What Is a Foreign Corporation?

Before you expand your corporation into new states, check the foreign corporation registration rules.

A foreign corporation is a company that does business in a state other than where the owners originally registered the corporation. Depending on the company's activities, the foreign state's laws might require the owners to register the business there as a foreign corporation and pay state taxes. If the owners fail to follow the rules concerning foreign corporation registration, the state might impose fines, prevent the corporation from continuing business in the state, and take away the company's right to file lawsuits in its state court.

When to Register a Foreign Corporation

To determine whether you must register your corporation, take a look at the laws of the foreign state. Typically, states require corporations to register when they regularly "transact business" in the state. While you will not find a clear definition of what it means to transact business, if your business does any of the following, you will likely need to register:

  • your corporation leases or owns a factory, corporate office, or storefront in the state
  • one or more of your employees live in the state, or
  • the corporation conducts regular and ongoing business in the state.

The more business you conduct in the state, the more likely you will have to register. For example, if your restaurant supply corporation contracted with a local restaurant in another state to provide all of their paper napkins for the next five years, you likely should have registered in the state where the restaurant is located. In contrast, if your only ties to the state are occasionally shipping goods to customers that made purchases from your online store, you likely will not need to register (but you should review internet sales tax laws, as explained here). If you are not sure whether your corporation's activities rise to the level of "transacting business," consult with an attorney in the foreign state.

Exempt Activities

While it can be challenging to understand whether your corporation is "transacting business" in another state, state laws provide at least some clarity by exempting certain activities from triggering the registration requirement. In most states, if the following are your only ties to the state, you likely do not need to register:

  • defending a lawsuit
  • maintaining a bank account
  • transacting with independent contractors
  • conducting isolated transactions that your corporation will complete within 30 days
  • securing or collecting a debt, or
  • holding internal meetings in the state, such as shareholder meetings.

If your corporation engages in an exempt activity but also transacts business in the state (such as shipping goods from a local warehouse), you will likely have to register as a foreign corporation.

How to Register as a Foreign Corporation

The process for registering as a foreign corporation depends on the laws of the foreign state. Typically, you will file paperwork with the Secretary of State and pay a filing fee. In the paperwork, you must provide basic information, such as your corporation's name, the state where you originally registered the business, and your mailing address. Most states require you to submit annual or biennial filings to maintain your registration. For more information on the registration process, check out this article.

Every state requires foreign corporations to appoint a local registered agent, which is a person or organization that accepts government correspondences and legal notices on behalf of the company. If none of the corporation's owners lives in the state, you might consider paying for a registered agent service. You can read more about registered agents and available services here.

Taxes and Licensing

When a state requires you to register your business there as a foreign corporation, you will likely also be responsible for tax registration and annual tax filings. Check with the state's tax department to determine if you must register for sales tax, payroll tax, unemployment insurance, and/or worker's compensation.

If you obtained licenses or permits in your home state, such as environmental or health permits, the new state might require you to apply for the same licenses from their state agencies. In addition, some states require all corporations to obtain general business licenses. Contact the state and local licensing divisions for information, and read more about business licensing here.

Penalties for Not Registering

If you transact business in the foreign state and do not register, your corporation could face penalties. The government might impose fines and file an injunction to prevent you from conducting further business in the state. The state might prohibit you from filing local lawsuits, which would leave your corporation without recourse to resolve conflicts (such as a breached contract) in the state. However, corporations are always permitted to defend against lawsuits brought against the company.

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