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If your company is physically expanding beyond your home state, you may be considered a foreign LLC and required to register in each state in which your LLC intends to conduct business.
Domestic LLC vs. Foreign LLC
A Limited Liability Company (LLC) is considered domestic in the state where it is formed. A foreign LLC is a Limited Liability Company created in one state and then registered as a foreign entity to conduct business in a different state.
For instance, if you form a Limited Liability Company in Illinois, your LLC would be considered domestic in Illinois, but considered as a foreign LLC in any other state in which the same business subsequently registers.
Your LLC must be registered as a foreign LLC before conducting business within the new state.
The process of registering your company in a new state in order to conduct business is referred to as “foreign qualification.”
Requiring out-of-state companies to qualify ensures that the state’s residents have access to basic information about the business entity. This information on record with the state is particularly important if a domestic entity or resident needs to serve legal process on the foreign entity.
Qualification also helps the state impose on foreign entities the same necessary tax and reporting required of domestic entities.
How Does a Company Foreign Qualify?
To foreign qualify, you should conduct a business name search in the new state to make sure the same name is not already registered. If a business with a similar name already exists, you can register a Doing Business As (DBA) name in your new state.
After conducting a name search, the next step to qualify is to submit a properly completed registration form to the Secretary of State’s Office for your state along with the necessary filing fee. This filing fee is typically higher than the registration fee for a domestic LLC and can range from $50.00-$750.00. Some states also require that foreign LLCs pay an annual renewal fee in order to maintain compliance.
Filing the appropriate qualification paperwork will yield a Certificate of Authority, a document that authorizes your company to transact business in the new state. Before granting this document, many states require a Certificate of Good Standing from your domestic state. The Certificate of Good Standing verifies that your company has met all the necessary requirements for a Limited Liability Company in your domestic state.
Although the type of information required to obtain a Certificate of Authority will differ by state, you should be prepared to provide the following:
- Company name
- Date and state of formation
- Name and address of your company’s registered agent in the state of qualification
- Name and addresses of LLC members/managers
- Description of your business’s purpose
- Financial information for your business
Another important step after qualifying is to designate a resident agent. A resident agent is an individual or entity in the state that can accept legal documents, tax notices, summons, subpoenas, etc. on behalf of a foreign entity.
When Does a Company Have to Foreign Qualify?
Every officially formed business (i.e., LLC, Corporation, Partnership) is required to register as a foreign business entity if conducting business in a new state. Sole proprietorships are not required to do so.
Each state has different rules to determine what is considered “conducting business.” This can make it hard to know for certain if you need to register as a foreign LLC. However, if your company satisfies the following criteria in a state other than its home state, you should most likely register as a foreign entity:
- Does your company have a physical presence in the state?
- Do any company employees work and/or live in the state?
- Does your company own real or tangible property in the state?
- Is there a company bank account or any other substantial financial assets in that state?
- Are there meetings between company officers, managers, or investors in that state?
- Does your company advertise primarily or exclusively in that state?
- To what degree does your company accept orders from that state?
It is important to note that, in general, doing business with another state only by internet without something more is not considered “conducting business.”
Consequences of Failing to Register
Most states impose a monetary penalty for failing to register as a foreign entity. Penalties range from $200.00-2,000.00, depending on the state.
In some states, failure to register could also result in limitations of the entity’s rights to pursue civil legal remedies against parties for breach of contract and other claims. Failure to register can also expose your business as well as any agents or employees associated with your business to personal financial liability. If you register after already commencing business in a new state, your company may be required to pay back taxes and other penalties accrued over the time you operated in that state without registration.