Foreign qualification is the process that a corporation or limited liability corportation (LLC) in the United States follows to carry out business legally in a state other than the one where the corporation was incorporated. It’s important to note that a foreign qualification is not related to international work; it only applies to interstate commerce.
When a corporation files an LLC in the U.S., the business is considered to be "domestic" in the state where the LLC was filed and "foreign" in other U.S. states. Filing for foreign qualification essentially asks for permission to do business in a new state and acknowledges that the new state may be able to impose certain taxation and reporting requirements.
All states require businesses to register if they want to do business in that state. If a company neglects to file a foreign qualification and receive a Certificate of Authority from the new state, then it does not have the legal authority to transact business within that state.
A failure to register means that the business could be penalized by the new state, and in some states the penalties can be severe. Additionally, failing to file for foreign qualification can increase a company's reputation risk in the new state, especially if the corporation is involved in legal proceedings.
There is an alternative to filing a foreign qualification. Instead of filing for a Certificate of Authority, it's possible to set up an entirely new business entity in the state where the company wants to do business. The compliance burden required for this approach can be complex, however, so it’s worth carefully administrative overhead before going down this road.
How to file for foreign qualification
Any LLC corporation or other business entity that wants to do business outside of its home state must take several steps to file a foreign qualification, including the following:
- See if the company name is available in the new state by searching the state's business register. If the name is available, reserve it. If not, register a business under a fictitious name, which is referred to in the filing as DBA (doing business as).
- Set up a Registered Agent Service in the desired state to accept legal documents and other relevant paperwork. Corporations must have a Registered Agent in each state where they want to do business.
- Obtain a Certificate of Good Standing to verify that the company has met compliance requirements in its state of origin.
- File foreign qualification documents with the new state. Typically, it takes at least 20 days to obtain a Certificate of Authority after filing for foreign qualification.