Incorporating or forming an LLC gives you the right to operate in the state of formation. You must apply for the right to operate in any other state. That process is known as foreign registration or foreign qualification. So if you form in Delaware or Nevada (or another state) but you transact business in another state, you will have to qualify your business in that state – what is often called a “foreign corporation.” When we hear the word “foreign” most of us think of something outside the United States. However, in the world of U.S. corporations and LLCs, the word foreign has a different meaning. This means if a company is doing business outside of its state of formation, it must register to do so. It is usually straightforward, but nearly always requires filing documents and paying fees.

“Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify.” 

When you foreign qualify a business, you obtain for a certificate of authority in the state or states where your company will be transacting business, by filing an application and paying the necessary state fees. By doing this, the state knows that a foreign corporation or LLC is conducting business within its borders. It also gives your company the right to bring a lawsuit in that state’s court system.

Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria evaluated include whether the company:

• Has a physical presence in the state.
• Has employees in the state.
• Accepts orders in the state.

Foreign qualification confers certain rights, but it also carries with it reporting obligations, such as the requirement to file annual information reports with the state. If your business is expanding into new states and you need to qualify it as part of this growth, these initial and ongoing fees should be considered a necessary part of doing business.