REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
The first time I looked at buying investment properties outside my state, something got me confused.
Back when I started my business, I formed my first LLC in Michigan.
After researching how to do business in other states, I started hearing about how I might need to register my LLC as a “foreign corporation” if I wanted to do business in any place outside of my home state.
Given that my business entity, physical office, bank accounts, mailing address, phone number, and every property I had ever owned were all in Michigan, I knew I was covered in my home state, but what if I wanted to start flipping properties in California, Texas, New Mexico or Florida? Could I use my Michigan LLC in those places, too, or was I required to register as a “foreign entity” in each of those states before I could do any deals there?
And what if I started doing deals without registering as a foreign entity? Would there be consequences if I neglected to do this?
My Attorney's Answer
I eventually decided to get some real answers from a real attorney.
After I explained how my business works, he told me that…
“Generally, you don't have to register your LLC in another state if all you are doing is owning property.
If you have employees or agents in the state, or if you “conduct business” in the state, then you would have to qualify to do business, but if you're simply owning the property, registering as a foreign entity wouldn't be necessary.”
So my next question was,
“What exactly does it mean to conduct business in another state?”
The vacant land properties I was hoping to buy and sell would be located in those new states, but since I was working remotely, doing 99% of my work via phone, email, and online, without ever setting foot over state lines, would I still be “conducting business” in these state?
To figure this out, my attorney gave me some questions to think about…
- Does your business entity have a physical presence in that state (e.g., satellite offices)?
- Do you ever travel to that state to conduct your business?
- Will you have employees in that state or hire contractors or subcontractors in that state to make significant improvements to the property?
- Are you required to hold a business license in that state?
- Are you buying and selling one or several properties in that state each year?
- How much of your company’s gross revenue is generated from that state?
In my case, I could confidently answer “no” or “not much” to ALL of these questions.
Furthermore, I wasn't planning to buy more than one or two properties per year in each new state. Since the income generated from each state would be fairly minimal relative to my company's overall revenue, I concluded that in my situation, I did not need to qualify as a foreign corporation in any of these other states.
However, if I had answered “yes” to one or more of these questions, I may have had to go through the motions of registering in these other states before doing business.
Disclaimer: As always, please be aware that I am not an attorney, and the information in this article should not be interpreted as “legal advice”. This article explains my understanding of the issues, but my thoughts are no substitute for legal advice from a licensed and experienced attorney. Before you act on anything described here, consult with a legal professional in your area to confirm you’re working with the right information and assumptions.
Foreign Qualification Examples
To help you see the issue from a few different perspectives, here are some examples of businesses that most likely would and would not need to qualify as foreign corporations outside their home states.
When Foreign Qualification Is Most Likely Needed
- John forms an LLC for his business in California, but his office and several employees are physically located in Oregon. He most likely needs to complete his foreign qualification in Oregon.
- Jane lives in New Mexico, but her business partner lives in Arizona. The company was formed in New Mexico, but Jane's business partner generates most of the company's revenue from customers and clients in Arizona. She most likely needs to register her New Mexico corporation as a foreign entity operating in Arizona.
- Tom registered an LLC in Wyoming to run his real estate agency in the northern part of the state. He is also licensed to sell real estate in Montana and regularly lists and sells properties there. He most likely needs to register his LLC as a foreign entity in Montana.
- Sarah is operating a legal practice in New York and wants to open a new office in Pennsylvania. She would most likely need to register for a foreign qualification in Pennsylvania.
When Foreign Qualification Is Most Likely Not Needed
- Dave runs a title agency with a corporation formed in Wisconsin. Most of the transactions his company closes are for properties in Wisconsin, but their buyers and sellers are occasionally located in Illinois, Minnesota, and Michigan. Dave doesn't have any agents or employees who work outside of Wisconsin, and most of the documentation is sent through the mail and email, with very few visits to meet their clients in person outside of Wisconsin. He likely does not need to qualify as a foreign corporation outside Wisconsin.
- Kyle is a web designer who formed an LLC in Utah to run his company. Most of his work is done on the internet, and his clients work in several states around the country. Since he is not physically meeting his customers in other states, he has no physical presence outside of Utah, he doesn't need a license to conduct business in other states, and his revenue streams don't have a strong concentration in any single state. He most likely does not need to register for a foreign qualification in any other state.
- Wes is a real estate investor who formed an LLC in Florida, where his home and office are located. He buys and sells properties in other states on occasion. Still, he isn't targeting any area specifically outside of Florida, he doesn't have employees in other states, he rarely visits the properties in person, and his revenue from these properties outside of Florida isn't significant or recurring year-over-year. He likely does not need to register as a foreign corporation in any other state.
Of course, these scenarios are just examples and may not be directly relevant to your business or situation. You should always check with your attorney or accountant to verify whether you need to qualify as a foreign entity in any other state.
How to Register in Another State
The paperwork and procedure are fairly straightforward if you need to register your business entity in another state. Still, most states have small variations in their forms and processes.
One way to make the process much easier is to enlist the help of a service like ZenBusiness.
Keep in mind that in most states, before they will grant their approval for your company's foreign qualification (aka – “Certificate of Authority”), you can expect them to check and verify that your business entity is in “good standing” in the home state where it was formed. This should already be handled in the regular course of your business, but if you've allowed this to lapse, you'll want to get it back in good standing before you move forward.
Alternatives to Consider
Depending on your situation, it may make more sense to simply register a brand new business entity in the state where you're planning to operate.
For example, if you're in the business of buying and selling vacant land, and you're planning to start doing a lot more deals in a new state where you haven't previously done much business, it could be simpler to just start a new LLC in that new state and run all of those state-specific deals through your new state-specific entity.
Even aside from the issue of having a domestic business entity in that new state, this could also offer some benefits in terms so spreading out the risk of your real estate portfolio by owning your properties in separate entities (so if one entity gets sued, the properties in your other entities would still be protected).
What Are the Consequences of Not Registering?
Having never been in this situation, I can't tell you much from personal experience. Still, based on what I've seen and heard from others, the biggest consequence of failing to complete your foreign qualification is that your company may have to pay fines, penalties, and back taxes for the period in which your company went “under the radar” by conducting business in that state without registering appropriately.
Your company could also forfeit its right to file a lawsuit in state court, so if you ever need to enforce a contract of any kind through a lawsuit (e.g. – if another party fails to perform on a purchase agreement, land contract, assignment agreement, etc.) you may be giving up your power to recover damages if you aren't properly registered in the state where you're conducting business.
Keep in mind, this doesn't mean your business entity won't provide any protection at all. An entity that isn't properly registered can remain intact, but you cannot file any counter-claims or cross-claims. For example, if a contractor stiffs you on a rental rehab and your LLC was not registered in the state, the contractor could get any case dismissed on these grounds. In some cases, you may be able to bring a claim after you register, but not until you register properly as a foreign entity in that state.
If you're looking for some other supporting information to determine whether you need to register as a foreign entity and/or how the process works, the best advice you can get is usually by talking to an attorney, but I also found this article and this article to be quite helpful.
You can also try contacting a company like MyCorporation by phone or email if you have specific questions about how the process works and whether you need to be concerned about the issue for your business.