Your business is enjoying success (congrats!) and now it’s time to take the next step and expand. The possibilities of a market existing in another state seem very realistic and you’re ready to set up operations.
Before you do, there’s an extra set of legal hoops you’ll need to jump through. These hoops are called “foreign qualifications requirements.”
Despite the confusing name, foreign qualification has nothing to do with another country. It simply refers to doing business outside the legal structure (or state) in which you’re currently registered.
The general requirements you need to follow to make sure your business is qualified to operate in another state are simple:
- Run a search to make sure the name of your business is available in the new state.
- Register an agent for service of process—someone who lives within the state and whose location will be on record as a legal conduit.
- Get a certificate of good standing from your current state.
- File the appropriate paperwork.
The basic foreign qualifications requirements may be simple, but determining if you need to do them can be a little more complicated. Simply having paying customers in another state doesn’t mean you are required to meet foreign qualifications requirements.
Here are issues that have to be looked at to determine if you need to go through the foreign qualifications process:
Will you have a physical presence in the new state?
If you’re setting up a retail outlet, then the answer to the question is easy. You need to meet the foreign qualifications requirements for your new state.
Do you have employees in the new state?
The gray area starts to move in now. If you’re a tech company with a third of your workforce in one state and they’re all full-time, you may have to qualify. If you simply work with a few contractors, you probably won’t. Consult with an attorney to determine where your business fits on the spectrum.
How many clients do you have in the new state?
Any business that involves consulting work—from law to accounting and a whole lot more—offers the possibility of a partnership between multiple people who live in different states. Or one of the partners could simply relocate and start building up a clientele in their new locale. Is the proportion of clients you have in a different state sufficient to require foreign qualifications? Talk to your lawyer.
What about e-commerce?
The grayest of the gray areas (this is still being worked out by states) is regulatory bodies and the courts. Once again, simply having a customer buy something off your website won’t make you an entity requiring foreign qualification. But if you’re a successful business doing a lot of transactions in a particular state, they will want their share of tax revenue. In this case, not only should you talk to your lawyer but also you should stay abreast of legal developments in an evolving arena.