What Is Foreign Qualification & When Is It Needed?

June 1, 2019

As your business or your clients’ businesses grow, the need for foreign qualification and foreign qualification filings will grow in tandem. When you incorporate a business entity in a state, you are permitted to do business in that state. When the time comes to make a significant expansion into a new state in terms of office space, talent acquisition, or long-term business, foreign qualification becomes important.

In this blog, we’ll be discussing what foreign qualification is, when it’s required, when it isn’t required, how to acquire it, and what could happen to your business if you need foreign qualification but choose not to qualify.


What Is Foreign Qualification?

Foreign qualification itself refers to registering your business in a new state.

Specifically, you’re registering your business with the Secretary of State office of the state in which you’d like to do business. This is done to ensure state compliance without having to re-incorporate your business entity every single time you enter a new state.

If you successfully submit your foreign qualification filing, you’ll receive a Certificate of Authority from the state’s Secretary of State office and will then be able to handle tasks like tax registration, state businesses licensure, and much more. It’s important to note that foreign qualification is far from the only compliance step when entering a new state, it’s simply the first step.

Once active in the new state or jurisdiction, you must establish a registered agent, comply with state-specific annual report due dates, and maintain state-specific compliance.


When Is Foreign Qualification Required?

Not all types of business activity in a state other than your own requires foreign qualification.

If you don’t live in the world of corporate law or accounting, the lines can become very blurred very quickly. If you’re ever unsure of whether foreign qualification is required in your specific instance, you should seek the counsel of your legal team.

As high-level guidelines, some of the most common reasons why a business would require foreign qualification include if you are:

  • Establishing a Physical Presence in a New State (Office Space or Retail Storefront)
  • Purchasing Property in a New State
  • Applying for a Business License in a New State
  • Conducting Face-To-Face Business in a New State
  • Earning a Substantial Proportion of Revenue in a New State
  • Hiring Employees Who Work in or are Residents of a New State

As we stated, this is far from a comprehensive list, so be sure to seek legal counsel if you’re unsure of the status of your business.


When Is Foreign Qualification Not Required?

This answer comes with the same caveat mentioned above and is in some ways more vague. This is not a comprehensive list nor does this constitute legal advice. You’re likely to not need foreign qualification if you are:

  • Conducting Isolated Transactions & Activities
  • Evaluating the Possibility of New Business
  • Handling Business Completely Digitally
  • Providing Services or Products Without a Physical Presence
  • Just Opening a Bank Account
  • Pursuing Wholesale Relationships
  • Engaging in a Partnership or Joint Venture

To put it simply, just because you may be making money from clients in another state does not inherently mean that you must file for foreign qualification. However, especially in the digital age, it can be difficult to draw clear lines. Always confirm with your legal team.


What Happens If A Business Fails To Foreign Qualify?

The legal answer to this question is simple. If you’re required to foreign qualify in a state, fail to do so, and conduct business anyway, you’re out of compliance and operating illegally in that state. A short list of consequences for operating illegally include:

  • Facing Fines, Interest, and Filing Fees Owed to the State
  • Not Being Able to Sue in the State
  • Owing Substantial Back Taxes

How Does A Business Foreign Qualify?

Rather than working with a state directly to handle this legal transaction, we encourage businesses to choose a partner like Legalinc to ensure the foreign qualification is handled efficiently and accurately.

Through Legalinc’s all-digital platform you can foreign qualify in any state with any entity type in just minutes. In addition to answering questions the state requires for foreign qualification, the business entity must also supply a Certificate of Good Standing from their current state, which Legalinc can also procure digitally.

One critical step when foreign qualifying is establishing a registered agent in the jurisdiction in which you’ll be doing business in this new state. When foreign qualifying through Legalinc, you’ll be prompted to establish this registered agent while actually completing your digital paperwork. Legalinc offers the only all-digital registered agent platform serving all 50 states, so no matter where you’re doing business, you’re covered.

We make foreign qualification pricing extremely transparent, with all foreign qualifications starting at $99 plus additional state fees that vary from state to state. No matter what, you’ll see a running total and an itemized list of costs as you proceed during the process.

Once you receive your Certificate of Authority and successfully establish your registered agent, you’ll be all clear to begin growing in this new territory!

We hope our high-level overview of foreign qualification sheds some light on this critical compliance task. If you have any questions, feel free to reach out to our team today. If you’re ready to foreign qualify your business in a new state, you can get started right away by creating your free Legalinc account!

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