In the United States, a company referred to as foreign doesn’t indicate a connection to an international entity. So what then is a foreign LLC? Although the classification could be interpreted as a definition of a company registered in another country, under U.S. corporate law, this designation simply refers to a company that does business in a jurisdiction different from its formation state.
For instance, if you initially register an LLC in Illinois but later find the need to conduct transactions in Indiana, your company automatically becomes a foreign entity and has to be registered with every state where you plan to operate, even if the activity itself seems perfunctory. So when are you required to foreign-qualify your company?
When Should You Register as a Foreign LLC?
The rules that qualify an entity as foreign vary depending on the state. There is no standardized list of activities that constitute “doing business” which is what the state takes into account when evaluating an entity’s status. You can always check with your secretary of state to find out more about the foreign qualifications in your jurisdiction.
That said, your company will likely be seen as a foreign business if it has a tax presence in a state other than its registration state. An LLC is considered foreign by a state other than its home state if any of the following statements is true:
- It owns property in the state;
- It has physical locations tied to the business such as retail stores, distribution facilities, offices, warehouses, etc;
- It operates through a local sales agent or distributor;
- It holds a bank account;
- It has an official payroll, i.e. employs workers;
- It holds one or multiple state business licenses/permits;
- It holds business-related meetings (with customers, investors, managers, reps, etc);
- It processes orders in the state;
- It is subject to sales tax.
Keep in mind that rules are only a general estimation, and each state may have additional requirements that others don’t. It’s always a good idea to consult a qualified attorney about the nature of your business, especially if you aren’t sure whether your planned out-of-state activities could be classified as expansion.
Another important note on the subject of terminology is the IRS classification, which differs from that of corporate law. The agency views all businesses formed in the U.S. as domestic regardless of their activities outside of their home states. According to the IRS, a foreign entity is any business that was not formed under U.S. laws.
For instance, in the eyes of corporate law, an LLC registered in Illinois will be viewed as a foreign company by the government of any other state where it chooses to conduct transactions. By contrast, the IRS will still see such an entity as a domestic one since it operates under U.S. law regardless of the state. But if, say, you formed a company under Canadian law and then legally expanded to the U.S., the IRS will classify such an entity as foreign.
Steps to Foreign LLC Registration
Any non-domestic LLC whose activities in another state fall under the definition of doing business must register as a foreign company. Foreign qualifications are essential for regulating businesses. By registering as a foreign entity, the company provides the assurance of their legitimacy to the public.
In most states, this process is also necessary for maintaining a fair marketplace, specifically when it comes to domestic companies. If domestic LLCs must adhere to reporting requirements and are subject to state taxes, then any other entity making a profit in the state should also be held to the same standards.
Additionally, the registration helps establish reliable communication channels between the state and the company. Without it, it’s impossible to regulate any form of business effectively. Remember that failure to foreign qualify your company may lead to severe penalties and rob you of the right for litigation.
So how does one obtain a foreign registration?
1) Ensure the validity of your legal name
When you form a company in your home state, you are required to check your name availability prior to registration. While your name remains unique to you in your registration state, other states might already have entities that use the same or similar names. Before you file any qualification documents, it’s vital to run an availability search in the state’s database. If it’s available, you could go ahead with your registration or potentially reserve it for the time being. If it’s unavailable, your only option is to register a DBA (doing business as), which is a fictitious name that allows you to run your business without the need to create a whole new company.
2) Find a registered agent
As mentioned before, the state must be able to reach you at all times. This can only be done through a registered agent—an individual or entity acting as your company’s delegate, as it were. They handle daily communications, service of process, and correspondence. When you foreign qualify in a new state, you have to always appoint an agent authorized to work in that state. Much like the agent in your home state, their information is essential for completing the registration.
3) Obtain a certificate of good standing
In most cases, expansion to other states requires a certificate of good standing issued by your home state. Sometimes referred to as the certificate of status/existence, this document proves your company’s “good standing” in your registration state, meaning that the LLC has met all maintenance requirements like annual reporting, tax filings, etc. It’s virtually impossible to foreign qualify without it. If your LLC has lost its good standing, you have to first reinstate its status by submitting all missed reports (along with service fees) and catching up with your taxes.
4) File the certificate of authority
The document that qualifies your foreign company for conducting transactions in the state is similar to the Articles of Organization that you file upon the initial formation in your home state. The contents of the foreign registration statement differ based on the state, but the general information usually includes:
- Legal name and DBA;
- Date and state of formation;
- Present address in the state of qualification;
- Local registered agent information;
- LLC members information;
- Management structure;
- Authorizing signature.
Sometimes, you may also be required to provide other details such as information about your company’s assets, entity’s duration, financial statements, and more. The service fees for filing this document fluctuate greatly. The most expensive state for foreign registration is Texas where it costs a whopping $750, while the lowest fee available today is $50.
Domestic LLCs vs Foreign LLCs
In terms of US corporate law, the main distinction between domestic and foreign LLCs is in the place of their formation. While there are no hard qualifiers for the exact definition of a domestic entity, it usually describes any company, including an LLC, that was formed in a specific state and keeps all its operations in that state.
As soon as that company registers for doing business in another state, it is considered a foreign entity. It’s possible to qualify as a foreign LLC in multiple states, not just one. Many owners choose this method of expansion as opposed to creating multiple separate LLCs in other states. Operating as a foreign company is usually easier in terms of maintenance and can often be less costly.