Q: I operate a construction supply sales business in New Hampshire as a limited liability company. My bank recently asked me if the business has any foreign qualifications. We do no business in Canada or overseas. What is the bank asking for and why?
A: The term “foreign qualification” is a common source of confusion for business owners. The term “foreign” in this context does not refer to international, but rather, the bank is asking if your company is registered to transact business in any state or jurisdiction other than New Hampshire.
A business, whether it is a corporation, a limited liability company, a partnership or a sole proprietorship, needs a state’s permission to transact business there. From the state’s perspective, this ensures that out of state businesses are on a level playing field with domestic businesses, which are subject to tax and reporting requirements. Foreign registration also ensures that the public has access to information about the business.
From the business’ perspective, foreign qualification provides the business with legal footing in a particular state, including the right to enforce contracts and collect on bad debts. Non-compliance can result in a state assessing fines or back taxes for the period the business was transacting in the state without being registered.
Unfortunately, it can be difficult to determine if a foreign qualification is required because every state has a different definition of what it means to “transact business”, but common factors that are considered include:
- Are there employees in the state?
- Is the business physically located in the state?
- Are there sales or services provided in the state?
- Are professional licenses required in the state?
If the answer to any of these questions is yes, your business may need to obtain a foreign qualification. De minimis activities, however, may not require registration. Note that the line between de minimis and non-de minimis is not always clear though, so it is best to consult your attorney.
If foreign qualification is required in a particular state, you must register your business with that state’s secretary of state. While state websites generally have the forms available to download, care should be taken to review and consider the requirements, process, and nuances involved. Again, it is best to consult your attorney to make sure your business completes the foreign qualification process accurately and to avoid penalties and potential legal and tax issues as your business grows.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.