Do you know what it means to file a foreign qualification for your business? Before you can answer this question, you must first ask yourself, “Which state should I incorporate in?”
An entity may choose from any of the 50 U.S. states or the District of Columbia for incorporation. Some entrepreneurs may want to operate their business in the same state as their entity formation. If this is the case, there’s no need to file a foreign qualification.
However, what about startups that want to do business in a state they did not incorporate in? If you want to legally operate your business in a state different from the one you incorporated in, you’ll need to file for a foreign qualification. Let’s take a look at what it means to “qualify” as a foreign corporation (as well as what it means to be a foreign corporation), the benefits of filing a foreign qualification, and the steps involved in the filing process.
Foreign Corporations: How Does My Business Qualify?
Here’s the quick scoop on foreign corporations, which tend to be more domestic than international, and how they tie in with filing foreign qualifications.
Let’s say there’s a small business that knows they want to operate their business in a state that’s different from their entity formation. They must “qualify” (or register) the business as a foreign corporation with the state they want to do business. Once the foreign corporation is authorized, the business is then registered, or qualified, in the new state. The company now has permission to do business in the new state, in addition to their home state.
Benefits Of Filing A Foreign Qualification
Some entrepreneurs may see their state of formation as their “home state.” Why would a small business want to operate and do business in another state? Let’s review a few common benefits for startups.
- Authority. Your business can conduct operations in this state — and is totally authorized to do so.
- Dealing with less complex business laws. Your home state may have more difficult business laws than you realize, or high tax rates and filing fees. Over the years, several states have emerged as “corporate darlings” to file a foreign qualification. Two of the biggest stalwarts continue to be Delaware and Nevada. Entrepreneurs often file with Delaware due to its flexible corporate laws, while Nevada boasts no corporate state or personal income taxes. Other states that are emerging corporate darlings? There’s South Dakota, a state that also has no corporate or personal income tax. Texas, with few filing requirements to keep up with in order to stay in compliance. And Wyoming, which only holds corporations formed in the state responsible for their federal income taxes. (No corporate or personal income taxes, franchise taxes, or enforced capital gains tax.)
- Expanding operations. Are sales strong in your home state? There’s a possibility they might be even better if you open another location in a new state! However, you’ll still need permission to operate the business in that state. This means filing a foreign qualification, which can ultimately provide a fantastic return on investment for the business.
Ready To File A Foreign Qualification?
Let’s get started in qualifying, or registering, your company to conduct business in another state! Here’s what you’ll need for filing a foreign qualification.
1. Form a corporation or LLC.
You might have already done this for your business. However, in the event that you haven’t now is the time to incorporate or form an LLC for your company. Remember that there are several benefits baked into incorporation. Your business receives liability protection, tax savings, and establishes credit quickly when you form a corporation or LLC.
2. Apply for a certificate of good standing.
A certificate of good standing is verification from the local Secretary of State that your business is in compliance. This certificate states that the business is in existence and has met all of its tax and filing obligations. The certificate of good standing must be obtained from the business’ state of formation.
3. Get a registered agent.
Registered agents (often abbreviated as RA) act as the point of contact between your business and the state. They accept official paperwork and private documents on behalf of the business, organize the materials, and discretely deliver them to the business owner. You may already have a registered agent in the state you do business. You will need to designate a registered agent in the new state. Remember: this RA must have a physical street address and be a resident of the next state you do business in!
4. File a foreign qualification form.
Now that you have all of your paperwork in order, you may start to file a foreign qualification form. This form allows you to file for permission to register your business as a foreign corporation.
A third-party service, like MyCorporation, is ready to assist you along the way. We’ll help you fill out the form and forward all necessary documents to you for your signature and personal review. The documents are then forwarded to the appropriate state agency.
What happens afterwards? If everything checks out with the state, you’ll receive a certificate of authority. This document designates your business as an authorized foreign corporation. Congratulations! Keep the mailed copy filed away for your personal records. You’re on your way to doing business in another state!