09 / 14 / 2016

What Is a Foreign Company and Why Should You Care?

map_of_the_united_states_with_pins.jpg

In this blog, a “foreign LLC” is defined as an entity created in State X, but operates and carries out its business in State Y. This is not to be confused with an overseas company does business in the United States. Similarly, the term “domestic LLC” refers to an LLC that was formed and currently operates in the same state; this is not to be confused with the more general definition of “domestic,” which would be too broad in this context.

  • Let’s say you form your LLC in Delaware, but choose to operate your business in Texas.
  • In this case, the “formation state” is Delaware while the “foreign state” is Texas.
  • Typically, the state you choose to form your LLC in will be the set of rules and regulations you follow regarding formation, internal affairs and management operations.
  • However, state laws require foreign LLCs to register their company with the secretary of state in order to transact business within that foreign state.

Continuing with the example above, you would follow formation laws of Delaware and registration laws of Texas. Here’s one exception to the registration laws: safe-harbor provisions protect those companies that don’t necessarily qualify as “transaction business within the foreign state” from actually being required to register in that state.

Refusal to register and its consequences

What happens if your company simply decides to not register within the foreign state? Typically, this is an expression of a “refusal to avail oneself” to that state’s courts. This type of entity is still allowed to defend oneself against claims within state courts, but cannot bring claims to court. In other words, a refusal to register implies that your company is not interested in utilizing that state’s court system, at least not in the offensive manner. Federal courts, on the other hand, are still open to bring claims and defend them.

Although this consequence from refusing to register may not appear very harsh, state laws have other ways of incentivizing a foreign LLC to register with their secretary:
  • From fines and penalties all the way to injunctive relief—thereby completely restricting the LLC’s business from transacting any more—state LLC statutes are typically very pro-registration.
  • Moreover, failing to register with the secretary of state in which you do business can delay your company's actually receipt of important notices including service of lawsuits, which can shorten effective deadlines and create problems in effectively responding to actions ranging from tax claims to private lawsuits.

What should you do?

If you are considering forming an LLC in one state and operating business in another, remember to investigate all relevant rules of both states. Generally, these rules are merely technical and are in place to keep everything in order, but states have the tendency to ensure their best interests are protected. Consult with an experienced business attorney so you don’t have to wade through multiple state LLC statutes alone.

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