The topic of Foreign Qualification needs some further clarification so our clients understand its meaning and importance. We find that there are a few false assumptions concerning operations in other states with a Delaware entity. That’s why we offer reliable information to those clients who form and file in Delaware but then operate or bank in another state or states.
Delaware may be the best state of incorporation – but this does not mean that you can simply file here and avoid other states’ compliance obligations. This is probably the biggest misperception we face and address. At Harvard Business Services, Inc. we strive to offer service and support for clients before, during and after incorporating. We offer complete foreign qualification services in all 50 states.
Many corporate activities are national in scope and they cross state boundaries with great frequency. Corporate mobility can be cause for some confusion regarding compliance. As Delaware filing specialists; we file most entities in Delaware and then advise each client as to the qualification process in their home state or state of actual operations. This process is similar in most states and involves an application process to the state government and a fee.
Delaware offers the benefit of no income taxation to those who file in our state but operate and create revenue elsewhere. In this statement we find the primary reason for the necessity of qualifying the Delaware entity in other state where the company operates, hires people or owns real estate – TAXATION. They say that there are only two sure-things in life – death and taxes. By qualifying in the states of operations the Delaware company becomes taxable in those states. All states require businesses actually operating in the state to register there and pay taxes, and most states charge penalties and back taxes when they catch companies operating within their borders without paying taxes.
The other necessity achieved through the process is one of – LEGALITY. Upon formation, the corporate entity is only legal and valid in the state of filing. This means that if the company is mobile and it desires to be recognized as legal and valid in the actual state of operations – it must comply and qualify. Failure to do so will result in undermining the primary reason for incorporating in the first place – security from issues of liability and protection to the individuals involved. In essence the company may not withstand a legal challenge in a state of operations if it has not qualified there.
Another issue addressed through qualification is one of financial concerns – BANKING. Most banks require the valid Certificate of Authority (achieved through qualification) in order to open an account to those who show record of filing outside that respective state. The bank account is the point where revenue is channeled and is considered part of a company’s operations.
Another misperception concerns companies that seem virtual in nature, such as dot coms. This group may feel that since there is no brick and mortar or physical address associated with operations – they can avoid qualifying. The answer to this issue is typically NO – again we go back to where banking and revenue trail are occurring and where the servers are actually located.
Incorporating in Delaware is the best first step for your business and will ensure a very stable and secure state of origin; however failure to realize and adhere to the compliance issues in other states will leave the company unstable and vulnerable. Harvard Business Services, Inc. is happy to support clients with the Delaware filing and agent service as well as the qualification in other states. With our expedited qualification service there will be a timely resolution to compliance issues. If you have questions concerning your home state – contact us today!
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9 Responses to “Clarification of Foreign Qualification”
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Thank you for this article. I sent a copy to one of my clients who incorporated in DE years ago but can’t understand why they have to register in their home state! Discovered this while trying to file their unemployment taxes for them and they were not licensed in their home state.
What is the benefit of filing in Delware instead of directly in the state where the company operates?
Please use this convenient link to review all the benefits of filing in DE: https://www.delawareinc.com/more/why_delaware.cfm
Typically, the top three reasons why so many people incorporate in DE is because of security, privacy and taxation benefits.
I am a non-resident alien and I am considering incorporating my VIRTUAL (dot com) business in DE. I have 25 employees worldwide and our business model restricts us to telecommuting as opposed to maintain a brick and mortar office anywhere.
My question is that if I choose to open our corporation’s sole and primary bank account in DE i.e. operate and create revenue within Delaware, what state income taxes will be applicable, if any?
PS – I do not have my own servers, I hire them for hosting my website. I keep changing them after every year. They may or may not be in Delaware, or even in USA. How will this affect my taxation and domestic/foreign qualification status?
Prateek, thanks for your comment and questions. We suggest you talk to a tax professional regarding your specific questions.
I am looking to Inc in Delaware but my business will potentially be functioning in all 50 states and internationally. How do I qualify for this?
Mr. Prateik Mishra,
I have the same question, as yours. Did you find any answer for that question. If so, can you please let me know. would really appreciate it.
Thank You,
Rakesh
Rakesh, thanks for your comment and questions. We suggest you talk to a tax professional regarding your specific questions.