The word “foreign” can sometimes cause confusion here. Many business owners misinterpret it to mean business outside the United States, when actually it simply refers to a U.S. state in which a particular company is not based.

As your business grows, you may want to begin trading in other states – and that means you will probably need to go through the process needed for foreign qualification of your business in those states.

The first step in securing foreign qualification involves gaining a certificate of authority. In addition to this, you need to pay the necessary state fees. You may have to pay fees and taxes both in the state of formation as well as in the state of qualification.

This is in short registering your business within the boundaries of the foreign state. This way, the state knows about your business and grants you permission, and you also qualify for certain basic amenities within the state borders. Along with these, you are also bound by certain rules and regulations.

What are the basic stipulations required for trading in another state?

  • The company's physical presence in the state.
  • The presence of employees in the state.
  • The company's accepting of orders in the state.
  • The presence of a valid bank account in the state.

Different states have various criteria that need to be fulfilled before trading can begin, and it’s important to consult your attorney and tax adviser regarding all the requirements.

What happens if you don’t apply for foreign qualification of your business? Trading in other states requires additional financial resources , as there are ongoing fees imposed by both state of formation as well as the state of qualification. This may seem like an unwarranted burden, and you may be tempted to try and trade without applying for foreign qualification. However, if you understand the consequences of not qualifying, then you’ll realize how important it is. You’ll save yourself a great deal of trouble later by sticking to the rules!

Let’s look at some examples. During trading, if a client sues your company, you will not be able to defend the lawsuit in the states court system if your company has not foreign qualified in that state.

Your company may also incur additional taxes, penalties and fines for not notifying the authorities about your transaction of business in the concerned state.

Note however, that if you form a totally new LLC or corporation in the state in which you wish to trade, you won’t need to foreign qualify your business, because your ‘new’ company becomes a separate entity in each new state in which you incorporate (and it also secures a physical presence in these states). Bear in mind, however, that maintaining bylaws, scheduling meetings annually and submitting minutes to form corporate records are additional responsibilities. Plus, every corporation in each state may have separate shareholders, members and directors; which may create a large amount of record keeping requirements.

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