The ease of interstate travel, along with the internet, makes it easier than ever to conduct business across America. The ease of accessibility and interstate travel, along with the internet, it is easier than ever to conduct business across America. Due to this ease of accessibility, potential customers in California can find and transact with a business operating in New York at the click of a button. While this is a positive for most business owners, there are rules and regulations that need to be followed if a business is planning on selling goods or services in a state other than the state in which it was formed. The ability to qualify your business to do transactions within another state is known as a “Foreign Qualification.”
Despite the name, Foreign Qualifications are a way for businesses within the United States to transact and do business in states other than the state in which it was formed. The state in which your business is formed is its “domestic” state, and any other state that your business qualifies to do business in would be classified as a “foreign” state. For example, a business formed in North Carolina upon filing Articles of Incorporation with the North Carolina Secretary of State would be domestic to North Carolina. If that same business obtained a Certificate of Authority to Transact Business within South Carolina, then that entity would be a “foreign” entity in South Carolina due to its state of formation being North Carolina.
When Does a Business Need to Qualify Within Another State?
The simple answer that most lawyers give to this question is – “it depends.” Typically, states require a Foreign Qualification when an out-of-state business conducts activities within another state. The act of “conducting business” varies, with each state having a specific set of rules that may subject a business to meeting this threshold. With that said, a general rule of thumb is when an out of state business opens a branch/warehouse/office, hires employees, applies for a professional license, or is subject to tax filings within another state, then a Foreign Qualification should be obtained.
However, each state will have exceptions to this rule. For example, in North Carolina, the following activities do not rise to the level of conducting business within the state:
- maintaining or defending an action or suit on behalf of the business;
- maintaining bank accounts or borrowing money within the state; and
- holding meetings of owners, directors or company officials related to internal affairs of the business within the state.
With that said, if your business were to open an office in North Carolina and then use that office to conduct business and hold meetings, then that would make the business subject to a Foreign Qualification filing.
Filing Process
Typically, the filing process to obtain a Foreign Qualification requires filing a form with the Secretary of State’s office (or its equivalent), along with paying a fee, however, this standard process can vary from state to state. While some states require a simple form and payment, other states may require more detailed information on business activities in order to qualify. It is also beneficial for a business to obtain its Foreign Qualification before conducting business within the other state, as waiting until business activities occur could open that business up to potential fines and fees for operating in a state without having the authority to do so.
JAH Can Help
Determining whether your business is “conducting activity” such that a Foreign Qualification may be needed can be a nuanced discussion. If you need guidance, the experienced corporate attorneys at Johnston Allison Hord can help. Click here to contact a member of our Corporate Practice Group.
Please note that the above JAH article does not constitute legal advice nor does it create an attorney-client relationship. Should you be in need of legal services regarding a particular matter, please reach out directly to one of our attorneys. Click here for our full website disclaimer.