Starting a business can be a pretty confusing process. There are a lot of terms and paperwork that you need to become familiar with in order to make sure that your business has completed all of the legal obligations it needs to operate. One of the terms and concepts you should be familiar with is something called a “Foreign Entity” – sometimes called a Foreign Limited Liability Corporation.
A foreign entity is a corporation that is incorporated one state but does business in another state. Due to being incorporated in another state, perhaps for tax reasons in Delaware, the state where you actually do business sees your corporation as a foreign entity. Here are a couple examples of when you would need to file as a foreign entity:
- You decided to use Business Solutions to incorporate in Delaware but your store is physically located in Michigan. In order to legally conduct business in Michigan, you will need to file a Foreign Corporation Certificate.
- You and your business partners are scattered across the United States and have initially worked out of your home state where the business was incorporated. Now, you business partners are starting to offer your business’s services to clients that live around them. Since they are conducting business under the umbrella of your corporation, you would be considered a foreign entity in those states.
- If you opened up a store in Michigan and are incorporated in Michigan and now you want to expand to Ohio, you would be considered a foreign entity in the state of Ohio.
The Benefits of being a Foreign Entity
You may be wondering what are the benefits of being a foreign entity. From the sounds of it, you might think that it’s just more paperwork and fees. However, that’s not the case. Incorporating in a different state, like Delaware, has benefits that far exceed the relatively small cost of filing a Foreign Corporation Certificate. Here are two main reasons why you should incorporate in Delaware, no matter where you do business:
The Court System – The quality of Delaware courts and judges are second to none when it comes to corporate law. The court system even has a special court called the Court of Chancery that specializes in corporate law disputes without juries. Instead of months and sometimes years of waiting for time on a judge’s docket due to non-corporate cases, the Court of Chancery offers businesses the expectation that corporate legal disputes are addressed promptly and by specialized judges. It also helps that the Delaware’s Court of Chancery dates back to 1792, providing some predictability to potential rulings.
Up-to-date Legal Framework – Delaware prides itself on having up-to-date laws that spell out what companies can and cannot do in the 21st century. Delaware’s General Corporation Law provides guidance to business entities and Delaware’s tax law is kept up to date, with 4 tax legislation bills proposed and passed in June and July of 2017 alone!
Lastly, it’s important to file the proper Foreign Entity paperwork in your state so that your business is legally operating in that state. If you don’t, your company may be subject to fines, have to pay back taxes that could be crippling to your business and you lose the ability to sue in that state.
In essence, incorporating in a state like Delaware and being a foreign entity in the state where you do business has long term benefits. Since LLCs are registered at the State level and not the National level, your LLC is eligible for all of the benefits and protections of the state you incorporate in. In Delaware, that means the friendliest court system towards business, predictable rulings, and up to date regulations so you and your business are always clear on what you can and cannot do.
You’ve now read through all of this and may be thinking about how you’re not sure if your online business needs to register as a Foreign Entity. As an online business, you technically do business in all states, or at least in more than one – so do you need to file for Foreign Qualification in all of them? Not exactly. If you are incorporated in a state and conduct your business online, either shipping products to another state or offer consulting services virtually, you more than likely don’t need to file the Foreign Qualification paperwork. However, states are becoming more and more creative around how to define Foreign Entities. While you most likely don’t need to file this instant, it’s important that you keep up to date on the foreign entity qualifications in the states you do business in.
Being considered a foreign entity in the state you conduct business in is a common practice that offers a lot of benefits to a business and a business owner. Completing the paperwork in the states where you conduct business will allow you to legally operate your business and pay the necessary taxes to that state, helping you avoid any fines or back taxes for operating illegally. The small cost of filing Foreign Entity Qualification paperwork is nothing compared to the long-term benefits of incorporating in a business friendly state like Delaware.