What is a Foreign LLC?
When starting a business, there are many different options to choose from. One option that may be unfamiliar to some is whether they need to register their business to operate in multiple states.
A foreign LLC is a term that refers to an out-of-state LLC wanting to be physically present and operating in another state. If your company is physically expanding beyond your home state, you may be considered a foreign LLC and are required to register in each state in which your LLC intends to conduct business.
In this article, we will explore what a foreign LLC is and when to use one.
What is a Domestic 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 a domestic LLC in Illinois, but considered as a foreign LLC in any other state in which the same business subsequently registers.
Your Limited Liability Company must be registered as a foreign LLC with the Secretary of State in the new state before conducting business within the new state.
Related: What is a domestic LLC?
How do you register as a foreign LLC?
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 in a foreign state ensures the state’s residents have access to basic information about the business entity and the state on the business activities of the LLC. This information on record with the state is particularly important if a domestic entity or resident needs to serve legal process on the foreign Limited Liability Company. Foreign qualification also helps the state impose the same necessary sales tax, franchise tax, and reporting required of domestic entities, such as the annual report.
As a part of the registration process, many states will also require a Certificate of Existence, which proves the LLC is in good standing in its home state.
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-$750. Some states also require that a foreign Limited Liability Company pay an annual renewal fee in order to maintain compliance.
Filing the appropriate qualification paperwork will yield a Certificate of Authority or a Foreign Registration Statement, which is 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 of the company’s registered agent and registered office address
- 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 transacting 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” or “transacting 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 do a foreign registration:
- 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 in another state only via online sales 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 LLC. Penalties range from $200-$2,000, 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.