Foreign Qualification: Doing Business in Other States

You’ve formed your company in your home state and now want to do business in a different state. Or maybe, you’ve incorporated in Delaware (because you’ve heard that’s where all the corporate magic happens), even though you live and plan to do business in another state. Depending on your anticipated business activities and the laws of the state in which you plan to do business, you may need to “qualify” to conduct business as a foreign entity.

“But my company is not foreign. It is a U.S. company,” you say?

The term “foreign,” when used in the corporate context, does not necessarily mean from another country. Because business entities are governed by state law, any entity that is not organized in a particular state (including those organized in other countries) is deemed a “foreign” entity.

Here are some things you should know about doing business in another state as a foreign entity:

• Obtaining a certificate of authority.

Most states provide that a foreign business entity may not transact business in the state unless a “certificate of authority” or similar authorization is obtained. The certificate of authority is obtained through a filing made to the state’s division of corporations, similar to how a business would incorporate in that state. However, there is an important distinction to be made here: A certificate of authority is not the same as forming a new entity in another state. This means that if you are, for example, a Delaware corporation and want to do business in Florida, do not file articles of incorporation in Florida. Doing so will result in the formation of two entirely separate and distinct corporations. Operating two corporations as if they are one can get very messy and cause a lot of problems down the road. (That said, there may be times when a separate entity is desirable to separate liability related to different business activities or to accomplish some other goal. In any event, this is something that should be discussed with legal counsel prior to submitting any applications or filings.)

Rather, a certificate of authority is an application for authorization to transact business in a state as a foreign entity. This application will require some basic information about your company—name, state of incorporation, date of incorporation, principal office/mailing address, directors/officers, etc.—and typically must be signed by a director, officer or other authorized representative. Most states also require you to submit a certificate of good standing from your home state with your application. Each state is different, so be sure to check the requirements of the particular state before filing your application. Once the application is filed and approved, your company will receive a certificate of authority and be authorized to transact business in the new state.

• Not all business activities require a certificate of authority.

Most, but not all, business activities will require you to obtain a certificate of authority. Each state has different requirements as to what does and does not constitute transacting business in the state. Florida, for example, sets out a list of activities that do not require a foreign company to obtain a certificate of authority, which includes (among other things) maintaining bank accounts; selling through independent contractors; creating or acquiring indebtedness, mortgages, and security interests; owning and controlling a subsidiary corporation; and merely owning real or personal property in Florida.

Thus, if you plan to use your Delaware company as no more than a holding company for your new Florida vacation home, you do not need to obtain a certificate of authority. If, however, you plan to own the home and rent it out during the summer months you spend in Delaware, you will need a certificate of authority.

• Name/Trademark issues.

When you first incorporated, one of the first things you likely did was check to see if the name of your company was available in your home state. You’ll need to do the same thing before applying for a certificate of authority in another state. Just because you are able to use the name “Bob’s Buns, Inc.” for your bakery business in Delaware, doesn’t mean you can do so in Florida, where another Bob is running his personal fitness business by the same name. If the name of your company is already being used in the new state, you will have to pick something else. The name doesn’t have to be completely different, but it will need to be distinct (according to the particular state’s laws) from anything already in existence. For example, “Bob’s Buns of Delaware” would be distinct from “Bob’s Buns.”

Regardless of whether your exact business name is being used, you may also want to consider whether there are any trademark issues in the new state. If a Florida Bob is also running a bakery business under the name “Bob’s Better Buns, Inc.” you may be infringing on his trademark by operating your bakery and brand under a similar name.  Furthermore, if you have gone to the lengths to register and protect your trademark in your home state (but not at the federal level), it is probably a good idea to take additional steps to protect your trademark rights in the new state as well.

• Having (or not having) an office in the new state and obtaining a registered agent.

In today’s world, a local, physical office is often not necessary to do business in other states. The law recognizes this, and most states do not require a physical or even a mailing address in the particular state in order for a foreign entity to qualify to transact business there. A certificate of authority can typically be obtained using the principal office and mailing address in the home state.

However, the foreign company will be required to have a registered agent who does have an office in the new state. Fortunately, if your Great Aunt Mildred is no longer living in Florida, there are many companies out there that offer registered agent and other corporate services in every state, so finding a local registered agent should not be too difficult.

• Information in the public record.

Before requesting a certificate of authority, it is important to be aware of what information will become part of the public record in the new state. Some states, like Delaware, afford more privacy. For example, it is possible to form a limited liability company in Delaware without ever disclosing the names of the LLC’s members and managers. Florida, however, requires that the name and address of at least one person with authority to manage the LLC be stated on a certificate of authority application. Once accepted, this information will be available to anyone who looks up the company on the Florida Secretary of State website. To the extent your company has concerns about the privacy of its principals or other information, it is important to understand the effect qualifying in another state will have on such information.

• Other authorizations/licenses.

It is important to understand that the certificate of authority is not the be-all, end-all to lawfully doing business in other states. Depending on your particular business activities, you may need to obtain other local licenses and authorizations. Chances are, if your business activities required licenses and authorizations beyond the filing of your organizational documents in your home state, similar licenses and authorizations are probably required in the new state. Some states even require certain authorizations at the municipal or county level. Accordingly, whenever you branch out into foreign territory, it is important to have a competent legal team to guide you.

• Why qualify?

Finally, although foreign qualification will surely entail some extra effort and expense, it is an important step that must not be overlooked. Failing to qualify as a foreign entity when required can subject a company to significant consequences including the following:

• The company may be prevented from maintaining a legal proceeding in any court of the state;
• The company may be subject to monetary penalties and fines, which can be very large in some states;
• If sued in the state, the company may never be made aware of the lawsuit; and
• The company may have difficulty making certain representations and warranties in business transactions, which could significantly hinder its ability to accomplish its goals (such as securing financing or closing a business deal).