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 Delaware, you may need to complete a foreign qualification in Delaware 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 Delaware?
Foreign qualifying is essentially asking permission to do business in the state of Delaware. 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 Delaware yields consequences that are far costlier than registering in the first place. If you fail to foreign qualify, your business:
- Will owe the Secretary of State $200 per year (or part thereof) it has been doing business without registering in Delaware.
- Will be required to pay all fees and taxes it would have paid (including late fees) had it been registered properly the entire time
- Will not be allowed to maintain any action or suit in Delaware courts until it has paid all fees and penalties for failing to register
- Can be stopped from transacting business in Delaware by the attorney general
While these penalties are detrimental to your business operations, they do not ban your LLC from all activities in the state. Penalties for operating without foreign qualifying will not affect the validity of your current contracts, nor will they prevent you from defending an action or suit in Delaware court.
Find a more in-depth description of these penalties in the Delware LLC Act, Sec. 18-907.
What is considered “doing business” in Delaware?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in Delaware? Read over the state’s LLC Act and you’ll find very few specific examples, but it does state that “doing business” means “the course or practice of carrying on any business activities in the State of Delaware, including, without limiting the generality of the foregoing, the solicitation of business or orders in the State of Delaware.” But in most states, you are considered to be “doing business” and required to foreign qualify if:
- Your LLC has some kind of physical presence in the state, including stores, offices, warehouses, etc.
- Your LLC has salespersons or representatives doing business in Delaware on its behalf
Something else to keep in mind is Delaware’s Franchise Tax. All LLCs operating in the state must pay an annual $300 tax for the privilege of doing business there. Foreign qualifying notifies the Secretary of State that you will be paying. If you don’t, you will likely be liable to owe this tax, plus late fees, later on.
If you’re unsure whether or not you need to file for foreign qualification in Delaware, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in Delaware?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in Delaware. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Maintaining, defending, or settling an action or proceeding in Delaware courts
- Holding meetings, or other internal affairs dealings, in the state
- Maintaining a bank account
- Selling products or services through independent contractors.
- Soliciting or receiving orders outside of the state before they become contracts
- Securing and collecting certain debts.
- Transacting business in interstate commerce
- Conducting one isolated transaction that is not in a series of similar actions
- Doing business as an insurance company
See anything your LLC does? Is that its only business action in Delaware? Then you’re probably in the clear and won’t have to foreign qualify. For a full list of exemptions, see the Delaware LLC Act, Sec. 18-912. If you have any doubt or question about whether or not you need to foreign qualify, it’s best to seek legal advice.
How to Foreign Qualify your LLC in Delaware
Foreign qualification in Delaware 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 Delaware, you’ll need to complete and submit a “Certificate of Registration of Foreign LLC Company.” The form’s first and second pages contain in-depth instructions for its completion. To make the process as quick as possible, have the following information on hand before you sit down with your form:
- Your LLC name (or a fictitious name if the original name is unavailable in Delaware)
- The state where you formed your LLC and the date on which you formed it
- Your registered office address in Delaware
- The name of your Delaware registered agent
- The date you intend to start doing business in Delaware
You’re not quite finished yet. Along with this completed form, you’ll need to submit:
- A Certificate of Existence, dated within six months, from your LLC’s home state
- A Filing Cover Memo (to ensure expediency in processing)
- A $200 fee, payable by check made out to “Delaware Secretary of State”
Once you’ve gathered your documents, you’re ready to submit! Mail everything listed above to:
Delaware Division of Corporations
401 Federal Street – Suite 4
Dover, DE 19901
Or fax them to (302) 739-3812
Processing times at the Delaware Secretary of State’s office are usually 2-3 weeks, but if you’re itching to start doing business, they also offer multiple expedited processing options at various costs.
- One-Hour: $1,000
- Two-Hour: $500
- Same Day: $100
- 24-Hour: $50
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 on its way to being foreign qualified and you’re embarking on another chapter in the life of your business.
Name Requirements to Remember
Between gathering documents, paying fees, and keeping up with all your other business owner responsibilities, it can be easy to forget about naming requirements. As a reminder, in Delaware, your LLC name must:
- Contain the words Limited Liability Company or an abbreviation like LLC or L.L.C.
- Contain a translation (only on the application) if the name uses words from a foreign language
- Not use any reference to the word “bank” or terms that might indicate a banking affiliation without approval from the Delaware Banking Commission
- Not use any words that the Secretary of State deems lewd, vulgar, or racist.
- Be distinguishable and available in the Delaware Secretary of State records
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 Delaware 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 Delaware. For a $100 service fee, they’ll handle that paperwork so you don’t have to.