Why the “foreign qualification” is a must for your growing business


As expected so far in 2021, many businesses are still operating virtually. Yes, stores and offices are gradually reopening, but that doesn’t mean employers and employees are willing to give up the flexibility of remote working. In the most recent Upwork Future Workforce Report, most companies (68%) believe remote working is now easier and smoother than when the shift to remote working began at the start of the coronavirus pandemic. The report also found:

  • 26.7% of workers will continue to work remotely even after being able to return to the office
  • By 2025, 36.2 million Americans will work remotely, an increase of 16.8 million from pre-pandemic rates
  • Managers highlight increased productivity and flexibility as the main benefits of remote working

Either way, the business world has most certainly embraced remote working and hiring. Hiring great talent from the best talent pool no longer means looking for workers near your office. In a borderless business, you might be working with employees across the country (or around the world). The challenge for employers is to understand the laws and compliance procedures involved in “foreign qualification,” which means doing business in states other than where you started your business.

A foreign qualification does not mean “out of the country”

Do not skip this article because you think you are not doing business internationally, so it is not about your business. Foreign qualification is the legal process of registering a business in another state in order to do business. Having a foreign qualification allows your business to legally trade beyond the borders of one state without starting a new business in another state.

Crossing state borders to do business covers a variety of activities, such as owning a warehouse or office space. Likewise, if you have employees on your payroll who live or do a significant amount of business in another state, you may need to apply for a foreign qualification in the state. You also need to register to pay payroll taxes in this state (more on that later).

Like most things, states vary on the terms of what constitutes “doing business” and whether or not your business requires a foreign qualification. In general, the following activities would require registration:

  • Have a physical presence, such as an office space, warehouse, or retail store in the state
  • The purchase of a property or building in the state to be used for businesses
  • Have a business partner in another state
  • Apply for a professional license (such as medical, accountant, etc.) in the state
  • Any activity of a business structured as a limited liability company (LLC), partnership or limited partnership (LP)

Fortunately, due to the pandemic, some regulations have changed. In the past, having full-time or part-time employees working and / or living in the state would automatically give you a link in that state. But not anymore. Having employees working from home in another state does not require having to qualify overseas.

However, if these home-based employees generate income in the state they live in, you will need to qualify overseas.

SARLs and companies are only considered “national” in the state where they were formed; therefore, these business entities must be qualified abroad in any other state in which they operate.

When foreign qualification is not necessary

Not all business transactions require a foreign qualification. However, if you think you might want to conduct regular business in another state in the future, it’s not a bad idea to qualify for overseas in advance. In most cases, e-commerce companies doing business online only do not have to qualify overseas. However, if most of your profits come from within a state, you might want to qualify overseas just to be on the safe side.

In most states, the following do not constitute in-state business transactions.

  • Settlement or defense of a dispute
  • Corporate or LLC board meetings
  • Have a bank account in the state
  • Use independent contractors
  • Debt collection
  • Carry out a “one-off” operation

How to register for a foreign qualification

The steps for registering foreign qualifications usually begin at the office of the Secretary of State in the state in which you wish to operate. Your business will need to download and submit a Certificate of Authority request form and pay the required fees. If you are asked to provide a reputable certificate as part of the application process, you can obtain an official copy from the office of the secretary of state in your home state.

The next step is to perform a name search in the desired state to ensure that the company name is legally available and not in use by another similar company. One of the reasons the state requires registration is to ensure that a business located outside the state borders does not encroach on another pre-established business. If you find that you cannot register the business under your original name, you will need to file documents for a “fictitious name” or Doing Business As (DBA) in the state.

The last step is to appoint a registered agent. Since your company’s head office is not located in the state, you must engage an agency in that state, in other words, a registered agent. The responsibilities of a registered agent (can also be referred to as a statutory agent) include managing processes in the state on behalf of the business, such as:

  1. Legal documents
  2. Federal and state communications
  3. Invocation of data
  4. IRS and State Tax Notice
  5. Legal procedures
  6. Directions to court
  7. Company deposit

To find representation, check the state secretary of state’s website for a professional registered agent. You want to hire someone (or usually it’s a company) who understands and knows the typical issues and processes associated with foreign qualification.

If you do not go through the foreign qualification process, you risk financial penalties and you will not have the right to protect your business from possible lawsuits.

Out of State Employees

Whether or not hiring employees in another state has motivated your company to seek a foreign qualification, having an employee who lives in another state means that you will also need to register to withhold and pay the appropriate payroll taxes in this state. Each state has its own payroll tax requirements, and many have local taxes that you are also responsible for paying or withholding at source. To withhold the correct payroll taxes for out-of-state employees, you must register with the state Department of Revenue (or equivalent office).

Unemployment Insurance Tax (UI) is a program administered by the federal government and funded by employers, not employees. Usually managed by the state Department of Labor, you must register, file quarterly reports, and pay the appropriate tax rate. Depending on the state, there may be other funds you need to contribute to, so make sure you are well informed of your responsibilities.

Image: Depositphotos

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