Do you have clients in more than one state? Are you opening a sales office across the country? Did you incorporate in Delaware, but live in California?
If you do business in a state other than where you incorporated or formed an LLC, you may need to register in that state. Yet many small businesses aren’t aware of this requirement at all, or are confused if it applies to their situation. If you answer "yes'' to any of the following questions, you most likely need to register your business in the state:
Does your LLC or corporation have a physical presence in the state (i.e. office, restaurant, or retail store)?
Do you hold property in the state?
Do you have any W2 employees in the state?
Does your company have a bank account in the state?
Are you required to hold any special licensing in the state?
Will you be shipping products from within the state? (i.e. do you have a warehouse in the state)
Did you incorporate your business in a state other than where you live/are physically located?
For example, if you incorporated your business in Delaware because of its business-friendly statutes but you actually live and work in California, then you will need to register the business in California. Or, if your business is incorporated in New York and you hire a new direct sales person in Washington, you’ll need to register in Washington.
Keep in mind that if you’re engaged in interstate business, you won’t need to register in other states. A common example is selling goods online. If you sell and ship merchandise from your home state to customers in other states, you won’t need to register in those other states. However, if you open a warehouse in another state and ship goods from the warehouse to customers in that same state, you will need to register there.
Foreign qualification. The term “foreign qualification” may sound like something an international company must do, but it’s simply how you register to do business in a state other than the one where you incorporated/formed an LLC.
By foreign qualifying, you are essentially notifying the state that you will be conducting business within its borders. To foreign qualify, you will need to submit a Certificate of Authority application with the state’s Secretary of State office.
While the paperwork is relatively straightforward, some states will require that you have a certificate of good standing from your home state. This means you will need to be up to date on your state taxes and filings. In addition, keep in mind that once you foreign qualify, you will be required to file annual reports, fees, and taxes in the state of qualification (in addition to your state of incorporation).
The benefit of foreign qualifying is that you have one corporation or LLC, versus having separate corporations in each state. This simplifies the administration of running a business, as you only need one set of bylaws, board of directors, officers, etc. And you only need to hold one annual meeting each year and keep one set of meeting minutes.
However, in some cases, savvy business owners will form a new corporation or LLC when expanding into another state. That’s because they want to separate the liability between each venture. If one location faces trouble and is forced into bankruptcy, the assets of the other location are shielded and won’t have to be used to pay for the troubled location.
If you don’t register your business, either by foreign qualifying or forming a new corporation/LLC, you could end up owing fines, interest and back taxes. You can also lose the ability to sue in a state where you’re not properly registered. Get your paperwork in before you set up shop in a new state. It’s a relatively simple process that can save you from any headaches down the road.
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