Why do some US states enact foreign qualification laws?

A US state is its own jurisdiction with its own laws – and its own penalties. Our US expert looks at why there needs to be a foreign qualification process when doing business in the US.

US states enact foreign qualification provisions to further certain interests, such as transparent and public disclosure of commercial information, facilitation of service of process, and equal treatment for all businesses operating in the state.

Public disclosure

One function served by the foreign qualification statutes is to require foreign business entities to disclose information about themselves to state officials and to citizens who may interact with the entities. In most states, this information is publically shared through two foreign qualification documents. One is the application for authority filed at the time of qualification; the other is an information report submitted to the filing office.

Foreign entities are required to keep the information in these documents up-to-date, including any changes related to mergers, consolidations or other reorganisations. When changes occur, the statutes require an amended application for authority citing the updates. Most states also require annual information reports to be filed and can revoke the certificate of authority if the filing requirements are not met.

Service of process

Another important state interest furthered by foreign qualification provisions is the facilitation of service of process. Qualified foreign business entities are required to appoint and continually maintain a registered agent and registered office in the state. A registered agent is an agent authorised by a business entity to receive service of process on its behalf. The registered office is the registered agent’s in-state location.

Without this registered agent requirement, government officials, in serving official notices, and citizens, in serving process, would have to locate an officer, manager, or other agent or employee authorised by the entity and the state’s civil procedure laws to receive service of process. In the case of foreign business entities, locating a proper person to serve can be extremely difficult. In addition, service upon an employee or agent often leads to expensive and docket-clogging litigation over whether the person served was authorised to receive process on the entity’s behalf. Further, service on a foreign entity occurring outside the state can lead to litigation over whether personal jurisdiction was obtained under the long-arm statute. The qualification requirement ensures that an in-state agent and location for service of process can easily be found.

Equal treatment

The foreign qualification statutes also allow the states to make sure that foreign entities doing business in the state do not receive an unfair advantage over the state’s domestic entities. For example, if domestic business entities were required to pay a franchise tax, file annual reports, and maintain a registered agent while foreign business entities transacting business in the state were not, it would give the foreign entities an unfair advantage over the state’s domestic entities.

Therefore, the ability to do business as an entity exists only if granted by the state, and the state wants equal treatment for all businesses operating within its borders. In exchange for granting a domestic entity a franchise, or recognising the franchise granted a foreign entity by another jurisdiction, the state charges a fee and requires compliance with certain laws. In return, the entity receives valuable state protections from its formal entity status, including limited liability.

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