Crossing State Lines: Navigating Foreign Qualifications

March 08, 2024

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Navigating foreign qualifications is crucial for growing your business across state lines.

Navigating foreign qualifications is crucial for growing your business across state lines. This phase can be thrilling, yet without clear guidance, it might also become bewildering and taxing. What strategies should you employ to broaden your business’s reach into new regions? 

What is a foreign qualification?

When starting a business, a domestic entity is created where the owner(s)/member(s) lives, where most of the business is conducted, and where the initial site is physically located. The process is called a foreign qualification when a business expands to another or multiple states. A foreign qualification is registering the company with a Secretary of State other than the domestic state, signifying an expansion.

Registration of the foreign business entity with the Secretary of State allows the entity to legally pursue growth opportunities across state borders without incorporating a new business entity. In this industry, foreign does not mean operating internationally. It simply means operating a business outside of the domestic state in which you are incorporated. Move states and operations, or want to pursue advantageous tax laws for businesses? Your domestic state can change through conversions (conversions & formations), formations & mergers, domestications, or other means to reestablish itself in a new state. Acceptable filing methods are state-dependent.

How can you determine when to file a foreign qualification?

Expansion can be exciting as you or your client grow the business. When a company wishes to establish a physical presence, hire employees, or conduct substantial business activities in a jurisdiction outside its home state or country, it is typically time to consider a foreign qualification. However, when do you know if it is officially time to register your business outside of your home (domestic) state?

Businesses seeking to expand or already expand can benefit from contracting or conducting a nexus study from an in-house finance employee or an external tax expert. A nexus study can help determine whether a business should or should not qualify in the states with physical locations, employees, or significant business transactions. Determining nexus, or tax obligation, in a state requires consideration of multiple factors.

There are two main types of nexus considerations: physical and economic. Physical nexus is created when a business has a physical presence in a state, such as an office, store, or warehouse, hires a W-2 employee, or keeps inventory there. Determining this type of nexus relies on annual or expected retail sales, a specific number of sales transactions, and sales tax on products and services. Until 2018, physical nexus was the primary way a business would establish nexus in another state. Post-2020, businesses may not have physical locations and hire remote employees, which creates an economic nexus. Economic nexus is created when a company has a “significant amount” of economic activity in a state but may not have a physical presence or employees.

How does a foreign qualification affect my business structure?

When your business grows and a foreign qualification determination is made, the company must file with the Secretary of State’s business division. Secretary of State names and divisions may vary: Secretary of State (Division of Corporations), Department of State, Department of Financial Institutions, Commonwealth of the State of, Department of the Treasury (Enterprise), or Department of Licensing and Regulatory Affairs, so it is wise to research the state you or your client are looking to foreign qualify in or hire a service company like Corp1, Inc. to conduct research specific to your entity type.

A foreign qualification implies that the business has expanded and the entity is conducting the same business and using the same name across multiple states.

A foreign qualifying entity will conduct the same business as the domestic (home) entity with permission from the new jurisdiction’s Secretary of State. Most states require proof of Good Standing or Certified Copies of documents from the domestic state of business, and the foreign qualification filing will provide, at minimum, the business entity’s legal name, business address, and name and address of its Registered Agent for service of process.

The entity is also allowed to use the same name across multiple states, provided the entity’s name is not already in use in the foreign qualification state. A name availability search should occur to ensure it does not conflict with a name already on the record. If the name is unavailable, the company may have the option to contact the company on the record for a consent letter or may be required to use an alternate name (also referred to as a fictitious name). If the entity name is available and it is essential to you or your client that the name is secured, consider filing a name reservation document with the Secretary of State before filing.

The foreign-qualified entity will be covered under the domestic entity’s issued Employer Identification Number (EIN). Also referred to as a Federal EIN (FEIN), the IRS reach applies to all states where an entity foreign qualifies and is subject to federal taxes. The Federal EIN is not to be confused with a Foreign EIN, a special identification number issued by the IRS to operate beyond US borders. An EIN is required to open a bank account and operate financially in the U.S. It is important to associate entities with the same EIN by their exact names and domestic jurisdiction documentation for business reporting, tax purposes, and other legal obligations or events.

When foreign qualifying, you will also need a Registered Agent to provide service of process and other document services physically located within that state. Your Registered Agent will then be able to quickly forward these documents to the people who act on behalf of the entity. Failure to acquire a Registered Agent will cause a filing document rejection, and failing to maintain a Registered Agent may hinder your business during a lawsuit, resulting in a default judgment against your company. The business owners or members/managers can serve as the Registered Agent to receive legal Service of Process at the business’s physical address.

What does a foreign qualification filing look like?

Since each U.S. Secretary of State operates under its own laws and business entity software and processes, there are many names for the same document. Across all states, filing in a state other than the entity’s domestic state is called a foreign qualification. However, the document may also broadly be called a Certificate of Authority, granting the entity the authority to do business in the foreign state.

  • In Colorado, it is called the Statement of Foreign Entity Authority.
  • In Illinois, it is called the Application for Authority to Transact Business.
  • In Utah, it is called the Foreign Registration Statement.
  • In Wisconsin, it is called the Application for Certificate of Authority. Once issued, the company has a Certificate of Authority with the Secretary of State records.

Each state will also have varying requirements regarding supporting documentation to file that accompanies the foreign qualification documentation. The documentation requirement will also vary by entity type (foreign corporation versus foreign LLC). Commonly required supporting documentation for foreign qualifications includes:

  • Good Standing from the home (domestic) jurisdiction dated within 30/60/90 days, six months, or one year,
  • Certified copies of Articles and all Amendments from the domestic jurisdiction. Many states with this requirement will allow the submission of Restated Articles and all Amendments, which can significantly reduce copy costs or
  • Special documentation, such as a required Name Reservation document acquired before the foreign qualification filing in Arkansas.

Click to view the Foreign Qual Documentation List.

Who can file a foreign qualification, and how is it filed?

States will have varying requirements regarding signatures on foreign qualification documents; each will accept at least one—but potentially a combination of—originally signed documents, signed and scanned documents, DocuSign electronic signatures, conformed signatures, or typed signatures within online submissions.

Submission methods vary by state; each will accept at least one—but potentially a combination of mail, fax documents, email, online submission, or online submission with a PDF document containing an Officer, Member/Manager, or otherwise Authorized Person’s signature.

What should be considered after a foreign qualification?

After registering your business with the foreign jurisdiction’s Secretary of State office, just as you did with your domestic entity, there are a few more items to consider so your business runs smoothly without interruption.

  •  Registered Agent Retention. Suppose a foreign-qualified business entity maintains a third-party Registered Agent with a physical address in the state. In that case, it is great to ensure that contact information and billing information stays current. The Registered Agent is required to maintain current contact information to forward legal Service of Process and official notices. Without it, they may resign from their obligation to the Secretary of State. If the entity serves as its own Registered Agent at a physical street address, ensure it is regularly staffed to receive Service of Process during business hours.
  • Annual Report and Franchise Tax Obligations. Secretaries of State usually require an Annual Report (i.e., Annual Renewal, Statement of Information, Annual List) to report changes to the business year over year. Annual Reports vary in due date, cost, and simplicity/complexity of information required depending on the state and business type. Annual Reports may be accompanied by franchise tax payments levied through the Secretary of State or separately through the state’s Department of Revenue (Revenue, Taxation, Franchise Tax Board, etc.). Your Registered Agent will forward any official state notices if received, but it is recommended that the entity tracks those due dates internally as well.
  • Business Licensing. Business license requirements, applications, renewals, and upkeep are hosted on each state’s website. If needed for the domestic or foreign entity, be sure to apply and track renewals.
  • Labor and Employment Enrollment. Varies by state. Contact your legal or tax professional for entity-specific requirements in each state.

Are you ready to expand your entity into other states?

By grasping the importance and timing of foreign qualifications, businesses can make well-informed choices regarding their growth strategy, ensuring they meet legal requirements, build trust, and discover new avenues for expansion. After speaking with your attorney or accountant and identifying the regions for your business expansion, our expert team at Corp1 is ready to assist. For support, please get in touch with or dial 720-823-9122.

Please note: The information in this article is not intended to substitute for professional, legal, or tax advice. Corp1, Inc. always recommends contacting your tax or legal professional to determine the best course of action when foreign qualifying.

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