When a corporation is growing and expanding into a new geographic region, it can be difficult to determine if it is necessary to formally qualify in the new state - and figuring out how to facilitate the qualification can be daunting. In this article, we share some good information on when a corporation might need to qualify as a foreign entity, and what to expect during the qualification process.
When is Foreign Qualification Necessary?
All states require foreign corporations to qualify before they may transact business in their states. However, few states attempt to define what activities constitute transacting business. Most states do, however, list in their statutes various activities that they do not consider transacting or doing business in their states. These lists are not exhaustive and may only serve as a guide. Generally, these lists include activities such as engaging in litigation, conducting internal corporate affairs, maintaining bank accounts, selling through independent contractors, creating, acquiring, or collecting debts, engaging in a single or isolated transaction, and transacting business in interstate commerce.
Whether a foreign corporation must qualify is decided on a case by case basis. The same business activities or contacts with a state that subject a foreign corporation to taxation or to the jurisdiction of the state’s courts will not necessarily subject the corporation to the requirement of qualification.
Consequences of Transacting Business Without Qualifying
The question of whether a foreign corporation should be qualified often arises when the corporation brings an action in state court. All states prohibit unqualified foreign corporations doing business in the state from bringing actions in the state’s courts. Therefore, the defendant will allege that the unqualified foreign corporation was doing intrastate business and cannot bring the action against it.
In addition to losing access to state courts, a foreign corporation doing business in a state without qualifying may be subject to a monetary penalty or fine. In some states, officers or agents acting on behalf of the foreign corporation may be fined as well. The theory behind the penalties to the corporation is that an unqualified foreign corporation should not be able to reap the same benefits and protections given a domestic corporation or a qualified foreign corporation, without having to pay for the privilege of doing business in that state.
Once the foreign corporation has qualified and any penalties due have been paid, it may enjoy the same rights, privileges and protections afforded any other domestic or qualified foreign corporation.
Selecting a Business Name
A corporation is not always able to qualify under the name in which it was incorporated. Most states require foreign corporations to meet the same name requirements as domestic corporations. Thus, if the state a corporation wishes to qualify in requires a corporate indicator in the name, and the corporation’s name does not contain one, the corporation will have to add such an indicator to its name in order to qualify in the state.
A corporation may also find its name unavailable for use in a foreign state if its name conflicts with a name already in use in the state. If a foreign corporation’s name is unavailable for use, most states will allow it to adopt and qualify under a fictitious name. The fictitious name chosen must be available for use in the state.
Qualifying a Foreign Corporation
Qualification is a procedure whereby a foreign corporation files documents with the state and pays a prescribed fee. The state then gives the foreign corporation the authority to transact business in that state. Among the documents usually filed with the state are an application for a certificate of authority and a certificate from the state of incorporation stating that the corporation exists in its domestic state and is in good standing. Instead of the certificate of good standing, some states require the filing of the articles of incorporation and any amendments thereto. A few states require the filing of both the certificate of good standing and articles of incorporation.
The application for certificate of authority generally must set forth such information as the corporation’s name, the place and date of incorporation, the period of duration, the principal office address, the registered office address, the registered agent’s name, and the name and address of directors and officers. Some states also want to know the corporation’s purposes, the number of its authorized and issued shares, and the estimated value of all the corporation’s property and of its property located in the state.
A qualified foreign corporation is subject to the taxation and reporting requirements of the states where it has qualified. However, qualification does not affect a foreign corporation’s ability to conduct its internal affairs, such as the election of directors and shareholders’ meetings. This is governed by the laws of its state of incorporation.
Naming a Registered Agent and Office
Almost all states require foreign corporations to maintain a registered agent and a registered office in the state. The registered agent acts as the agent to receive service of process on behalf of the foreign corporation. The registered office is the place where service can be made.
A registered office and agent must be maintained so that a plaintiff may bring an action against a foreign corporation without having to serve process outside the state. If a foreign corporation fails to maintain a registered agent and office, the state will often revoke the corporation’s authority to transact business.
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Content courtesy of CT Corporation, our partner in Registered Agent services.