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The first time I started looking at buying investment properties outside my home state – there was something that got me really confused.
You see… when I started my business, I had formed my LLC in the state of Michigan.
After researching how to do business other states, I started to get the impression that I needed to register my LLC as a “Foreign Corporation“ in any jurisdiction that WASN'T the same as my home state.
Given that my business entity, physical office, bank accounts, mailing address, phone number and every other 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 other places like Ohio, Arkansas or Oklahoma? Was I required to register my Michigan LLC as a “foreign entity” in each one of these states before I could do anything there?
…and what if I DIDN'T go through these motions? What would be the consequences if I failed to comply?
After agonizing about it for a while, I decided to get some real answers from my attorney. After I explained the specifics of 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?”
Obviously, the vacant land properties I was looking to buy and sell would be located in those new states – but since I was working remotely, did 99% of my work via phone/email/online and I never planned to set foot over these state lines, would I still be “conducting business” in these state?
As a way of figuring 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 to make significant improvements to the property?
- Are you required to hold a business license in that state?
- Are you buying and selling one property or several properties in that state per year?
- How much of your company’s gross revenue is generated from that state?
In my case, I was able to confidently answer “No” to ALL of these questions. Furthermore, I usually wasn't planning to buy more than one or two properties in each state per year, and since the income I was planning to generate from each state would be fairly minimal relative to my global revenue, I came to the conclusion that in my situation – I did NOT need to qualify as a foreign corporation in any of these other states.
On the other hand, if I had answered “Yes” to one or more of these questions, then I may have had to go through the motions of qualifying 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 contains 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, be sure to 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 business that most likely would and most likely wouldn't need to qualify as a foreign corporation outside of their home states.
Foreign Qualification Most Likely Needed
- John Smith forms an LLC for his business in California, but his office and several of his employees are physically located in Washington. He most likely needs to complete his foreign qualification in Washington.
- Jane Doe 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 overall revenue from customers and clients in Arizona. She most likely needs to qualify the business as a foreign entity operating in Arizona.
- Tom Atkins 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 he regularly lists and sells properties there. He most likely needs to register his LLC as a foreign entity in Montana.
- Sarah Roe is operating a legal practice in New York and she wants to pen up a new office in Pennsylvania. She would most likely need to register for a foreign qualification in Pennsylvania.
Foreign Qualification Most Likely Not Needed
- Dave Jones runs a title agency with a corporation formed in the state of Wisconsin. Most of the transactions his company facilitates are for properties in Wisconsin, but occasionally their buyers and sellers are located in Illinois, Minnesota, and Michigan. Dave doesn't have any agents or employees who work in these areas, and most of the documentation is sent through the mail and email, with very few visits to meet their clients in person. He most likely does not need to qualify as a foreign corporation outside of Wisconsin.
- Kyle Johnson 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 any 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.
- Wes Grant is a real estate investor who formed an LLC in Florida, where his home and office is located. He buys and sells properties in other states on occasion, but he isn't targeting any area specifically, he doesn't have any employees in other states, he rarely visits the properties in-person his revenue from these properties isn't significant or recurring year-over-year. He most likely does not need to register as a foreign corporation in these states.
Of course, these scenarios are just examples and they 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 states.
How to Register in Another State
If you need to register your business entity in another state, the paperwork and procedure is fairly straightforward, but most states have small variations in the forms and processes they use.
One way to make the process much easier is to enlist the help of a service like MyCorporation. I've used them for similar registrations in the past and found them very easy to work with.
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 is something you should already be handled in the regular course of your business… but if you've allowed this to lapse for any reason, you'll want to get it back in line before you move forward.
What If You Fail To Comply?
Having never been in this situation, I can't tell you much from personal experience – but 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 of time 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 by way of a lawsuit (for example – if the opposite 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.
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.
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