When Is A Corporation Considered Foreign?
Posted on March 12, 2008 - Filed Under Automotive, Legal and Law
The word “foreign” carries connotations of something in a country other than one’s own. In the world of corporate law, of course, it has an entirely different meaning.
For the most part, corporate law falls into the bowels of state law. Put another way, each state writes its own rules and regulations regarding business entities. There is no federal law on the subject and none seems imminent regardless of how strange some of the state laws are.
If states love anything more than writing their own laws, they like collecting taxes. At their core, each state is a little Napoleonic entity overseeing their own geographic empire. When it comes to corporate law, this leads us to the concept of foreign corporations.
Foreign corporations are any corporate entity that is formed in one sovereign area and deemed to be doing business in another. In this case, however, the sovereign areas are states, not countries. In simple terms, a Nevada entity doing business in Los Angeles is considered a foreign corporation in California. Accordingly, it must register [and pay a fee] with Secretary of State in California as well as the Franchise Tax Board [and pay taxes]!
As you can probably surmise, being deemed a foreign corporation is not a positive development. Every state has different laws and different standards it expects a corporation to comply with. In larger corporate entities, there are entire departments that do nothing else but try to meet these standards and comply with the tax laws of each state. Ah, the joy!
So, how do you know if you are considered a foreign corporation by a particular state? Well, there is no universal test for making the determination. In fact, most states have come up with their own creative analysis. Factors that commonly appear in the determination are sales made in the state, amount of revenues generated, bank account locations and the shipment of products into the state. Some states considered all of these and some have completely different tests, so make sure to look into the test for the state in question.
The foreign corporation designation is one that involves a catch-22 situation. In truth, the officers and directors of most corporations have no idea they are violating such laws. At the same time, most states don’t have any particular standardized procedure for informing businesses how the determination is made and what is expected of the businesses.
So, do you really need to be worried about a state coming after your corporate entity? Yes. States are very aggressive for the most part in making the assertion. Why? Well, the designation produces fees and taxes for the state, which we all know makes politicians sit up and take notice whether they are on the federal or state level. If you find yourself doing business more and more in another state, make sure you understand where you stand in relation to being designated a foreign corporation.
Richard A. Chapo provides legal services to businesses needing to incorporate in California via SanDiegoBusinessLawFirm.com
Tags: California, corporation, foreign, incorporate, jurisdiction, law, legal, nevada, register
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