Qualifying Your Business: What Does That Mean?
You incorporated your business, which is now a legal business entity. However, you’ve heard about qualification, and you don’t have a clue. So let me clarify that for you: In a nutshell, a company that incorporates as a corporation or LLC but is doing business in a different state most likely has to “qualify” to do business in that state.
You incorporated your company in business-friendly Delaware. It made sense at the time because Delaware has several attractive corporate features, including
- single member ownership
- single member board of directors
- initial anonymous ownership
- no corporate income tax
- a pro-business Court of Chancery
- low annual fees
This is a common situation. Delaware and a few other states such as Nevada and Wyoming have incorporation laws that are attractive to many businesses. In fact, most companies have incorporated in these states but typically are not physically located in or operate in these states.
Because of these features, you chose to incorporate there, but your business is not physically located in Delaware. It is located in Florida because you wanted to escape winters. In order for you to operate your company in Florida, you are now required to “qualify” your business in Florida. So what steps do you have to take, and what additional requirements or regulations exist for you in the state of Florida?
The state of Florida will consider your business a foreign corporation or foreign Limited Liability Company because you originally incorporated in Delaware. Your business is “foreign” to them. In this case, Florida requires you to qualify for a business you have conducted in the current calendar year no later than January 15 of the following year. For example, if you provided services in Florida in 2014, you must qualify your business by January 15, 2015. However, this is just one example. Each state has its own rules and regulations about whether a business has to qualify or not. But here are some common company characteristics that constitute “doing business”:
- Maintaining a brick and mortar location
- Hiring employees in the state
- Purchasing property/Holding real estate
- Transacting business that requires special licensing
Conversely, there are characteristics of a business, which may not require you to qualify such as
- Telephone sales
- Maintaining a website that sells to people in a different state
- National advertising campaigns
- Selling through independent contractors
So your business is physically located in Florida. To qualify, you will have to undergo a similar incorporation or formation process in your physical state. Similar to incorporating or forming an LLC, there is a state process to qualifying your business. In most states, the document that must be filed is called a Certificate of Authority. In a few cases, the document is called a Foreign Application or Application for Registration. As with any state applications, you are on the hook for any filing fees, which range on average from $25 to $750. Each state requires that these documents (s) be accompanied by a Certificate of Good Standing and/or a Certified Copy of the Articles of Incorporation or Certificate of Formation from the home state. The Certificate of Good Standing will demonstrate that your business is in good standing and that there aren’t any outstanding fees. Obtaining a certified copy of your corporate documents from the Secretary of State in your home state will cost you between $50 and $150. If you have retained a Registered Agent to manage your corporate filings, they can obtain these certified documents on your behalf.
In addition to maintaining a Registered Agent in the home state where you initially filed, you will need to maintain a Registered Agent in the state where you will be conducting business. Most Registered Agent companies provide their services in every state, so you will be able to retain the same Registered Agent.
Once you have secured all of your documents, the Certificate of Authority, Certified Copy and/or Certificate of Good Standing, and any other supporting documentation, your Registered Agent can then submit a complete application to the state. Normal processing times vary from one to three weeks.
As with other incorporation or LLC filing requirements, a few states have other requirements of Foreign Corporations or LLCs. Arizona, Georgia, Pennsylvania, Nebraska, and New York require that a business advertise or publicize in a local paper that your company is now providing services and conducting business in that state. Many states also require that foreign companies and LLCs file an annual report. In a few states you will be required to file biennial reports. And of course there will be filing fees. To aid businesses in this requirement, many states have online portals for filing annual reports.
You as the business owner, however, will remain responsible for any state, income, or employment taxes.
Consequences of Non-Compliance
If you do not register as a foreign entity and you were required to do so, the state has the ability to levy penalties. For example, the state of California has strict compliance laws: non- compliance can cost you an initial $250 penalty. In order to avoid non-compliance and any penalties, please visit the Secretary of State’s website where you want to do business for additional guidance, as well as rules and requirements.
So now that you have a better understanding about “qualification,” it is ultimately your job as the business owner to ensure compliance. It is your responsibility to conduct due diligence and to make sure you have all of your ducks in a row in order to operate a sound and efficient business. So check with any state that you plan on doing business in and research their laws. A good starting point for research will always be the Secretary of State’s office.