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BE FOOLED BY AN UNCONSTITUTIONAL DRUG CHECKPOINT, AND... Q: I saw a drug checkpoint sign in Colorado recently but they didn’t stop me. What gives? A: That’s because real drug checkpoints are unconstitutional, but fake checkpoints are valid. Police hide nearby and wait to see if commercial or other drivers turn around or toss drugs or drug paraphernalia out the window of their vehicle. Apparently, you did not throw out anything. MORE
ON DOING BUSINESS So, you’ve set up your corporation as we talked about in the October issue and now you want to undertake business outside the state in which you have incorporated by setting up another terminal or facility in another state. While it may be common knowledge that a company is not required to incorporate in the state in which it operates business, the process of foreign qualification remains more of a mystery. What allows a company to transact business outside its state of incorporation? How does a corporation qualify to do business in a foreign jurisdiction? It may be as simple as a Foreign Qualification. Corporations allow for a world of benefits if structured correctly. Even tax experts agree that 70% of Americans fail to take the deductions they are legally entitled to. Corporations are perpetual in existence and allow for the transfer of wealth to one’s heirs, without incurring large estate taxes. Corporations also offer the most in fringe benefits with excellent retirement planning options, not to mention the fact that dividends paid out are only taxed at 15%. Nobody likes to think about failure, but if you structure your corporation “right” from the beginning, you can protect yourself and recoup some of your losses if the business were to go under. Section 1244 of the IRS Code permits ordinary loss treatment up to a maximum of $50,000, on the sale of stock, when issued by a small corporation. Let's look at some of the basics regarding where to incorporate. In making the decision of where to incorporate, at least the following three (3) factors should be considered: 1) the location of the business’ physical facilities; 2) a cost analysis comparing (a) incorporating in the state of operation versus (b) qualifying to do business as a foreign corporation from another state, and 3) determining the advantages and disadvantages of each state’s corporate laws and tax structure. Sound selection requires comparison not only of the advantages involved in incorporating in one jurisdiction or another, but also of the relative costs and benefits of doing business (and often formally qualifying) in jurisdictions other than the jurisdiction of incorporation. Once these “basics” have been analyzed, the next step is understanding the difference between the corporate designations. There are three (3) types of corporate designations - domestic, foreign and alien. A domestic corporation is a U.S. corporation that transacts business, and is based, within the state in which it is incorporated. A foreign corporation, on the other hand, undertakes business in a state outside its state of incorporation. In fact, a corporation is referred to as a “foreign corporation” in all states outside its state of incorporation. In order for a foreign corporation to conduct business in another state, it must register for a certificate of authority to conduct business in the other state. Finally, a corporation organized in another country outside of the U.S. would be considered an alien corporation. As mentioned earlier, a corporation or LLC is considered to be domestic only in the state where it was formed. In all other states, a company is registered as a foreign corporation or LLC. If a company expects to transact business outside of its state of incorporation, a company may be required to qualify as a foreign corporation or foreign LLC. If an entity is incorporated elsewhere, most foreign jurisdictions require that corporations pay a set fee and undertake certain formalities before doing business in that jurisdiction. This process is referred to as qualifying as a foreign corporation, “foreign” referring to a corporation incorporated in another state, rather than another country. Necessary paperwork and fees must be filed to qualify a business as a foreign corporation or LLC in any of the 50 states. For example, if you are doing business only in California, and you were to form a Nevada corporation and subsequently undertake business in California under that Nevada Corporation, you would have to file documents and pay fees to foreign qualify your Nevada Corporation with the California authorities. The consequences of not qualifying in a foreign state in which a company transacts business may include loss of access to that state’s courts, as well as potential fines. So how do you get qualified? Generally, most states require that the following steps be taken to qualify as a foreign corporation: 1) check the preliminary name availability in the state of qualification; 2) file a Certificate of Authority in the state of qualification; 3) obtain a Certificate of Good Standing or certified copy for your business from the state of formation, which must accompany a Certificate of Authority; and 4) pay state filing fees. It is important to remember, however, that each state has different requirements. There are companies that can assist in “foreign qualifying” your company. These types of companies are useful in assisting corporations to meet all of the requirements in each jurisdiction in which the corporation is doing business outside of its state of incorporation. Next month I will continue this series by discussing how to pay yourself and succession planning for family-owned businesses. If you have questions, call me at (562) 279-0557. Until then, "Drive Safe - Drive Smart!" |