“Well, of course, we’re qualified. That’s why customers hire us!” Got it. What we’re talking about here is whether your business is “qualified” (in the strictly legal sense) to conduct business in a state other than your home state (i.e., the state where your business entity was formed). This is also sometimes referred to as “registration.” All states have laws that require out of state businesses to qualify/register as a condition to doing business within that state. Here is an example — the Wisconsin law. Why do these laws exist? Remember, incorporation is a state by state process. You may have filed the necessary information to become an LLC in Texas, but that information is not necessarily known to the bureaucrats in other states where you conduct business. States enact these foreign entity qualification/registration laws so that they can protect their citizens from unscrupulous “carpet baggers” and – of slightly less importance – to generate income from the out-of-state entity’s qualification/registration fee.
Whether your level of activity in a particular state rises to the level that requires qualification depends on the particular laws of that state. In some states, qualification is only triggered when you open a physical office in the state. In others, merely soliciting orders in the state requires qualification.
What happens if you ignore the qualification requirement? Again, the rules are state-by-state. However, here are some examples: Imposition of fines, penalties and interest; Issuance of an injunction (think “TRO”) prohibiting you from conducting business in the state; Disqualification to bid on government projects. Aside from these bad outcomes, some entities with whom you conduct business will simply have a policy or preference of only transacting business with out of state entities who have taken the trouble to qualify.
What’s the lesson? If your business is beginning to grow in a neighboring state, spend a few minutes to consult that state’s laws regarding qualification of foreign businesses.