Foreign Entity Qualification

Foreign Entity Qualification 

What is Foreign Qualification?

Many security companies operate in multiple states outside their state of formation, or home state. When a company transacts business outside their home state, the company is considered a foreign entity in that state, thus requiring the company to “qualify” (also known as “register”) in the new state as a foreign company.

Most states do not define exactly what constitutes “transacting business” in their state, but they do list activities that are NOT considered as transacting business. These normally include such things as conducting corporate affairs, maintaining bank accounts, collecting debts and engaging in litigation. Certainly, services in a regulated profession, such as the installation or service of alarm systems or the provisioning of security guards, would typically fall within the scope of transacting business and thus require foreign registration. 

Transacting business outside your home state without properly registering in that state as a foreign entity creates several issues.

  1. The company will be prohibited from bringing court actions in the foreign state, restricting their ability to enforce contracts or obtain other legal protections in the event an issue arises in that state. 
  2. The company (and even its officers in certain states) may be subject to monetary penalties or fines for transacting business in another state without having qualified as a foreign entity.
  3. The company may be prohibited from obtaining state or local licenses required for their business activities. 

Qualifying or registering as a foreign LLC, foreign corporation or other foreign business entity is a fairly simple and straightforward process. Most states offer a short online application process during which you will typically be required to:

  1. Appoint a registered agent (more about that later). 
  2. Pay a registration fee. 
  3. Provide other information such as state of formation, formation date, business purpose, principal office address, and name and address of officers and directors. 
  4. Some states require additional information such as the number of authorized and issued shares, value of the company’s property and the value of company property located in the state.
  5. Most states also require that you upload certain additional paperwork, such as a certificate from the state of formation demonstrating that the entity exists in its domestic state and is in good standing. In certain states, a certified copy of the entity’s articles of formation and any amendments thereto are required instead of, or in addition to, the certificate of good standing.

Registered Agent

The registered agent you appoint in the foreign state not only forwards legal notices and other important items via mail but is also responsible for receiving service of process on behalf of the foreign entity. A registered agent and registered office are required so that actions can be brought against a foreign entity without having to serve process outside the state. An entity may choose to use an individual such as an employee, family member or friend who happens to reside in the foreign state as a registered agent. However most entities choose to use a commercial registered agent service, typically charging about $120 per year for a single state. 

Using a Fictitious Name

Many companies in the security industry choose to advertise and contract their services under a name that differs from the legal corporate name. This is called a fictitious name or trade name. You may also find it necessary to use a fictitious or trade name when qualifying in a foreign state if the entity’s legal name conflicts with a name already in use in that state. Except for a few states, fictitious business names must be renewed every 5 – 10 years if you intend to continue doing business under that name.  

Ongoing Requirements

Whether registered as a foreign limited liability company (LLC), foreign corporation, foreign limited partnership, foreign limited liability partnership or other type of business structure, a foreign entity must comply with certain ongoing obligations such as filing an annual report or biennial report, filing franchise tax returns, and maintaining a registered agent and registered office. Failure to comply with these requirements may result in revocation of the entity’s authority to transact business in that state. Reinstatement of a revoked foreign registration involves additional paperwork and a filing fee. If the foreign entity cannot be reinstated, it would be required to reapply and pay an additional fee before continuing to transact business in the state.

In Conclusion: Foreign Entity Qualification

For more information on foreign qualifications or if you need assistance preparing and filing the paperwork for foreign qualification, annual reports, or fictitious business names, contact Compliance Management Solutions at (704) 288-1798. Learn more at www.compliancesolutions.us.