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 Tennessee, you may need to complete a foreign qualification in Tennessee before you can expand there.
What happens if I fail to foreign qualify before doing business in Tennessee?
Foreign qualifying is essentially asking permission to do business in the state of Tennessee. 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 Tennessee 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 a lawsuit in any Tennessee court
- Can have any existing legal proceedings stayed by the court
- Will be subject to a fine that is three times the required filing fee for each year it did business without authorization
- Can be stopped from doing business by the Attorney General
Let’s add up those penalties. Say you started doing business in Tennessee on June 1, 2012 but didn’t foreign qualify until December 1, 2015. The minimum fee for registering a foreign LLC is $300 (potentially more depending on how many members you have). Multiplied by three, that’s $900, and you’ve conducted business over four years. So, you’ve got $3,600 in fines right away. Compounding this penalty is the fact that the Attorney General can cut off your LLC’s revenue stream but restricting its business activity. Quite simply, it’s best to avoid these penalties completely by foreign qualifying right away.
You can check out the legal context for these penalties in the Tennessee LLC Act, Section 913.
What is considered “doing business” in Tennessee?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in Tennessee? Unfortunately, the state’s LLC Act doesn’t directly define this, which can lead to some confusion. But tax laws indicate that you are considered to be “doing business” and required to foreign qualify if:
- Your LLC has stores, offices, warehouses, distribution centers, or some other type of physical presence in the state.
- Salespeople, employees, or other representatives are conducting business on your behalf in the state.
And, of course, you can’t escape taxes. Most business entities operating in Tennessee must pay an annual franchise tax, along with other potential business taxes. Foreign qualification lets the state know that you will be paying these taxes. If you try to avoid them by flying under the radar, it will most likely lead to severe penalties down the road.
If you’re unsure whether or not you need to file for foreign qualification in Tennessee, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in Tennessee?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in Tennessee. Certain actions do not qualify as “doing business” and therefore don’t require a foreign qualification. Some examples are:
- Maintaining, defending, or settling a claim or proceeding in Tennessee courts
- Activities and events that deal with internal business affairs, like holding manager or member meetings
- Maintaining bank accounts
- Having offices for the transfer, exchange, and/or registration of the corporation’s own securities
- Selling through independent contractors.
- Soliciting or completing orders that require acceptance outside of Tennessee before they turn into contracts
- Creating or acquiring indebtedness
- Securing and collecting certain debts
- Owning real or personal property in Tennessee
- A single, isolated transaction, taking place within 30 days, that isn’t part of your typical business activity
- Transacting business in interstate commerce
Time to take a step back. Make a list of your LLC’s activities in Tennessee. Do you find them all here? If so, great! You can likely skip foreign qualification. But if you’re unsure, it’s best to speak with an attorney. You can find a more detailed list of these exemptions on the Business Entity Filings FAQ page or in Tennessee’s LLC Act, Section 902.
How to Foreign Qualify your LLC in Tennessee
Foreign qualification in Tennessee 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 Tennessee, you need to apply for a Certificate of Authority, available both online and on paper.
Both filling methods will require you to submit a Certificate of Existence (or equivalent document) from the state where you formed your LLC, so request that first, then work on your application for authority while you wait.
Sometimes speed is key, especially if you’ve already begun doing business in Tennessee. If you need to foreign qualify quickly, filing online is your best option. Head to the Business Services Online page and choose “Form or Register a New Business.” Then, just click the button that says “Start Now!” and follow the instructions. You’ll be done in no time.
But postal mail is a reliable option as well. Download the “Application for Certificate of Authority” and enter all the necessary information. Pages 1-4 have in-depth, step-by-step instructions to help you complete the form. Then mail or hand deliver it, along with your Certificate of Existence and filing fee, to:
Tennessee Secretary of State
ATTN: Corporate Filing
312 Rosa L. Parks Ave FL 6
Nashville TN 37243
The filing fee in Tennessee is an interesting case. You’re charged based on how many members your LLC has. You’re charged $50 per existing member at the time of filing, with a minimum of $300 and a maximum of $3,000. So, if your LLC has eight members, that’s a $400 fee. If it has 15 members, that’s $750. If it has two members, that’s the minimum of $300.
Here are your payment options for each filling method:
- Online: Credit or debit card (or you can print your electronic form and mail it with a check)
- Mail: Check, cashier’s check, or money order made payable to “Tennessee Secretary of State”
- In person: Card, check, or cash
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
In all the excitement of expanding your business to Tennessee, don’t forget that your LLC name needs to comply with the state’s specific requirements. Double check to make sure that your name:
- Uses a term that designates its business type, like “limited liability company,” “L.L.C.,” or “LLC.”
- Does not contain language that implies affiliation with any “fraternal, veterans’, service, religious, charitable or professional organization” unless that affiliation is recorded with the Secretary of State’s office.
- Does not imply that it is a government agency
- Is distinguishable in the Secretary of State’s records from all other Tennessee business entity names. Check your name’s availability 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 Tennessee 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 Tennessee. For a $100 service fee, they’ll handle that paperwork so you don’t have to.