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 North Carolina, you may need to complete a foreign qualification in North Carolina before you can expand there.
What happens if I fail to foreign qualify before doing business in North Carolina?
Foreign qualifying is essentially asking permission to do business in the state of North Carolina. 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 North Carolina yields consequences that are far costlier than registering in the first place. If you fail to foreign qualify, your business:
- Will no longer be able to maintain lawsuits in North Carolina courts
- Will owe the state all fees and taxes it would have paid had it been properly registered during its time in the state. This includes late fees for failure to pay on time.
- Will be charged with a civil penalty of $10 per day it transacted business without authority, up to $1,000 per year
Let’s add up those penalties. Say you’ve been doing unauthorized business in North Carolina for three years. That’s $3,000 right off the bat ($1,000 per year). Then, add the cost of an Application for Authority ($250) and three annual reports ($200 each). That comes to a grand total of – drum roll please – $3,850. And this isn’t even including taxes and potential late fees, which could make that total much higher.
This won’t, however, cancel or invalidate any of your current contracts or prevent you from defending a lawsuit.
If you’re interested in the law behind these penalties, read the North Carolina Revised Statutes, Section 57D-7-02.
What is considered “doing business” in North Carolina?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in North Carolina? State law is vague on the subject, which can lead to some confusion. But according to other state and tax laws, you are considered to be “doing business” in most states and required to foreign qualify if:
- Maintain any kind of physical presence in the state. This means offices, stores, warehouses, distribution centers, or other structures
- There are salespeople, agents, or other representatives making transactions on behalf of your LLC in the state
LLCs with certain structures are required to pay a franchise tax each year in North Carolina. But the state won’t know to tax you unless you’ve foreign qualified. If you’re thinking “it’d be easier to skip qualification and avoid the tax,” don’t be tempted! This will likely lead to heftier fines in the future. For more on the franchise tax, see the North Carolina Department of Revenue website.
If you’re unsure whether or not you need to file for foreign qualification in North Carolina, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in North Carolina?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in North Carolina. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Defending or settling a lawsuit in a North Carolina court
- Any action that solely concerns internal affairs, like holding meetings of managers or members
- Maintaining in-state bank accounts
- Having offices/agencies for the maintenance or exchange of the LLC’s own equity, ownership interests, or securities
- Soliciting or procuring orders to be completed outside the state before becoming contracts
- Making or investing in loans
- Collecting debts
- Transacting business in interstate commerce
- A single, isolated transaction outside of normal business activity and not in line with similar activities
- Selling through independent contractors
- Owning real or personal property in North Carolina
While this list is fairly comprehensive, you can find a bit more detail in North Carolina statutes, Section 57D-7-01. If your only business activities in North Carolina appear on the list, you’re most likely exempt from foreign qualifying. Still, it’s a good idea to speak with an attorney if you’re unsure.
How to Foreign Qualify your LLC in North Carolina
Foreign qualification in North Carolina 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 North Carolina, the Secretary of State’s website has a helpful page containing all the information you’ll need. Feel free to browse or look for any particular information you might need. But when you’re ready to begin the filing process, click “Get Started” under “Preparing and submitting the documents.” Then select “Submitting the document for filling.”
There are three options for submission: online, mail, and in person. Click the one you prefer to get instructions. For all three, you’ll need to complete a Form L-09: Application for Certificate of Authority for an LLC, so do that first. Then:
- Online: Go to the PDF Upload Portal. If you don’t have one already, create an account. You’ll want to “upload a creation filing,” and follow the instructions. At the end, you’ll be prompted to pay the $250 fee with a credit or debit card.
- Mail: Complete your form and mail it, with a $250 check (payable to “North Carolina Secretary of State”) to Business Registration Division, P.O. Box 29622, Raleigh, North Carolina 27626-0622.
- In Person: If you live in or near Raleigh, feel free to drop off your documents at 2 South Salisbury Street, Raleigh, NC 27601, across from the State Capitol Building. The office is open 8:00am-5:00pm, Monday through Friday. In person, pay your fee with a check or money order made out to “North Carolina Secretary of State.”
No matter how you file, the state requires you to include a Certificate of Existence or Good Standing – not more than six months old – from the state where you formed your LLC. Reach out to your home state’s government to obtain one.
Typical processing time is 5-7 business days. But if you’re itching to do business in North Carolina and you need it sooner, you can pay $100 from 24-hour service or $200 for same day service. Request expedited processing on your Cover Sheet.
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 foreign qualification and you’re embarking on another chapter in the life of your business.
Name Requirements to Remember
Before you send off your documents, double check to confirm that your LLC name follows all of North Carolina’s business name requirements. To comply, your name must:
Use a term that designates its business type, like “limited liability company,” “limited company,” “L.L.C.,” “LLC,” “L.C.,” or “LC”
Not use any of the Secretary of State’s “prohibited words.” Find a full list here.
Be available for use and distinguishable from the names of all other business entities on file with the Secretary of State.
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 North Carolina 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 North Carolina. For a $100 service fee, they’ll handle that paperwork so you don’t have to.