Foreign Entity Registration: What and Why?

When advising clients on forming new companies, the question comes up about where to form the company. Should the client form the company in the state where their business is located (Wisconsin most of the time), or somewhere else? When the client elects for “somewhere else,” their entity is considered a “foreign entity.” This means the entity was formed in one state and is doing business in another state. There are a variety of reasons why a client might elect to be a foreign entity rather than a domestic entity (an entity formed in the state where it is doing business), such as:

  1. Each state has its own unique body of corporate/entity law, and the client might want to tap into that body of law in a state where it will be easiest to conduct its business affairs.
  2. The client might be interested in taking on investors, and those investors might have preferences on the state in which the company is formed.
  3. The company might be doing business in multiple states. Since it can only be a domestic entity in one state, it will inevitably be a foreign entity in every other state where it does business.

Whatever the reason that the client elects to operate as a foreign entity, there are complications that come along with such a choice. One example is registering the entity in every state where the company is “transacting business.” The definition varies state by state, but typically making repeated sales and hiring employees typically qualify as “transacting business,” while internal meetings or one-time sales typically do not qualify.  The registration process also varies state-to-state, though it typically requires filing a form with the state and payment of a filing fee. Wisconsin’s filing fee is a minimum of $100, while Texas’s fee starts at $750. Once the initial filing is made, states typically require annual report filings from each foreign entity registered in the state, which are oftentimes accompanied by a filing fee.

You might now be asking yourself why you would want to file these documents and pay these filing fees. There are some carrots, such as satisfaction of following the law and knowing that you affirmatively have the approval of a state to do business within that state. There are also several sticks. If a state finds out you are doing business in their state and aren’t registered, they will require you to file the same forms and pay the same fees, plus a penalty (sometimes a pretty steep penalty). States might also restrict what the entity can do in the state. For example, a state might prevent the entity from bringing or defending a lawsuit within the state until the entity is properly registered.

I think there are a few takeaways to draw from this discussion. First, if you are considering forming a foreign entity, and it is not because you plan on doing business in several states, think about why it is you want to do it. Only move forward with it if the benefits of that reason outweigh the hassle of registering as a foreign entity. Second, think ahead about which states where you may need to register as a foreign entity and what the filing requirements are. Knowing what to expect is often better under these circumstances rather than crossing the bridge when you get there. Thanks for reading!