Texas LLC Foreign Qualification: Here’s What to do
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 Texas, you may need to complete a foreign qualification in Texas before you can expand there.
What happens if I fail to foreign qualify before doing business in Texas?
Foreign qualifying is essentially asking permission to do business in the state of Texas. And the notion that “it’s easier to ask forgiveness than permission” doesn’t apply here. Failing to foreign qualify before starting business in Texas 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 Texas court.
- Can be stopped from doing business in the state by the attorney general.
- Will be subject to a civil penalty equal to all fees and tax that would have been imposed since the date you were required to register.
- Will be subject to a $750 late registration fee for each calendar year you’ve been doing business (plus the initial $750 it costs to register).
Let’s add up those penalties. If you don’t foreign qualify, your business will be charged a minimum of $1500 for the first year you fail to foreign qualify, plus $750 for each additional year, plus the taxes you would have been paying since starting your business in Texas.
Say you started doing business in Texas on June 1, 2012 but didn’t foreign qualify until December 1, 2015. You would owe $3,000 in late fees plus the original $750 fee for a grand total of $3,750. And that’s not even considering the retroactive taxes you’d have to pay and the fact that the attorney general could completely cut off your business transactions. It’s not something you want to risk.
You can read more about possible penalties on the Texas Secretary of State website.
What is considered “doing business” in Texas?
We’ve established why you shouldn’t do business without a foreign qualification. But what exactly does it mean to “do business” in Texas? You are considered to be “doing business” in Texas and required to foreign qualify if:
- You have a physical presence in the state. Offices, warehouses, stores, and mailboxes located in Texas all count as physical presences.
- You have salespersons or representatives in the state who are working on behalf of your business.
Another important consideration is state tax. Remember that any income made within the state of Texas is also subject to state franchise tax. Foreign qualifying your business lets the state know that you might be filing taxes on money earned while doing business there.
If you’re unsure whether or not you need to file for foreign qualification in Texas, we suggest seeking legal counsel.
Could I be exempt from foreign qualifying in Texas?
The foreign qualification, however, isn’t a hard and fast rule for all LLCs performing any kind of action in Texas. 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 Texas court.
- Dealing with internal business affairs, like holding meetings in the state.
- Having a business bank account in the state.
- Voting in the interested of an entity your LLC has acquired.
- Selling products or services through independent contractors.
- Securing and collecting certain debts.
- Transacting business in interstate commerce
- Completing a single transaction—outside of your typical business dealings—within a window of 30 days.
- Owning real or personal property in Texas
For a full list of exemptions, see section 9.251 of the Texas Business Organization Code. If your only business actions in Texas appear on this list, you are exempt from filing a foreign qualification.
How to Foreign Qualify your LLC in Texas
Foreign qualification in Texas 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 Texas, you can do so by filing Form 304 with the Texas Secretary of State. The fastest way to file is online through the Texas SOSDirect website.
You can also download and print the form online to file by mail to P.O. Box 13697, Austin, TX 78711-3697 or by fax to (512) 463-5709.
If you’re located in or near Austin, you can file in person at James Earl Rudder Office Building, 1019 Brazos, Austin, TX 78701.
There is a $750 application fee for filing to foreign qualify, along with any late fees that may be applicable. You can use SOS late fee calculator to assess your amount based on the date you started doing business within the state.
You can pay your fees by personal check, money order, LegalEase debit card, or any major credit card. Checks and money orders must be made out to the Texas Secretary of State. There’s an additional 2.7% convenience fee if you pay with a card.
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
Like other states, Texas also has business entity name requirements. When foreign qualifying your LLC in Texas, you must register under a name that:
- Contains a term of organization that identifies it as an LLC (like Ltd. or LLC)
- Does not contain any word or phrase that implies you’re engaged in actions you aren’t authorized to pursue (see Texas Administrative Code Ch.79 for details)
- Is available and distinguishable in the Secretary of State records from the name of other registered or reserved business entities.
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 Texas 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 Texas. For a $100 service fee, they’ll handle that paperwork so you don’t have to.