Foreign Registration


Foreign Registration

Overview

Every state requires qualification by a foreign if it is "doing business" in that state. The question of whether a company is "doing business" is both a legal and factual question that is decided on a case-by-case basis in each state. There must be sufficient contact with a state before it can constitutionally assert jurisdiction over a foreign business and impose requirements for qualification. There is no universal test or set of factors that all states apply to make this determination.

The qualification process always involves completing an application form and submitting documentation from your formation state to confirm that your entity exists and is in good standing. The foreign state then provides a certificate of authority permitting your entity to conduct business in the qualifying state.

An entity that is "doing business" in a state without qualifying and obtaining approval is subject to payment of fees, taxes, penalties and interest if discovered.


FAQs

Are there any penalties for not registering as a foreign business?

A business may be subject to payment of back taxes on income that has been produced in the foreign state, any franchise taxes that would have been required, plus penalties and interest. If a business wants to sue or is sued in the foreign state arising out of its business activities there, it will not have legal standing to bring a lawsuit or defend against a lawsuit if it has not qualified to do business.

If I have a sales representative or employee in another state, can I avoid being classified as "doing business" if this person is an independent contractor?

This analysis becomes a "form over substance" question. In other words, if a business is considered to be "doing business" by having an employee working in a state, simply calling that person an independent contractor (even by issuing a 1099 rather than a W–2) doesn't necessarily change the true relationship between the person and the business. If the person works only for one business and certain control factors reside in the business owner over how the outside person operates, the state will likely be able to classify the person as an employee and support a finding that the company is "doing business" in that state.

That said, if a person is a true independent contractor and this is the only contact in a state, a company may be able to avoid being classified as "doing business." It will depend on how a particular state views this one factor. Utah excludes an independent contractor as a factor while Texas specifically includes independent contractors along with a true employee.

Am I doing business in a state by selling goods or services from my website?

This is a complex question that requires consideration of additional factors such as whether an online provider has any physical presence in a state (an office, employees, independent contractors, distribution center, etc.). If no physical presence exists and the only connection to the state is the placement of orders to be filled outside the state or services to be delivered from outside the state, it is unlikely that a state could find sufficient contact to tax income generated in that state.

Am I required to pay income taxes in a state if I'm "doing business" there?

Not necessarily. A state often has two types of business taxes: a franchise tax and an income tax. A franchise tax is usually considered a privilege tax and is not based on revenue or sales. A business may have sufficient contact with a state to be required to register and pay a franchise tax, but not enough contact to require that income taxes be paid in a state.

If I'm required to pay income taxes in a state, is all my business income taxed even if it was produced outside that state?

No. All states have procedures for allowing a business to apportion its income between states where it conducts business to avoid income being taxed multiple times. There are many factors that states consider, but they generally focus on whether the income was generated from sources within a state and look at employees, payroll, property, and other state-related factors.

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