The legal system comes in categories and layers that most people don’t grasp at first. One of the layers has to do with how corporations are regulated and leads to the odd situation where many corporations are designated as “foreign” even if they are formed in a state.
“Legalese” is a term referring to various terms in the law that don’t really mean what they seem to suggest. A “foreign” corporation is just one of those terms. It can refer to corporations that were formed in another country as the name suggest. More often than not, however, it refers to a corporation formed in one state but doing business in another.
When it comes to corporate law, it vital to understand that it is controlled by the states instead of the federal government. This means each state has separate regulations and requirements related to the creation, running and closure of the entities. This can be a real problem for corporations that do business in more than one state, a common occurrence with internet businesses. Let’s take a look.
Assume I live in Las Vegas and start a business selling remote controlled cars. I incorporate in Nevada. The business does well and I decide to start a website selling the cars. The site does well and I have customers in California. Since my corporation was formed in Nevada, California is going to view it as a “foreign” corporation.
So, do I have to register in California and pay taxes? Well, the test is different for every single state! In most states, it boils down to whether a corporation is “doing business” in the state. With a few online customers in California, I am not going to be required to register. If I open a retail store in Los Angeles, however, I certainly am.
There is no clear line or test for determining if you have to file as a foreign corporation in most states. Instead, there is generally a sliding scale of factors related to things such as whether you have an office in the state, a bank account, derive a certain percent of revenue and so on.
If you find yourself doing a lot of business in another state, you would be wise to check into the issue of whether you need to register in that state. Failure to do so can lead to penalties, fines and an absolute ton of aggravation.
Richard A. Chapo writes about how to
incorporate in California for SanDiegoBusinessLawFirm.com.
