Why You Must Understand The Concept of Foreign Corporations

Business entities are formed, run and closed every day. There are a host of different types and most people are familiar with the most popular choices of "S" corporations, LLCs and traditional corporations. In this article, we take a look at an entity known as a foreign corporation and how it is becoming a major topic these days.



What is a foreign corporation? It is any business entity that is operating in a jurisdiction other than where it was formed. We use the term "corporation", but it could just as easily apply to an LLC, Partnership or whatever. The corporation designation is just a catchall much like saying you want a Coke instead of a soda.



At this point, you are probably picturing business entities formed overseas in China or somewhere. While these are certainly going to qualify, what we are really talking about here is state jurisdictions. Business entities are formed at the state level, so a California entity doing business in Nevada is a foreign corporation in that state even if what happens in Las Vegas stays in Las Vegas.



What does it mean to be a foreign corporation? Usually it means you have to file for permission to transact business in the state. This is done through the Secretary of State for the jurisdiction. Once you file, you then must pay taxes and fees the state requires of businesses. Generally, you get a second helping of what you are already getting in your own state plus a few unpleasant surprises. In California, for example, there is an annual $800 fee for "the privilege of doing business" in the state. And people wonder why California is considered so business unfriendly!



So, why should you care about foreign corporations? Well, you just might be considered one. The thing you are reading this on has opened up a new world of jurisdictional issues. No, not the computer – the internet. A business in San Diego rarely would conduct business with customers in other states before the internet. Not now. Now every business has a website and orders come in from everywhere. Well, are you collecting sales tax on those orders? Are you registering in states where you have repeated sales? Probably not and you probably think being required to do so would be madness. Well, ask Amazon.com about that.



Many states are passing what are called Amazon laws. These laws simply say that a business that makes repeated sales off the web in a state may be subject to the laws of that state, to wit, must collect sales tax and pay it to the state. The sites are fighting back, but it is only a matter of time until one passes a law arguing that the repeated sales constitutes grounds for finding the online entities to be foreign corporations. If your online business makes sales to people in other states, that should frighten you.



Foreign corporations were once a minor side issue in the world of business entities. Unfortunately, that looks to no longer be the case in the future.



Richard A. Chapo is an incorporation lawyer with SanDiegoBusinessLawFirm.com.