TLDR:
- Foreign qualification and Secretary of State registration are relatively interchangeable terms.
- Each state has different criteria for what they deem "doing business" or "transacting business" within their boundaries, which triggers the registration requirement.
- These criteria can include hiring a remote employee, that employee's role, the amount of sales generated, or physical presence.
- Failure to register once required can result in massive fines and headaches.
What do you mean by foreign qualification and Secretary of State?
The Secretary of State is a government body at the state level that acts as a central hub for ensuring that all businesses are operating legally and compliantly.
They manage new business registrations, business formations, business name availability, maintain various business records and play an administrative role with Uniform Commercial Code Administration.
The Secretary of State has various regulations stating whether or not a company needs to register - also known as achieving foreign qualification - if they are deemed "transacting business" in the state.
What do you mean by transacting business?
The criteria for determining what constitutes "transacting business" can vary significantly from one state to another, which is why it is important to understand the specific regulations and guidelines set forth by each state. This variation makes it crucial for businesses operating across multiple states to carefully review and comply with the individual requirements of each jurisdiction in which they conduct business.
Remote Employees
In 29 states (including Washington DC), hiring a remote employee requires registration with with Secretary of State regardless of that remote employee's role and responsibilities.
The other 22 states, take into consideration what that remote employee is actually doing. If they're an executive or someone generating sales? That's likely to trigger the requirement.
An operations or administrative person, however, probably won't trigger the requirement in these states.
Economic Thresholds
But when you start thinking about those various requirements, not only do remote employees trigger a Secretary State requirement, but you also have to consider your economic nexus.
So have you hit the economic nexus in the various states? Some are based on number of transactions and other based on the dollar amount of revenue that you're doing in the state.
Physical Locations
It seems like you might have also have to consider do you have physical locations? That could be a distribution center or warehouse and office.
Professional Organizations
Law firms, insurance agencies and real estate brokers that have specialty licensing can trigger foreign qualification requirements.
Non-profits
Most states require registration with the Secretary of State in order to solicit donations.
Why is foreign qualification a sneaky requirement?
This sneaky requirement made our list of top 5 state compliance misconceptions because in 2024, it's easier than ever to 1) hire employees that do their jobs remotely and 2) sell your product or service anywhere.
If you, say, hire a new remote software engineer who happens to be the first person at the company living in New York, you won't have a payroll blocker if you don't register. Unless you're well informed, you really won't even know you have to.
The same thing goes for sales. The business takes off and all of a sudden you sold over $250,000 worth of widgets in Alabama? You're probably more focused on celebrating the growth than on the fact you now need to register there.
What sort of penalties could I face if I don't register?
Some states are fairly expensive to register in. For instance, Tennessee costs $750 when you're registering on time.
But if you register late in the state of Tennessee, that registration charge could exceed $4,000, just because you didn't even know you were required to register there.
Oh, and don't even think about saying you just now started to transact business in a state.
State governments are certainly not stupid, and they want their cash, so if you've been transacting business for months and say you just started yesterday … be prepared to write an even bigger penalty check when they find out.
So What Should I Do?
If you're not sure if you need to register in a given state, there are two potential options depending on your bandwidth and tax competency.
If you prefer to DIY state compliance, you can use sites like California's Business Entity Search
DIY
Most states have a freely searchable websites. Googling Secretary of State Business search for Alabama leads you to the Alabama Secretary of State Business Entity Records page
Search your company name and it will tell you the status of your registration and whether it's in good or bad standing.
Some states are a little harder than others and some require a small free, but if you're a DIYer, this is the way to go.
Get Help
If you opt to get help, you could use a technology solution like AbstractOps, or if you've got a much larger budget and want to go completely hands off, use a legal or accounting firm.
Whether you go with a technology solution or a firm, to reduce headaches, be sure they can also help with Registered Agent services as well.
