If you’re looking to expand the operations of your limited liability company (LLC) beyond the borders of your home state, you’ve probably heard the term “foreign LLC” before.
While the word “foreign” typically implies another country, in this case it actually means that the LLC is expanding to a new state.
Even once the basic definition is out of the way, there are plenty of questions surrounding the foreign LLC. Who needs one? How do you register one? How does a foreign LLC differ from a domestic LLC?
In this article, we’ll answer these questions and more, as we aim to improve your understanding of this important aspect of the American business world.
Guru Tip: The same online LLC formation services that help you form a domestic LLC (like Incfile and Northwest) can help you create a foreign LLC.
What Is a Foreign LLC?
A foreign LLC is not an LLC that was formed outside the U.S. Naturally, that’s what we all assume, but it’s not the case. Businesses formed outside the country need to use a different entity type, but a foreign LLC is simply an LLC operating in a state that’s different from its state of formation.
When an LLC is first formed, it is a domestic LLC. It can later register to become a foreign LLC in other states. Once an LLC has registered, the state will grant it the authority to conduct business there.
It’s important to point out that you cannot form a foreign LLC if you don’t already operate a domestic LLC, because the foreign LLC is not a new business entity. It is merely an extension of the previously existing domestic LLC, and cannot be operated separately.
Do I Need to Register as a Foreign LLC?
Just because you conduct some business outside of your home state, you don’t always have to register as a foreign LLC. It largely depends on where you “conduct business.” We’ll use a scenario to explain this distinction.
Let’s say that a business operates as a domestic LLC in the state of Kansas. The business grows and begins shipping its products to customers in other states. In this case, the LLC does not need to register as a foreign LLC. However, if the business establishes a warehouse in Oklahoma, it would need to register because it is conducting business there.
“Conducting business” usually means that you have a physical presence in that state, whether personally or through one of your locations. Typically, selling a few products from your website to customers in other states does not constitute conducting business in that state.
However, if you open a retail store in another state, hire employees in that state, or even hold business meetings outside of your domestic state, it’s likely that you will need to obtain a foreign qualification to be able to operate in compliant fashion.
What Happens if I Don’t Register a Foreign LLC?
There are different penalties in different states when it comes to operating a business without foreign qualification.
However, one aspect that is more or less the same across all states is that you will almost certainly be required to pay a significant fine. This is reason enough to register your foreign LLC, because in most states this fine is much more expensive than simply acquiring a foreign qualification in the first place.
In many states, the punishments go beyond just a monetary fine. If your LLC has entered into contracts with other entities in that state, those entities will be allowed to void their contracts with you if you don’t foreign qualify your business. You could also find your business is barred from using the courts in that state, meaning you would be unable to sue anyone.
In addition, you could see your owners lose their limited liability protection in that state, which could put you in a financially compromising situation if your business is sued. Long story short, the risks of failing to register a foreign LLC are not even remotely worth it.
How Do I Apply as a Foreign LLC?
If you haven’t already started your business in one state, you’ll need to create a domestic LLC first. If you’ve already formed your domestic LLC, you do not need to file the articles of organization again in the new state. Doing so would create a new LLC (which you can do, but it isn’t very practical).
Foreign LLCs submit what is usually called an application for a certificate of authority (or a similar name) from the state where they want to conduct business. Before you do that, though, you’ll need to do a couple other things.
For one, you should check if your current business name is available for use in your new state, and you also need to appoint a registered agent within the new state. Usually, a state requires your registered agent to maintain a physical presence in that state.
Once your application is complete, the state will process it and grant you a certificate of authority to transact business. You can repeat this process for as many states as you wish.
In addition to getting a certificate of authority, you should learn what tax and legal requirements exist for running a compliant business in the new state.
How Do I Stop Operating My LLC in a Foreign State?
For any number of reasons, you may decide to stop conducting business in a foreign state. If so, you’ll need to file an application for the withdrawal of your certificate of authority in that state.
If you fail to do so, the state will expect you to continue participating in your ongoing compliance requirements — for example, they will expect you to continue filing annual reports, and if you don’t, you could be subject to fines.
Thankfully, the process for withdrawing a certificate of authority is quite simple, and usually just requires spending a couple minutes filling out a one-page form. The important thing is remembering to do it!
Even though a foreign LLC might not be exactly what it seems to be at first glance, it isn’t too complicated to register one — especially with helpful online services at your disposal.
The hardest part will be doing your research to learn what constitutes “conducting business” in the state where you’re expanding, because not all business activities require a foreign qualification.
Adding certificates of authority for additional states is a good way to grow your business’s impact, while still maintaining your good standing and complying with all ongoing requirements.