A foreign corporation is a business entity incorporated in one jurisdiction, but doing business in another. When a business entity, like a corporation or limited liability company, operates outside its home state, it’s considered “foreign” in the states where it transacts business — even though it’s a domestic corporation in its place of origin. Let’s dive into the basics around foreign corporations.
What Are the Basics of a Foreign Corporation?
The concept of a foreign corporation isn’t new, but the 20th century saw a spike in foreign business due to globalization and tech advancements. With the rise of foreign corporations, international treaties surfaced to regulate their activities.
As foreign corporations integrated more into global markets, scrutiny increased. They faced tighter regulations, especially around income tax, competition, and corporation law. To operate legally in a foreign state, a corporation typically needs a certificate of authority from the secretary of state.
This means filing an application for authority, often accompanied by articles of incorporation and a certificate of good standing from their home state. There’s usually a filing fee, which can often be paid via credit card if you file online.
Moreover, foreign corporations need a registered agent and a registered office in the state they’re doing business. They might also need to submit an annual report and are subject to franchise tax in some states.
For businesses considering expansion, understanding the nuances of being a foreign corporation is essential. This includes nuances like maintaining a principal office, ensuring the name of the corporation is available in the foreign state (possibly requiring a name reservation or choosing a DBA), and understanding tax implications, such as whether they need to open bank accounts or make tax payments in the foreign state.
Tools like Mosey can streamline this compliance process, making it easier to navigate regulations across different states. Mosey also allows you to automate the process of foreign qualification and filing annual reports so your business remains compliant with ease.
What’s the Difference Between Foreign Corporations and Domestic Corporations?
A domestic corporation is a business entity incorporated and doing business in one U.S. state. For instance, if a company is formed under the corporation law of Texas and operates there, it’s a domestic corporation in Texas.
Conversely, a foreign corporation is incorporated in one state (or country) but transacts business in another. If our Texas business starts operations in Florida, it’s considered a foreign corporation in Florida.
With that in mind, let’s look at some distinctions:
Registration: Foreign corporations must secure a certificate of authority from the secretary of state in any state they’re doing business in. This means filing an application for authority, typically with a filing fee, and might involve submitting articles of incorporation from their home state.
Operational Essentials: A foreign corporation needs a registered agent and registered office in each state in which it operates. They may also be required to file an annual report with the state’s corporations division. Note, if you use Mosey to register with the Secretary of State as a foreign entity, Mosey is automatically your registered agent so you won’t need to worry about this additional requirement.
Tax Nuances: Foreign corporations could face added tax burdens, like income tax or franchise tax, in the states where they operate. Some states might also necessitate specific bank accounts for tax payments.
Compliance: Non-compliance, such as lacking the right certificate of authority, can lead to penalties like fines or even business halts in that state.
Operating out-of-state brings added responsibilities, and businesses need to be aware of these nuances to ensure smooth operations and compliance.
What Are Some Examples of Foreign Corporations?
Let’s look at a hypothetical scenario. Imagine Business A is a business entity incorporated in Delaware because of the state’s favorable business corporation regulations. While Delaware is its home state, Business A sets up its principal office and operations in New York, where most of its employees work and where a substantial amount of its business is transacted.
In this context, even though both states are within the U.S., Business A is a foreign corporation in New York. To legally transact business in New York, it must register as a foreign corporation obtaining a certificate of authority from the secretary of state.
This involves fulfilling specific requirements, from paying a filing fee and appointing a registered agent for service of process in New York to filing necessary paperwork such as an application for authority or possibly presenting a certificate of good standing from Delaware.
Furthermore, despite being incorporated in Delaware, Business A would have tax obligations in New York based on the income generated there. This demonstrates the dual nature many corporations face — being domestic in one jurisdiction and foreign in another.
When it comes to real-world examples, many major corporations, like Apple or Amazon, are incorporated in one state — but they operate and are registered as foreign corporations in multiple other states due to the vast reach of their operations.
These companies ensure compliance with local corporation law, file annual reports, and manage tax payments in each state they have a significant place of business.
What Are the Advantages of Registering as a Foreign Corporation?
Foreign qualification provides a plethora of advantages for a business entity aiming to expand its operations out-of-state:
A foreign LLC or corporation can optimize its taxation. Different states have varying tax rates and structures; thus, selecting an advantageous jurisdiction can lead to significant savings. Moreover, some investors specifically favor entities registered in tax-friendly states, ensuring the company’s activities are lawful in every state of operation.
Favorable Business Laws
Certain states are recognized for their well-defined business processes and entrepreneur-friendly regulations. Opting to qualify in such states can provide a more conducive environment for operations.
To attract a diverse range of investors, it may be essential to qualify in states known for robust capital-raising environments. Savvy investors often examine a state’s legal system before committing funds, ensuring compliance and security.
Recognizing the value of entrepreneurship, some states offer distinct incentives, programs, and support, especially to startups and SMEs. A foreign qualification can unlock these benefits, propelling growth and sustainability.
As business entities expand, challenges arise, often tied to increased expenses. Registering as a foreign corporation can offer financial benefits, including lower taxes and enhanced access to vital resources. Factors like access to a skilled workforce or infrastructural needs become pivotal when considering where to transact business.
While there’s a filing fee and the need to maintain a registered agent and office, the benefits — ranging from tax savings, better business laws, access to investments, and state support — make foreign qualification a strategic move for many companies.
What Taxes Do Multinational and Multistate Corporations Pay?
Multinational and multistate corporations operating in the United States are subject to various taxes, and the specifics can vary from state to state. Here’s a breakdown of some of the taxes they might encounter:
Federal Corporate Tax: Multinational corporations are subject to a 21% federal corporate tax on their worldwide income.
Effectively Connected Income (ECI): Income earned by an international corporation from conducting a trade or business in the United States is considered ECI and is subject to U.S. taxation.
Branch Profits Tax: Multinational corporations engaged in trade or business in the U.S. may be subject to a Branch Profits Tax, which is equal to 30% of the dividend equivalent amount for the tax year. This tax is in addition to the corporate-level tax imposed on ECI.
State Taxes: On the state level, the taxation of international and multi-state corporations depends on various factors, including the extent of their business activities within a state. States may impose income, gross receipts, or net worth taxes on multinational corporations depending on their level of engagement within the state. The specifics can vary widely from state to state.
Local Taxes: Besides federal and state taxes, multi-state corporations may also be subject to local taxes, which can include property taxes, sales taxes, and other local levies.
The exact tax obligations of a foreign corporation can be quite complex and will depend on numerous factors, including the nature and extent of their operations in the U.S., as well as the specific tax laws and regulations of the federal government, individual states, and local jurisdictions.
How Do You Register a Foreign Corporation?
If you’re a U.S. corporation looking to set up shop in an additional state, you might be wondering where to begin. Think of the registration process as similar to moving into a new neighborhood.
Do Your Due Diligence
Firstly, you need to make sure your “name,” or your brand, isn’t already being used by someone else in the state you’re eyeing. It’s a bit like ensuring there isn’t another house with the same number on your street. If your original name is taken, you might have to come up with a nickname — what’s often referred to as a “doing business as” name, or DBA.
Select a Registered Agent
Next, choose a registered agent who will handle your mail and any official state notices. While you can choose someone within your company, there are also professionals out there who specialize in this.
Check State Filing Requirements
Before you can join the neighborhood, many states will want to know you’re in good standing where you originally come from. Think of it as getting a recommendation from your previous neighborhood’s watch committee. This typically means providing a certificate proving you’re all good in your home state.
Gather Fees and Necessary Documents
Finally, bring along your formation documents (a bit like your ID) and be prepared to pay some fees. These differ from state to state, much like the cost of living. For instance, while setting up in Alabama might set you back $150, California may ask for $100 for corporations or $70 for LLCs.
Compliance for Your Foreign Corporation With Mosey
Feeling a bit overwhelmed with the process? Don’t navigate the foreign corporation landscape alone. Let Mosey guide your way. Thanks to Mosey, you can get a Certificate of Good Standing, foreign qualify with the Secretary of State, and even set up a registered agent all on one platform.
With Mosey, compliance is a breeze. We ensure you’re always on the right track, allowing you to focus on what you do best — running your business.
Read more from Mosey:
- What Is a C Corporation (C Corp)?
- What Is Payroll? A Guide for Small Business Payroll
- What Is a Legal Entity? Definition & Examples
- What Is SUI? State Unemployment Insurance FAQs
- HR Compliance Checklist: 16 Items To Consider
- LLC vs. S-Corp: What Are They & How They Work
- Sole Proprietorship vs. LLC: Key Differences