Small Business Multi-State Compliance Issues

by Lynnea Bylund on July 24, 2011 · 4 comments

As a small company owner, sometimes you’re expected to be an expert in state law and compliance. Well then pay attention because this may affect you if your business is starting to reach across state lines or your company was formed and registered out of state.

multiple states registrationAn area of continued mis-understanding surrounds “foreign-qualification” (Doing business in multiple states legally). By definition, if your business intends to do business in any other states than your home state of incorporation or formation, then you might need to register your company in those states.

For example, writes Nellie Akalp at Small Business Trends

  • You have a restaurant in Florida and decide to expand into Georgia and South Carolina. Once you have locations open in those states, you’re doing business there and will need to file a foreign qualification in both Georgia and South Carolina.
  • You incorporated your business as a Delaware LLC, but are physically located in New York. You’ll need to file a foreign qualification to conduct business in New York. (For this reason, it’s often best for small companies with fewer than five shareholders to incorporate in their home state.)
  • You live in Washington and your business partner lives in California. You incorporated your company in Washington, but recently your partner has been finding and meeting with the bulk of your clients near his home in California. You’ll need to file a foreign qualification in California.
  • You’re a consultant who performs the majority of your work online, with clients in multiple states. In this case, you do not need to file a foreign qualification. Just because you’re making money from clients in other states doesn’t mean you’re transacting business there, according to the law.
  • What is meant by “doing business?”

    In today’s mobile/virtual world, it can be difficult to know just what constitutes doing business in a state. If you’re uncertain whether your particular business needs to foreign qualify, you should check with your attorney or accountant. However, here are some general questions to answer:

    • Does your LLC or corporation operate out of any physical presence in the state (i.e. office or retail store)?
    • Are you frequently conducting in-person meeting with clients in the state (and not just conducting business via email/phone)?
    • Does a significant portion of your company’s revenue come from the state?
    • Do any of your employees work in the state? Do you pay state payroll taxes?
    • Did you apply for a business license in the state?

    If you answered yes to any of these, your business may need to file a foreign qualification in the appropriate state.

    What is a foreign qualification? To register your company in another state, you will need to submit a Certificate of Authority application (sometimes it’s called a Statement & Designation by a Foreign Corporation) with the particular state’s Secretary of State office. You can download the form from the Secretary of State’s website or have your incorporating company handle the filing and requirements for you. Some states will require you to have a certificate of good standing from the state where your LLC/corporation was formed (which means you’ll need to be up to date on your state taxes, fees, etc.).

    Why is a foreign qualification important?

    Foreign qualifying your company in states where you conduct business is your legal obligation. Failing to properly register your company could result in:

    • Fines and interest for any time when you were not foreign qualified (in addition to paying the standard fees that should have been paid)
    • Liability for back taxes for the time when you were not foreign qualified
    • Inability to sue in a state where you are not registered

    You’ll want to foreign qualify in as few of states as possible. After all, with each foreign qualification comes filing and/or annual fees, additional laws to learn, and added paperwork. However, you simply can’t overlook your business’s legal requirement to foreign qualify; it could end up costing you much more in the long run.


    1 Marylin Stetler July 28, 2011 at 6:35 pm

    The state foreign qualification certainly caught me by surprise. Thanks for a strong overview of the compliance issues.

    2 Teiya August 10, 2011 at 3:12 am

    No question this is the place to get multi-state company compliance info, thanks y’all.

    3 SurfPerch Communications September 20, 2011 at 1:39 pm

    Multi-state compliance is an important issue not to be overlooked by small companies that are moving or expanding beyond their initial state boundaries.

    4 KaceeJ January 8, 2012 at 11:58 pm

    Good primer on the multi-state issue, for companies moving or expanding.

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