Best Practice Summary
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limited liability companies and other business entities are initially authorized
to do business only in the state in which they are organized. State
laws of each state require that foreign businesses (those organized and/or
incorporated in another state) "qualify" or "register" if
they wish to "do business" in that state. The qualification process
is variously known as an "application for authority to do business"
or a "foreign qualification application". The approval from the foreign
state takes the form of a "Certificate of Authority" or a "Foreign
Determining whether an entity
is "doing business" in a state, and therefore is required to qualify
as a foreign entity in that state, requires analysis of the law in that state.
State laws are similar, but not identical, in this respect and accordingly each
situation must be analyzed individually. Generally, a business should qualify
to do business in a state if it intends to perform any of the following activities
in that state:
- Maintain an office
- Hire employees
- Own real estate
- Serve as a general partner of a partnership organized
in the state
Generally, an entity does not need to qualify
to do business in a state simply to maintain a bank account, hold a meeting, effect
sales through independent contractors, solicit orders or borrow or lend money.
Failure to qualify a business that should have been qualified
carries statutory fines and penalties as set forth in the applicable state law.
Reference Guide: A quick reference guide to state laws, requirement and forms
can be found at 50
State Foreign Qualification Chart or at your service company's web site.
When qualified or registered,
a foreign entity is entitled to the same rights and privileges, and subject to
the same duties and liabilities, as the equivalent domestic entity. However, it
should be remembered that a business entity doing business in two states is subject
to the restrictions in effect in both. For example, Delaware allows a corporation
to be a general partner of a partnership regardless of whether this power is set
forth in its certificate of incorporation. Massachusetts, on the other hand, requires
such a statement in the charter. Therefore, if a Delaware corporation seeks to
become a general partner of a Massachusetts limited partnership, the corporation
must have the authority to do so stated in its Delaware certificate of incorporation.
Qualification as a foreign entity in a state enables a business
to sue or be sued in that state. Accordingly, a business must appoint a resident
agent in each state in which it is qualified. A resident agent may be a natural
person, but more often companies contract with a national registered agent service
company. Appointing a service company to act as resident agent is often
preferred because it lends accountability and assurance in knowing that important
time-sensitive documents will be expeditiously forwarded to the appropriate person.
Practice Tip: A company qualified to do business in several states may qualify
for a group discount by using the same resident agent in all states in which it
and any of its affiliates are qualified.
A foreign entity is liable for franchise or excise taxes in each state in which
it is qualified to do business and must file tax returns in each such state.
State law varies, but most states require annual or biennial
report filings from all business entities qualified to do business in the state.
Annual report forms are typically sent by the secretary of state's office to the
business' resident agent and forwarded to the business unless other forwarding
instructions have been provided to the resident agent. Even if a business does
not receive a reminder including the annual report form from the state, the entity
still the obligation to make the filing and pay any taxes or fees due. Annual
report forms may be found online at most secretary of state's offices using LeapLaw's
Connection or via your preferred service
Best Practice Tip: If the annual report will be prepared by company personnel,
it may be most efficient to instruct the resident agent to forward the annual
reports directly to the company's CFO or accountant or other responsible person
rather than passing through an outside law firm. Forwarding can be easily arranged
by e-mailing or faxing instructions to the resident agent. Keep a copy of the
forwarding instructions in the minute book or record book for future reference.
and Reporting Structural Changes
to the state must be kept current and accurate. If a business changes its name,
principal address or resident agent, increases its authorized stock, changes it
jurisdiction an amendment to the certificate of authority may be required.
Reference Guide: LeapLaw's 50 state pages provide a quick reference to when amendments
are required at each state.
A merger may require an amendment
if the surviving entity changes its state of incorporation or the name of the
Consent of Directors, Managers or General Partners
Directors, managers or general partners must authorize the entity to qualify
to do business in a foreign state and empower individuals to perform the acts
necessary to establish qualification.
Name Availability and Name Conflict
The next step is to check the business name for availability in the target
foreign state(s). LeapLaw's Corporate
Connection) provides quick access to name availability information available
online. A name conflict arises when the secretary of state's office deems a proposed
name to be deceptively similar to the name of another business already registered
in the state. Issues of trademark infringement must also be dealt with in some
cases as a separate matter.
A fictitious name (also
known as a "d/b/a", "doing business as" or trade name) may
be used to cure a name conflict in some cases. An additional form may also be
required along with the application for certificate of authority.
Forms may be found at LeapLaw's Corporate
Connection (corporate and LP forms), LLC
Connection (LLC forms) or via your preferred service
Practice Tip: Applications typically require a good standing or legal existence
certificate issued by the state of organization to be attached. Specific state
requirements can be found in LeapLaw's 50 state pages.
Once filed, certificates of authority
should be kept in a section of the minute book or records book. It is convenient
to maintain an index in the front of the minute book that contains a list of the
states where the company is qualified along with the dates of qualification.
may choose to withdraw from a state in which it is qualified to do business because
it has ceased doing business in a state, merged out of existence, closed its offices
in the state or no longer has employees in the state or otherwise is no longer
obligated for taxes and annual filings in the state because it no longer is "doing
business" in the state, as defined in the applicable state law. The withdrawal
process and requirements vary from state to state and can be long and complex
in some states due to tax clearance procedures. Generally, state
laws should be consulted to assure proper steps are taken.
- A resolution of directors, managers or general partners will usually be necessary
to authorize withdrawal.
- A tax clearance (a statement from the state's
department of revenue that no taxes are owed) may be necessary to withdraw from
a state. Your service
company can assist you in determining the applicable tax clearance requirements
and taking the required steps to obtain the tax clearance.
Connection (corporate and LP forms), LLC
Connection (LLC forms) or via your preferred service
An entity's authority
to do business may be revoked by the secretary of state for failure to:
- File annual reports
- Pay state taxes
- Pay franchise taxes and/or penalties
- Maintain a resident agent
- Notify the state of certain changes required
State law varies as to the manner in which an
entity's authority to do business can be revived once it has been revoked. Some
state statutes provide for revival simply by filing the past due annual reports,
paying taxes and/or penalties to date, while others require the filing of a certificate
of revival in addition. Some states require the entity to re-qualify entirely.
Checking the status of an entity in a state may be done online in many cases at
Connection or by contacting your service
Related Best Practice
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