Foreign qualification is the process of registering your company with the Secretary of State as an out-of-state business (i.e. not in the state your company was incorporated).
Does your company need to foreign qualify in states with remote employees working from home?
Unfortunately, this is not a straightforward question to answer. Here’s why:
- Each state defines when foreign qualification is required. Usually that means your company is “doing business” in the state.
- What constitutes “doing business” in the state is not clearly defined. Most states offer a list of what it does not mean. Employees working from home is a gray area.
- There are potential consequences for not registering and additional obligations when you do register.
How to decide
The safest option would be to consult with a lawyer and tax professional to get advice about your company’s specific situation.
An analysis of Mosey customers with employees in multiple states found they tend to adopt one of two strategies to manage compliance risk and obligations:
Always foreign qualify in states where there are employees working from home
Being proactive and registering keeps the business compliant by default, but comes with additional obligations to stay in “good standing.” Staying in good standing means maintaining a registered agent, filing an annual report, and paying additional taxes depending on the state.
Wait to foreign qualify until the business receives notice or is otherwise obligated to register
By waiting to register, the business forgoes the additional obligations like filings and paying additional taxes. If the Secretary of State later determines the business should have been registered, there is a risk of back taxes and fines.
In this way, deciding the register with the Secretary of State when the only presence is remote employees working from home is often seen as a business decision.
Understanding how other businesses navigate this decision can help, but ultimately you’ll need to evaluate your own situation and choose the approach that aligns with your company’s operations and risk profile.
