What is a foreign entity?

A company must organize or incorporate in one state, but business activities often extend across state lines. A foreign entity is a business organization, such as a corporation or limited liability company (LLC), that does business in a state other than the one where it is incorporated or organized. If a company has a physical presence or engages in significant business activities in another state, it usually needs to register there as a foreign entity under that state’s laws. Foreign LLCs and corporations must register with the Secretary of State and maintain good standing in that state.

What Is a Foreign Limited Liability Company or Corporation?

Every state has a Secretary of State's office that handles business entity formation. A business formed under the laws of a state has the legal authority to operate there. This is the entity’s “domestic” state.

Because state laws stop at the border, a company must obtain permission before doing business elsewhere. In those states, the company is considered a foreign entity. To operate legally, it must complete certain steps, which generally include:

• Qualification: The business must meet the state’s requirements for a foreign entity. This commonly includes being in good standing in the domestic state and appointing a registered agent in the foreign state.
• Registration: It must apply to register as a foreign business entity with the foreign state’s Secretary of State.
• Certificate of Authority: If the business qualifies as a foreign entity, the Secretary of State will issue a Certificate of Authority.

Please note that, in this context, the term “foreign” refers to different states of the United States. Doing business across international borders involves treaties and other legal issues.

Can a Foreign Entity Do Business in Another State?

Yes, foreign entities can do business in another state, although they may have to register in that state.

The U.S. Constitution prohibits state governments from unreasonably interfering with commerce between two or more states. A U.S. state cannot, for example, prohibit all entities organized in another U.S. state from doing business there. However, states can require foreign entities to comply with their laws. That is why foreign qualification and registration are necessary.

A business entity that has a Certificate of Authority in a foreign state must remain in good standing in that state. This typically means following certain state laws about filing information reports and paying franchise taxes.

When Does a Foreign Entity Need to Register in Another State?

A foreign entity must register with another state’s Secretary of State when it “does business” in that state. The definition of “does business” may vary from one state to another, but there are some common features.

1. Physical Presence

A business that maintains a physical presence in a state most likely needs to register. This includes offices, warehouses, and retail locations.

Merely owning real estate does not necessarily count as “doing business.” For example, a company that owns an unused or vacant property might not need to register.

2. Employment

A business that employs people in a state develops economic ties to that state through payroll taxes and employment laws. This is often enough to require registration in many states.

Remote work has made this more common, as employees can now work from different states.

3. Contractual Obligations

Having a significant number of contractual obligations in a state may count as “doing business” for foreign registration purposes. This can be subjective, but certain factors increase the likelihood that registration is required:

• Duration: The contract lasts a long time, typically more than a year, creating strong ties to the foreign state.
• Size or value: The contract accounts for a substantial part of the business’s operations or revenue.
• Performance: The contract creates obligations in the foreign state.
• Enforcement: The contract is governed by the foreign state’s laws, and any claims must be handled in that state’s court system.

4. Substantial Revenue

A business that earns a significant portion of its revenue from a foreign state might need to register there. The internet and e-commerce have made this analysis more complicated.

Whether a company needs to register often depends on the nature and size of its revenue from the foreign state:

• Individual or isolated sales in another state typically do not count as “doing business.”
• Large, ongoing revenue streams from a state are more likely to trigger registration requirements.

What Happens if a Foreign Entity Does Not Register in Another State?

Failing to register as a foreign company can create serious business challenges, even if it doesn’t void your contracts or shield you from liability.

Fines and Penalties

The Secretary of State may impose fines or back fees for operating without a Certificate of Authority. In some states, individuals who conduct business on behalf of an unregistered foreign entity can also face personal penalties.

Limits on Legal Rights

An unregistered foreign entity is typically barred from filing or maintaining a lawsuit in that state’s courts until it becomes properly registered. However, this does not invalidate the company’s existing contracts or prevent others from suing it. Once the business obtains its Certificate of Authority and pays any required penalties, it can usually proceed with its legal claims and restore full access to the courts.

If you still have questions about business formation or expanding into another state, ask one of our attorneys for personalized guidance.