’ll need to conduct business responsibly and follow all of the state’s requirements in maintaining good standing, including paying annual fees, submitting annual reports, responding to state and tax notifications and having a dedicated Registered Agent assigned to your business. By not meeting these obligations, you may put your business at risk and lose your opportunity to move or expand your company through foreign qualification.
Part II: Forming an LLC as a Non-U.S. Resident
Now that we know what to do when it comes to opening a business in another state other than your home state, let’s move on to the next part of this article: forming an LLC as a non-resident.
Requirements for Forming a Business Entity as a Non-Resident
For the purposes of the second part of this blog, let’s assume that you are a non-U.S. citizen and are looking to form a business in the United States. Once you know the type of business you want to run, select a business name, and do your due diligence to make sure that name is available. Once that’s off your "to-do" list, the next steps for completing your business formation application will require the following:
Step 1: Obtain the Appropriate Visa from the U.S. Government
If you are a non-resident and intend on starting a business in the U.S., the first thing you’ll need is a visa. This may consist of an E-2 Treaty Investor Visa or an EB-5 Visa. An E-2 Treaty Visa will allow you to travel to U.S. and back for work as long as the United States has a treaty of commerce and navigation with your country of citizenship.
Step 2: Choose Your State of Formation
The United States is a huge country covering thousands of miles. That said, you have your pick of climates from tropical to polar and everything in between. Picking the right location can depend on the type of business you want to establish. It can also depend on the costs involved in setting up your business, including the cost of doing business (fees, rent, taxes, etc.) Take the time to research the state where you will begin your business formation process. Your business will need to follow the laws of that state, including paying taxes and annual fees, for as long as your business is running.
Step 3: Get an ITIN
Non-residents do not have a social security number, but they can apply for an Individual Taxpayer Identification Number (ITIN). Having an ITN will then allow them to acquire an Employer Identification Number, which is required for owning and operating a business.
Step 4: Apply for an Employer Identification Number (EIN)
With your ITIN, you can apply for an Employer Identification Number (EIN) by filling out and submitting Form SS-4. The EIN identifies you as an employer within the United States to the federal government. It’s like having a Social Security number, but the EIN is specifically assigned to your business.
Step 5: Hire a Registered Agent
You will need to assign a Registered Agent within the state where you formed your business. Your Registered Agent can be an individual or a company that will accept all of your important documents and acts as a representative for your company within the state. Having a Registered Agent is mandatory. They must also have a physical location and be available during business hours in case the government or court needs to contact you.
Make sure to follow the steps above and use the checklist provided below. And don’t forget to complete your state filing and submit your application. Once the application for your business entity has been filed, it can take several weeks to complete the process. If you’re in a rush, you can expedite the process and shave off a few weeks, though that comes with an added cost of as high as several hundred dollars tacked on to any other filling fees.
Types of Businesses a Non-Resident Can Form
Corporations are required to be owned by citizens or resident aliens. This is because an owner must reside in the jurisdiction, or have a physical presence, in order to be incorporated. This is to ensure that the business is invested in the community for tax purposes. Although foreign persons can be shareholders of a C Corporation, unfortunately, they cannot be an owner of an S Corporation. (S Corp are pass-through entities and allow filers to apply against their personal taxes. In short: Your business taxes can "pass through" to your personal taxes.)
Most states allow for the formation and ownership of a Limited Liability Company (LLC) to anyone, including a non-U.S. resident. Luckily, this means that an interested entrepreneur that is not a resident within the jurisdiction of their business can incorporate as an LLC and run the company within U.S. tax codes without actually living here. Depending on the state, however, there may be certain state-specific restrictions that must be followed.
Should the LLC require permits and licenses within the state, then those guidelines must be met in order to legally run the business in the U.S. In addition to forming a business as an LLC, non-residents can also choose to form a corporation, partnership or sole-proprietorship.
If a foreign owner qualifies as a "resident alien" under tax codes, they can participate in the formation of LLCs and corporations as owners, managers or shareholders. To be considered a resident alien, a foreign investor or entrepreneur must meet the criteria for either a green card or maintain a substantial presence test within the country for the calendar year.
Tax Reporting Requirements for Foreign-owned LLCs
Starting in 2017, the Treasury Department and IRS announced new regulations for “domestic disregarded entities with foreign owners” (this could include foreign-owned LLCs, which are typically treated as “disregarded entities” for tax purposes). The new regulations require these foreign-owned disregarded entities to file IRS Form 5472 to identify the companies’ foreign owners and report certain transactions.
This is part of an attempt by U.S. authorities to “combat tax evasion and money laundering across borders and make it harder for foreign nationals to use U.S. shell companies to hide assets from tax authorities back home.”
Form 5472 filing obligation for a domestic disregarded entity" includes:
- Property sales
- Remunerated services
- Amounts paid/received in connection with the formation, dissolution, acquisition, and disposition of the entity.
This means that even funding the LLC with a loan or initial contribution would trigger the Form 5472 filing obligation.
Make sure to talk to your accountant, tax attorney or another professional tax adviser for the latest updates and advice pertinent to your situation with running a business or starting an LLC as a foreign business owner. Being a foreign owner of a U.S. LLC can entail certain obligations and reporting requirements that might be different from the rules of your own home country, and it’s important to stay compliant with the latest U.S. regulations.
Need Help Getting a Foreign Qualification or Starting a Foreign-Owned Business?
If you want to open a business in another state or start a business as a non-U.S. resident, Incfile can help! We have several packages available, including premium services and value-added options like a free business tax consultation, assistance with obtaining an EIN, getting foreign qualified and more. Start today and learn more about how Incfile can help you form an LLC.