Doing Business in Another State: Foreign Qualification

While COVID-19 brought major disruption to the working world as we knew it, the pandemic also brought new opportunities for workers. With the rapid pivot to working remotely came the ability for workers to log on from almost anywhere with an internet connection. Working remotely was nothing new, of course. But prior to the pandemic, just 7% of civilian workers in the United States were able to work remotely — and many of those jobs were reserved for “the affluent few,” according to Pew Research. Now, with millions of Americans closing in on their second year of remote work, the trend is likely here to stay. As of September, Gallup saw that 45% of full-time employees were still working remotely and 9 out of 10 of them want to continue working remotely to some degree. One of the major benefits of remote work is that you don't have to live where your office is. People have taken advantage of visiting friends and family in other states and even exploring new locations across the country while working remotely. Depending on your company, where it’s located, and where your workers are logging on from, businesses big and small can be facing remote work compliance issues like these. What we’re talking about here is foreign qualification. This is the procedure that businesses often have to go through if they have employees working in a state that’s different from their registered one. Haven’t heard of foreign qualification before? Maybe you’re not quite sure how to approach such a seemingly daunting task? Perhaps you have employees who have sprawled out across the country and you’re now realizing they might want to keep things that way for a while. Whatever the reason, here’s a crash course in foreign qualification in the United States.

What is foreign qualification?

Don’t let the name fool you. Foreign qualification doesn’t have anything to do with international business. In this instance we’re talking about the state level in the U.S., which means that a business is “foreign” if it does business in any other state other than the one where the owner(s) incorporated it. For example, if you incorporated your LLC in Delaware, it’s technically a foreign business in any state other than Delaware. As Beth Lyden of the Dykema Gossett law firm explained in a recent webinar, “corporations are legal entities that are created under the laws of the state of incorporation.” A business exists, she says, “because of the laws of its own state, and it’s subject to regulation by its own state. So if a corporation is properly incorporated and only conducts business within its state of incorporation, it will not be subject to regulation by other states.” But if you have employees who are working in another state, things change legally speaking.

Conducting business in other states

Foreign qualification is the process of a business being allowed to conduct business in a state other than the one where it was created. These permissions, or qualifications, happen on the state level. If you incorporated your business in Delaware and you want to do business in New York and California, you’ll have to go through the foreign qualification processes in both California and New York. This is because states have different rules for the types of businesses they allow and don’t allow. “There are consequences when a corporation does business outside its state of formation,” Lyden says. “It will find itself subject to … suit in that state, taxation in that state, and they’ll be required to qualify to do business in that state.” While other business elements like taxation often overlap with foreign qualification, they’re not the same thing and one doesn’t necessarily include the other. Foreign qualification is simply getting the permission to operate in another state (although it may trigger other elements, like paying state or local taxes).

Foreign qualification is the process of a business being allowed to conduct business in a state other than the one where it was created. These permissions, or qualifications, happen on the state level.

How do I know if I need to file for foreign registration in another state?

Like many things, it all comes down to state law. Every state does it differently — some require registration while others are more worried about being able to tax businesses and are less concerned with registrations. Zack Beaver, also with Dykema Gossett, explained in the same webinar, “every state is going to have their own kind of qualifications and their own analysis on how that applies.” Beaver gives the example of South Dakota, a state that has set out to tax e-commerce companies that don’t have a physical presence in the state in order to generate more revenue. In this instance, the State of South Dakota decided that e-commerce companies are on the hook for taxes in the state, but they don't have to register as a business in the state. As you can see, it’s a bit complicated. There isn’t a hard and fast answer to determine whether or not you’ll need to register for foreign qualification in any given state because each state is different. The good thing, though, is that you only need to be concerned with states where you’re doing business or where you have employees working.

Determining whether or not you need foreign qualification

Some questions to ask in order to determine whether or not you need foreign qualification include:

• Am I doing business in another state?
• Do I have a physical location in another state?
• Do I have facilities, offices, stores, warehouses, or employees working in another state?
• Am I hiring an employee who resides in another state?
• Am I offering services, selling products, or competing for contracts in another state?
• Will I be applying for professional licenses in another state?

If you’ve said yes (or even maybe) to any of these questions, that should be enough to at least enlist the services of a lawyer in that state to help decide whether or not you need to register there. According to Harbor Compliance, there are, however, a few scenarios where foreign qualification is generally not required. Of course, you should always seek legal advice from a professional in the state in which you might be doing business, but some general scenarios include:

• One-off transactions that take place over less than 30 days
• Evaluating business prospects in another state
• Opening a bank account
• Engaging in a partnership or joint venture

How does foreign qualification work?

Because this is a state-level process, foreign qualification works differently in each state. The entity you’ll be dealing with in whichever state you want to qualify in will likely be the secretary of state’s office. Generally, this process requires some kind of certificate of good standing from the state where you incorporated your business. You’ll also likely need to have a registered agent who maintains a physical address and receives legal documents for your company. Like all state processes, the timelines and fees associated with foreign qualification vary from state to state. Some states can take several weeks to process the qualification, but there are generally options to expedite the process for a fee. In general, you can expect to spend between $100 and $300 on fees and processing costs in order to obtain a foreign qualification in another state. Once you go through the state’s particular foreign qualification process, the secretary of state’s office will issue your business a certificate of authority. This document (or another similar one depending on the state) is what allows you to do business in another state. Once you have this in hand, you’ve completed the foreign qualification process.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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