While most people instantly think of “foreign” as meaning “from outside of the United States,” when it comes to limited liability companies, “foreign” doesn’t have the same meaning.
When reference is made to a foreign limited liability company it means an LLC that carries on business or plans to carry on business in a different state. If an LLC has been formed in a state and carries on business in that state, from the perspective of that state it’s known as a domestic LLC.
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.
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.
Foreign LLC Registration
The foreign LLC registration process in most states is very similar to the registration process for a domestic LLC.
However, in most states a foreign LLC registration form is different from the one you would fill out and file for a domestic LLC registration so when registering an LLC as a foreign LLC, the correct form is the one that applies to foreign LLCs specifically.
Exemptions to the Registration Requirement
If you have plans to carry on business with your LLC in another state outside of the state in which your LLC was formed, will you need to file a foreign LLC registration? In most cases, the answer is yes, but depending on the state in which you wish to carry on business, there may be exemptions to this requirement.
For example, the state of Texas requires a foreign LLC to register if it intends to “transact business” in Texas, and while Texas legislation doesn’t define what is meant by “transacting business”, the legislation does provide a list of fifteen activities that do not qualify as “transacting business.”
Since different states have different exemptions, It’s best to consult with an attorney based in the state in which you wish to do business to see if the business you will be conducting falls within any of the exemptions allowed in that state.
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.