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 Illinois, you may need to complete a foreign qualification in Illinois before you can expand there.
What happens if I fail to foreign qualify before doing business in Illinois?
Foreign qualifying is essentially asking permission to do business in the state of Illinois. 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 Illinois yields consequences that are far costlier than registering in the first place. If you fail to foreign qualify, your business:
- Will be prohibited from maintaining any civil action in an Illinois court
- Must backpay the state all the fees and taxes it would have owed during its time in Illinois had it been registered properly
- Will be liable for a penalty of $2,000, plus an additional $100 for every month it has been transacting business in Illinois without foreign qualifying.
Let’s add up those penalties. Consider this: you started doing business in Illinois on June 1, 2014, and didn’t foreign quality until January 1, 2019. Your initial penalty is $2,000. Then, let’s add $100 for each of the following 55 months. That’s $7,500, and we haven’t even added all of the fees and taxes you missed paying. This would put a serious dent in your profits. Seeing as the fee to foreign qualify is only $150, it’s not worth the risk to go unregistered.
Despite the steep penalties involved, transacting business without qualification won’t invalidate your current contracts, nor will it prevent your LLC from defending an action in Illinois courts.
The Illinois LLC Act has more to say about this in Sec. 45-45.
What is considered “doing business” in Illinois?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in Illinois? The state’s LLC Act doesn’t provide specifics, but based on state tax laws, you are generally considered to be “doing business” in most states and required to foreign qualify if:
- Your LLC has stores, offices, warehouses or other physical presences in the state.
- Salespersons, agents, or representatives are conducting business on behalf of your LLC in the state.
And, of course, there are always taxes to consider. Depending on how you’ve chosen to set up your LLC, you may very well be liable for specific business taxes in Illinois. If you don’t foreign qualify, the state won’t know to tax you, and you could be subject to additional tax-related fines later on. For more information on Illinois’ corporate taxation, visit the Illinois Department of Revenue website.
If you’re unsure whether or not you need to file for foreign qualification in Illinois, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in Illinois?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in Illinois. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Settling, defending, or maintaining any legal action in Illinois courts
- Facilitating meetings of board members, shareholders, managers, etc., or other activities pertaining to internal affairs
- Maintaining bank accounts
- Operating or selling through independent contractors.
- Soliciting orders as long as they require acceptance outside the state and are executed before becoming contracts
- Completing a single transaction, not in a series of similar ones, within 120 days
- Owning real or personal property in Illinois
- Having a corporate officer who lives in Illinois
Cross-check this list with your LLC’s activities in Illinois. If you find your only business activities present, you’re likely exempt from foreign qualifying in the state. Still, it’s a good idea to look over the full list in the Illinois LLC Act Sec. 13.75 just to make sure. And if you have any questions, seek legal counsel.
How to Foreign Qualify your LLC in Illinois
Foreign qualification in Illinois 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 Illinois, go to the Secretary of State Forms page and find LLC-45.5: Application for Admission to Transact Business. Filing this form by mail or in person will get your LLC foreign qualified and ready to operate in Illinois.
Download and fill out the form. For the most ease in processing, complete it electronically using Adobe Acrobat before printing. Before you sit down with your application, make sure you have the following information on hand:
- LLC name or assumed name (only if your company name is unavailable in Illinois)
- Jurisdiction (the state where you formed your LLC)
- Date you originally formed your LLC
- Period of LLC duration
- Principal address
- Illinois registered agent name and address
- Date you first conducted or plan on conducting business in Illinois
- The purpose for your LLC
- Names and addresses for all LLC managers
But you’re not done yet! You also need to obtain and submit a Certificate of Good Standing (or Certificate of Existence) – no more than 60 days old – from your LLC’s home state.
Got it all? Great. Then mail your form, certificate, and application fee to:
Department of Business Services
Limited Liability Division
501 S. Second St., Rm. 351
Springfield, IL 62756
*You can also drop it off in person if you live near Springfield
There is a $150 fee for foreign qualifying in Illinois, and you can pay it with a check or money order made out to “Secretary of State.” Typical processing time is 7-10 days. If you’re submitting your form in person, you can request expedited processing for an additional fee.
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
We wouldn’t want your application returned for having a noncompliant LLC name, so remember to follow all of Illinois’ business name restrictions when submitting it. Your LLC name must:
- Use one of the terms: “Limited Liability Company,” “L.L.C.,” or “LLC”
- Not contain any of the following terms: “Corporation,” “Corp.” “Incorporated,” “Inc.,” “Ltd.,” “Co.,” “Limited Partnership” or “LP.”
- Be recognizable and available within the Illinois Secretary of State records.
Want to check your name availability? You can do so here.
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 Illinois 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 Illinois. For a $100 service fee, they’ll handle that paperwork so you don’t have to.