Your business is growing, and you’re planning an expansion to other states. It’s a good problem to have!
But it’s not quite as simple as choosing another location. Because each state has different rules and requirements for business operations, you may need a “foreign qualification” in each state you plan to do business.
It’s a common misconception that foreign qualification is only for businesses operating outside the U.S. But in this case, “foreign” refers to any business operating in a state that isn’t the state where the LLC was originally formed.
For example, if your LLC is registered in Washington and you are looking to open a second location in Colorado, you may need to complete a foreign qualification in Colorado before you can expand there.
Important Note: If you’d like to save time and have the foreign qualification paperwork taken care of for you, look into a reliable online service like Northwest Registered Agent.
What happens if I fail to foreign qualify before doing business in Colorado?
Foreign qualifying is essentially asking permission to do business in the state of Colorado. And the notion that “it’s easier to ask forgiveness than permission” doesn’t apply here. Failing to foreign qualify before starting a business in Colorado yields consequences that are far costlier than registering in the first place. If you fail to foreign qualify, your business:
- Cannot maintain an action, lawsuit, or proceeding in a Colorado court.
- May be completely stopped from doing business by the Colorado Secretary of State.
- Will be subject to a civil penalty of up to $5,000
- Will be required to pay additional fees of up to $100 per calendar year your business has been transacting business without foreign qualification.
- Will owe the state any fees it would have paid had it been properly registered. For example, the Foreign Entity Authority Statement comes with a $100 fee and the biennial Periodic Report has a $10 fee. Your LLC will also be charged with paying any affiliated late fees for these filings.
Let’s add up those penalties. Say you’ve been doing business in Colorado for four years. Your civil penalty could be $5,000. Then, add $100 for each of the four years, $100 for your Foreign Entity Authority Statement, $10 for each of two Periodic Reports, and $100 for a Statement Curing Delinquency. Your total comes to (drum roll please): $5,620. And that’s not even considering the retroactive taxes you’d have to pay and the fact that the attorney general could cut off your current transactions, costing you profits. It’s simply not something you want to risk.
However, while you wouldn’t be able to bring a lawsuit to court if caught operating without authority, you would still be allowed to defend a suit in Colorado.
Need more info? Take a look at the Colorado Corporations and Associations Act 7-90-802.
What is considered “doing business” in Colorado?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in Colorado? The state’s Corporations and Associations Act uses both “transacting business” and “conducting affairs” in reference to business activities, but doesn’t provide specifics. However, in most states, you are considered to be “doing business” and required to foreign qualify if:
- Your LLC has a physical presence in the state. This could mean offices, stores, warehouses or other property.
- There are salespersons or representatives transacting business on your behalf in the state.
If you’re unsure whether or not you need to file for foreign qualification in Colorado, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in Colorado?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in Colorado. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Maintaining, settling, or defending a lawsuit in a Colorado court.
- Holding meetings of owners, board members, etc. in the state.
- Maintaining bank accounts
- Having offices or agencies in the state for the transfer or exchange of its own securities
- Selling products or services through independent contractors.
- Lending or acquiring debts
- Creating or acquiring mortgages
- Facilitating a single transaction, not one in a series of similar transactions, within a 30-day period.
- Transacting business in interstate commerce
If you find your only business activities in Colorado on this list, you’re likely off the hook and don’t have to foreign qualify. But keep in mind that this list, while thorough, isn’t exhaustive. So if you’re at all unsure whether you need to foreign qualify, we recommend seeking legal counsel.
For additional information, read over the Colorado Corporations and Associations Act 7-90-801.
How to Foreign Qualify your LLC in Colorado
Foreign qualification in Colorado is simple if you know where to find and send your forms. If you or your legal counsel has decided to foreign qualify your LLC in Colorado, go to the Secretary of State’s Business Forms List and find the “Statement of Foreign Entity Authority,” in the Foreign Entities section. There is no paper form available, so you’ll need to do so online by clicking the “file online” link. For the most efficient filing process, make sure you’ve gathered the following info before you begin:
- You LLC “true name,” as it appears in the records of its home state, or its “assumed name,” if the true name is unavailable in Colorado
- Entity ID Number — if your LLC isn’t yet on file in Colorado, leave this blank
- Jurisdiction — you will likely select “foreign” for this, indicating your LLC was formed out of state
- Registered agent name, address, and consent
- Date you will begin commencing business in Colorado
- Delayed Effective Date — your LLC will be immediately registered unless you specify otherwise
- Individual Causing Delivery — your personal information, or that of an associated individual
The last step in the process is paying the form’s $100 fee. Enter your credit or debit card information on the last page of the online form. Before you hit submit, make sure that you’ve entered all information correctly, as mistakes could result in fines or legal consequences.
Since you’re filing online, your form will be processed immediately.
After your form is in and your fee is paid, sit back, take a deep breath, and pat yourself on the back. Your LLC is foreign qualified and you’re embarking on another chapter in the life of your business.
Name Requirements to Remember
Your LLC name is an important part of the registration process. It’s how your company will be known in Colorado. That said, don’t forget about the state’s naming restrictions.
Your LLC name must contain a signifier that designates it as a Limited Liability Company. Acceptable signifiers are:
- “Limited Liability Company”
- “Ltd. Liability Company”
- “Limited Liability Co.”
- “Ltd. Liability Co.”
More importantly, your name must be distinguishable from all other business entities on record with the Colorado Secretary of State. Before you do anything else, refer to the S.O.S. Name Availability Search to determine your name’s uniqueness.
Need to save time?
Let’s face it, there’s never enough time in the day, especially when you’re running a company. And properly registering your LLC in Colorado involves research and time, time that you could be using to continue growing your business.
If the thought of paperwork, fees and state correspondence makes your head spin, consider using a service like Northwest Registered Agent to foreign qualify your business. Services like Northwest ensure that your forms are filed correctly and on-time, potentially saving you thousands of dollars in penalties, not to mention a bunch of time and stress.
And as a bonus, they include a free registered agent service for one year to keep your business compliant and in good standing with the state of Colorado. For a $100 service fee, they’ll handle that paperwork so you don’t have to.