Expanding Your Business To Other States: Foreign Qualification And What You Need To Know

Your business is booming and you have an opportunity to expand your business or practice to other states, whether through a physical location or telehealth. Before you move ahead, here is what you need to know.

What is foreign qualification?

The state in which your entity originally incorporated or organized is called your state of domestication. All other states consider your entity to be a foreign entity. As a result, foreign qualification is simply the process of registering your entity in a state other than the state in which it was originally incorporated or organized.

When is foreign qualification required?

In short, foreign qualification is required when an entity is “transacting business” in another state. So, what is transacting business? State laws vary but, generally, transacting business is when you are transacting commercial activity in a state. Unfortunately, state laws do not often define what is “transacting business” and instead define what is not considered “transacting business.” Again, state laws vary but the laws generally include the following exceptions:

(1) maintaining, defending, or settling any proceeding;

(2) holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs;

(3) maintaining bank accounts;

(4) maintaining offices or agencies for the transfer, exchange, and registration of the corporation’s own securities or maintaining trustees or depositaries with respect to those securities;

(5) selling through independent contractors;

(6) soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if orders require acceptance outside of the state before they become contracts;

(7) owning, without more, real or personal property;

(8) conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature; or

(9) having a corporate officer or director who is a resident of the state.

Based on the above, seeing patients in other states constitutes transacting business. Owning a property in an LLC in another state is not considered to be transacting business but, if you rent or lease that property, then it would constitute transacting business.

How do I qualify my entity as a foreign entity?

This process does vary by state but generally requires the entity to file an application for authority to transact business as a foreign entity. This filing usually includes a filing fee and requires the entity to provide a good standing certificate from the Secretary of State (or equivalent agency) of its state of domestication. There are also a few things to be aware of when preparing and filing the foreign qualification paperwork:

(1) Like as required in the state of domestication, the entity is required to have a registered agent. However, that registered agent must have an address in the state in which the entity is qualifying.

(2) State laws vary on the types of names or entities that can provide professional services. For example, Illinois law allows medical corporations to use “Ltd.” as a name ending; Florida does not. So, the name your entity must use in Florida will be different from the name you use in Illinois. Also, Illinois allows one to use a PLLC for a medical practice while Wisconsin does not allow a PLLC. Ownership requirements for professional entities may vary as well.

(3) For professional entities, some states (like Illinois) require the entity to have a license from the governmental licensing agency in addition to an owner’s individual license while others may only require the individual owner to be licensed.

(4) After qualifying as a foreign entity, most states have an annual reporting requirement and fee that must be filed and paid to keep the entity in good standing.

What if I do not qualify my entity?

In short, you and your entity can be subject to penalties/fines that can range from a flat rate to a daily rate for each day the entity was not properly qualified. These penalties/fines vary by state. Additionally, for professional entities, there can be potential consequences with your professional license or the license for the entity. Finally, the entity cannot avail itself of the court system in that state. For example, if your entity has a telehealth patient in Colorado that does not pay for the services and the entity is not properly qualified in Colorado, the entity cannot sue that client in Colorado for non-payment. Furthermore, if a Colorado patient sues the entity for malpractice, the entity may never be made aware of that lawsuit as it may not have a physical location or registered agent in the state.

Conclusion:

You should consider foreign qualification as part of any business expansion discussions. While it may seem overwhelming, the process is fairly straightforward and necessary to keep your entity in compliance with all applicable laws and regulations.

For further information, contact attorney Raya Bogard. You may also reach out to Malecki Brooks Ford by contacting Raya directly at [email protected] or by sending a message through our contact form.