What Happens If You Don't Register as a Foreign Corporation?


What Happens If You Don't Register as a Foreign Corporation?

When it comes to doing business outside your home state, ignorance is not an excuse for failing to follow the rules and apply for the necessary qualifications. If you are considering growing your business and working in another state — or across multiple states — then something is going right for you. Odds are that business is good and you are expanding the reach of your company. But risking what you’ve worked so hard to build should not be a factor in the growth equation.

Business owners looking to expand outside the borders of their home state will need to apply for a Foreign Qualification. So how do you do that, and what are the consequences of not registering as a foreign business and failing to abide by the rules?

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What Is a Foreign Qualification?

The term “foreign” may be a bit confusing when it comes to your Foreign Qualification or operating your business as a foreign entity. Most may reason that it involves conducting business from another country, but that’s not the case. It would actually make more sense if it was called an “Out-of-State Qualification” since that is what it really is.

A Foreign Qualification is required when an LLC or corporation wants to conduct business in another state. A business’s home state is considered their “domestic” state. That’s where they filed for their business formation. States outside the domestic state are considered foreign states. And if you want to do business beyond your home state's borders, you’ll need to first go to the foreign state's Secretary of State website and find the requirements of “doing business” outside your domestic state.

How to File a Foreign Business Registration

So what does your business need to “qualify” as a foreign entity in another state? Just check out the list below, which includes the information all states typically require for Foreign Qualification. Once you confirm the requirements of the foreign state you want to do business in, the next steps include:

  1. Making sure that your business is in good standing within your home state. If it isn’t, odds are you’ll be denied a Foreign Qualification in another state.
  2. Conducting a business name search to ensure that your business name is available. If your name is taken, then you’ll need to apply for a DBA.
  3. Designating a Registered Agent for your foreign state.
  4. Applying for a Certificate of Authority. This may include the need to provide additional documentation, including your Certificate of Good Standing (see point 1), bylaws and Operating Agreement.
  5. Filing your Foreign Qualification.

Once approved, which may take between one to two months, you can start conducting business in your foreign state. If in a rush, most states will expedite the process for an additional fee.

Risks of Not Filing for a Foreign Qualification

Not all businesses need to apply for Foreign Qualification. It all depends. If you have a brick-and-mortar business in your home state and conduct ecommerce with a customer in another state, then you will not need to apply for Foreign Qualification as long as you do not have a fulfillment center in a different state. The same goes if you are a freelancer and have clients across the country. But when it comes to which businesses should file as a Foreign LLC, the following will highlight what's usually considered “doing business.”

  • You have a physical location in another state.
  • You have employees working for you in a different state.
  • You frequently travel and conduct business outside your home state.
  • You conduct banking within the foreign state.
  • You have a business partner based in a foreign state.
  • You applied for business licenses outside your domestic state.

If your business is doing any of the above without having filed and received approval for a Foreign Qualification, then you are functioning as an illegal business entity within the foreign state, and in doing so, have put your business at risk. Not filing for a Foreign Qualification comes with penalties and consequences that can include:

  • Losing legal protection, including the inability to file for a lawsuit within the foreign state
  • Paying back taxes for the entire time you’ve been operating illegally in a foreign state
  • Fines and penalties against the company
  • Penalties imposed on the directors, board members and Registered Agent
  • Inability to apply for loans and other financing at banks or financial institutions
  • Loss of your Certificate of Good Standing and your limited liability status

Just like operating a business in your home state, conducting business in a foreign state means that you need to ensure that your LLC is in good standing. Receiving Foreign Qualification approval is the first step. You are still responsible for paying annual fees and submitting annual reports. You’ll also need to respond to state and tax notifications as well as legal correspondence including summonses, which is why you will need a dedicated Registered Agent in the foreign state. Failure to meet the obligations of your business can also cause you to lose your foreign qualification.

If a penalty was already incurred, you have very limited options beyond paying the fine and initiating your filing to gain Foreign Qualification. Since you are not recognized by the state as a legal foreign entity, there is little to no recourse in the courts to fight fees and penalties incurred by non-compliance. Even applying for a Foreign Qualification may be more challenging. Should your company fall in bad standing, reinstating your business and gaining Foreign Qualification may be both time-consuming and costly.

Getting Help with Foreign Qualification

There's a lot to lose if you neglect filing for a Foreign Qualification. For most small business owners working day-to-day and managing a business, it's often helpful to get support from a professional who knows the ins and outs of company compliance.

Since 2004, Incfile has helped over 500,000 business owners with their business formation and compliance needs and can also help you file a Foreign Business Qualification. Let Incfile take care of the business so you can focus on your plans of growth and expansion.

Moving or Want to do Business in Another State or Multiple States? Incfile can get you the Foreign Qualification you need.

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