Your business is located in the U.S, all your employees are in the U.S, and all your sales are made within the U.S. So how can you be called a “foreign business”? You don’t have to be doing business overseas to be a foreign business. A foreign business is any company legally formed in one state that is conducting business in another state. For example, you formed a corporation in New Jersey but maintain an office in New York or warehouse your goods there. To the state of New York, due to your physical presence there, you’re a foreign business. What should you do about this?
What to do
To operate legally within a state other than the one in which it was created, you need foreign qualification. Essentially, this is a matter of registering with the state. This entails completing some forms (not onerous) and paying a fee (ranging from a low of $20 in Wisconsin to a high of $750 in South Dakota). Delaware Business Incorporators, Inc. has a state-by-state list of fees for foreign corporations. There’s also a list here of state websites to find more information about registering a foreign corporation.
The corporation must have a registered agent in the state (a person or company authorized to receive any legal notifications, including service of process of any legal action against the company) and file an annual report. The same rules for corporations usually apply to limited liability companies (LLCs). The rules don’t apply to sole proprietorships or general partnerships.
If you operate in another state but don’t register there, the corporation, and perhaps owners as well, may be subject to fines or penalties. What’s more, your business won’t be able to initiate any legal action against another person or company in that state; you haven’t been “qualified” yet.
Tax implications
Tax implications apply to all types of business entities; registration is not a condition for imposing taxes. This means that sole proprietorships and general partnerships may be subject to the same tax exposure in other states as corporations and LLCs. As long as you have a nexus (connection) to the state, you may be subject to income taxes on the portion of income earned in the state and/or obligations with respect to sales taxes on remote sales.
Nexus for tax purposes is increasingly based on an economic connection (conducting a certain amount of activity in a state, such as remote sellers through their websites or online platforms); a physical presence is no longer needed. Avalara has a map showing economic nexus for sales tax purposes.
Cost of being a foreign business
So, let’s add up the cost of doing business in another state:
- As a corporation or LLC, you have to pay a registration fee as well as annual fees to remain registered
- Regardless of the type of entity you use to run your business, you have to collect and remit sales tax on sales within another state, unless you qualify for an exemption, or the state doesn’t have a sales tax. While the business doesn’t pay the sales tax—the buyer does—the business has administrative costs for compliance. There may also be quarterly or annual sales tax returns to be filed.
- Regardless of the type of entity you use to run your business, you must file state income tax returns, unless the state doesn’t have a state income tax. If there is one and your business is a pass-through entity (e.g., LLC; S corporation), then each owner may also have to file a personal income tax return in that state as a nonresident to report his or her share of business income. Professional fees for return preparation and filing for filing in two or more states can really add up.
Final thought
A Roman playwright—Titus Maccius Plautus—is credited with the saying “You have to spend money to make money.”
If you’re a foreign business, this statement rings true. What choice do you have?
