Your business is growing and you’d like to open a new division or branch in a nearby state—known as foreign qualifications.
It can often be confusing, especially for corporations and limited liability companies (LLCs) because both are considered “domestic” only to the state in which they are incorporated.
If you plan to do business in another state, you need to register to do business in that state, which is “foreign” to the incorporated state.
Here are five things to take into consideration before making the move.
- State Taxes and Fees: When you register for the Certificate of Authority in another state, your business is required to file state taxes and fees in the new state, as well in the state of incorporation. If you fail to register, your company may be liable for fines, penalties, and back taxes for doing business in that state.
- Employees, Physical Presence, Bank Accounts, and Purchase Orders: Each of those items determine if the company qualifies as a foreign business within a state. If you have one or more of those criteria, then the company needs to foreign qualify. However, speak with an attorney and/or accountant before making any assumptions.
- Legal Defense: If you’re doing business in a state that the company is not qualified to do business within, you cannot defend the lawsuit in that state because your company is not qualified to do business there.
- Liability Separation: If you decide to open a new branch of the company under a new LLC or Corporation, you may have liability separation in each state. That means if a state-division LLC filed for bankruptcy, the company assets in other states would not be used to pay for the bankruptcy issues in the troubled division’s state.
- Annual Reports: Whether you have shareholders or not, companies still need to file an annual report. Both domestic and foreign corporations and LLCs must file an annual report.
If you’re considering opening another branch or division of your company, or even working in another state, we recommend that you speak with your legal counsel before doing any work there. Also, your accountant should be informed of any foreign qualification to help ensure you’re paying the proper taxes and fees in each state as those fees can be different from state to state.
These decisions may be made on a case-by-case basis. Contact us if you’re considering this step. We’re here to help move your company forward.