October 23, 2023

Foreign qualification guide

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The American federal system comes with significant consequences for business owners, and foreign qualification is near the top of the list. While some countries allow business to incorporate once and operate in any location, US businesses must re-register each time they start operating in a new state. This process is known as foreign qualification.

Foreign qualification rules can be extremely confusing, and even seemingly small compliance issues can lead to big consequences. In this article, we’ll explain when you need to file for foreign qualification, walk you through the process, and help you keep your business fully compliant with all state regulations.

What is foreign qualification?

Foreign qualification is the process of registering to do business in a state other than the state in which your company is incorporated. For example, if your business operates in Delaware and is also incorporated there, you will need to file a foreign qualification in order to start operating in California.

The advantage of foreign qualification is that you can register your existing business instead of forming a new entity in each state. This is the much simpler and more affordable way to expand across state lines.

Every state mandates foreign qualification so they can manage business reporting and tax requirements. Foreign qualification is sometimes known by other names. For example, the New York State government provides Certificate of Authority, which is equivalent to foreign qualification in other states.

Similarly, each state has its own unique fees and processes. For example, Hawaii allows foreign qualification for less than $80, while Idaho charges a fee of $255. Click here to learn more about the different requirements and filing options in each state.

When do I have to foreign qualify in another state?

One of the most common questions we receive is whether businesses can operate in a state without filing for foreign qualification there. Unfortunately, this isn’t always clear, especially since different states have different rules about what exactly counts as “operation.”

In general, you should file foreign qualification if you find yourself in any of the following situations:

You want to hire an employee who lives in another state
You want to buy an office, storefront, or other physical property for your business in another state
You want to receive a professional license in another state
You want to sell products or services in another state

On the other hand, these circumstances are less likely to require foreign qualification:

Performing an isolated transaction (e.g. buying from another supplier in a pinch)
Opening or maintaining a bank account
Holding corporate meetings without ongoing operations in that state

These regulations can be tough to keep track of, especially if you start operating in a number of different states. Don’t hesitate to contact our team if you have any questions about how foreign qualification rules apply to your business.

What if I don’t file for foreign qualification?

Operating in a state where your business isn't registered can lead to significant compliance issues. While the specific penalties vary by state, it's always a good idea to file for foreign qualification as soon as your operations begin.

‍California, for example, charges a $20 fee every day a business operates without a valid certificate from the Secretary of State. The state can also prosecute companies for willful non-compliance with penalties determined on a case-by-case basis.

Furthermore, California and many other states prevent businesses from bringing lawsuits in the jurisdiction until they become compliant. This means that you could be left without legal recourse if something happens to your business.

You may get a chance to do so before filing suit, but you don’t want to have to be at the mercy of the state government. Don’t risk late fees, legal issues, or other penalties by failing to meet the foreign qualification requirements.

How to file for foreign qualification

You won’t be able to do business in a new state until your foreign qualification is approved. With that in mind, it’s a good idea to start the process as soon as you think it might be necessary.

When you file for foreign qualification, you will also need to designate an individual to serve as your registered agent in that state. Firstbase Agent can provide a registered agent for your business and handle all foreign qualification paperwork in all 50 states.

Most states charge a fee for foreign qualification. Some states also require specific documents, such as a certificate of good standing from your home state.

Each state has its own rules, but there are four steps that you should expect in every state:

See if the state you’d like to register in requires a certificate of good standing from the state where your business is incorporated.
Appoint a registered agent in the new state.
Complete the foreign qualification application.
Deliver the certificate of good standing, application, and fees to the filing office.

Some states offer expedited service for faster processing. The extra charge for expedited processing will sting, but it could be worth the money if it allows you to start operating more quickly.

Firstbase is the easiest way to file for foreign qualification, supporting expansion into all 50 states including registered agent services and all required filings. Click here to learn more about Firstbase Agent and start your foreign qualification with Firstbase.

Start your foreign qualification now

Foreign qualification is a confusing area for business owners, especially those outside the US. While it might be a pain to register in multiple states, there’s no getting around state regulations. If you want to operate throughout the entire country, you should expect to file 49 foreign qualifications.