Corporations, limited liability companies, and other business entities are considered domestic in their state of formation. In other states, they are generally considered foreign entities. If a company conducts business outside its state of formation, it may be required to register or qualify as a foreign entity in the state where business is being conducted.
Foreign qualification is the process of registering an existing entity to conduct business in a state other than its state of formation. Depending on the state and entity type, this registration may be referred to as an application for a Certificate of Authority, Certificate of Registration, Foreign Registration Statement, or similar authorization.
Foreign qualification does not create a new business entity. The company remains organized under the laws of its domestic state, but becomes authorized to conduct business in the foreign state.
There are many factors used to determine whether a company is transacting business in a state. The analysis is fact-specific and varies by jurisdiction. Some activities may require foreign qualification, while others may be specifically excluded from the definition of transacting business. New York, for example, notes that its statute provides only a nonexclusive list of activities that do not constitute doing business, such as holding meetings, maintaining bank accounts, and defending proceedings.
Activities That May Be Considered Transacting Business
Depending on the state, entity type, and facts involved, the following activities may indicate that a company is transacting business in another state:
- Maintaining an office, store, warehouse, or other physical business location in the state;
- Having employees, representatives, or agents regularly working in the state;
- Providing services or performing work in the state on an ongoing basis;
- Entering into repeated or regular contracts in the state;
- Owning, leasing, or managing real estate in the state;
- Maintaining inventory, equipment, or other business property in the state;
- Operating a retail, service, or professional business in the state;
- Installing, servicing, or maintaining products in the state;
- Conducting construction, contracting, or project-based work in the state;
- Soliciting and accepting business in the state on a regular basis;
- Holding required state or local licenses to conduct business activity in the state; or
- Otherwise carrying on regular, continuous, or systematic business activity in the state.
Some states provide statutory examples of activities that do constitute transacting business. For example, Massachusetts law states that a foreign corporation that transacts business or has a usual place of business in the Commonwealth must register, and includes ownership or leasing of real estate as an example of activity that constitutes transacting business.
Activities That May Not Be Considered Transacting Business
Many states also provide lists of activities that, by themselves, generally do not require foreign qualification. These lists vary by state and are often nonexclusive. Depending on the jurisdiction, the following activities alone may not be considered transacting business:
- Maintaining, defending, or settling a lawsuit or administrative proceeding;
- Holding meetings of shareholders, members, directors, managers, or other owners;
- Maintaining bank accounts;
- Maintaining offices or agencies for the transfer, exchange, or registration of securities;
- Selling through independent contractors;
- Soliciting or obtaining orders that must be accepted outside the state before becoming binding contracts;
- Creating or acquiring indebtedness, mortgages, or security interests;
- Securing or collecting debts;
- Owning, without more, real or personal property;
- Conducting an isolated transaction completed within a limited period of time;
- Conducting business in interstate commerce; or
- Merely having customers located in the state without additional in-state business activity.
For example, Nebraska’s statute lists several activities that do not constitute transacting business, including maintaining or defending proceedings, holding meetings, maintaining bank accounts, selling through independent contractors, and soliciting orders that require acceptance outside the state. Delaware also provides specific statutory exceptions, including certain mail-order or similar activities where orders are accepted outside Delaware and filled by shipping goods into the state.
These examples should be used only as general guidance. An activity that does not require foreign qualification in one state may be treated differently in another state, and a combination of activities may require registration even if one activity alone would not.
To qualify in another state, the company must generally file the required registration document with the appropriate state filing office and pay the applicable state filing fees. Many states also require evidence that the company exists and is in good standing in its domestic state. This evidence may be a Certificate of Good Standing, Certificate of Existence, Certificate of Status, or a similar document, depending on the terminology used by the domestic state.
In some cases, a certified copy of the company’s formation document, such as the Articles of Incorporation, Certificate of Incorporation, Articles of Organization, Certificate of Formation, or subsequent amendments, may also be required from the domestic state.
Most states require a foreign entity to maintain a registered agent and registered office in the state where it is qualifying. The registered agent is responsible for receiving service of process and certain official state communications on behalf of the company.
After foreign qualification, the company may be subject to ongoing requirements in the foreign state. These may include annual or biennial reports, registered agent fees, franchise taxes, tax registrations, business licenses, and other compliance obligations. These requirements vary by state, entity type, and the nature of the company’s activities.
Failure to qualify when required may result in penalties, late fees, interest, restrictions on maintaining a lawsuit in the state, or other consequences. The specific consequences vary by jurisdiction. For example, Delaware law states that failure to obtain authority does not impair the validity of contracts or prevent the foreign corporation from defending an action, but other consequences may still apply under the statute.
