Any newly-incorporated company must grapple with the issue of whether and when it needs to qualify to do business as a foreign corporation in various states. What exactly does this mean? Suppose that a Cincinnati-based startup files papers in Delaware to form a C corporation, with an eye towards raising venture capital in the future. The company isn’t actually located in Delaware; it doesn’t have an office there, and isn’t doing any business there. It’s just incorporated in Delaware. Because the company’s main office is in Cincinnati, it is doing business in Ohio, and therefore it must “qualify to do business in Ohio.” This means it is registering with the state as a foreign corporation, and will have to pay taxes in Ohio.
The process is fairly straightforward. The company must file Form 530A with the Ohio Secretary of State and pay a filing fee (currently $125). In Ohio, this form is the “Foreign For-Profit Corporation Application for License.” If the company also had a development office in California or was transacting business in California, it would have to qualify in California, too, using California’s “Statement and Designation by Foreign Corporation – Stock.” The Ohio form asks for the company’s name, date and state of incorporation, location of principal office, and a brief summary of the corporate purpose to be exercised in Ohio. The company also has to designate an agent for service of process, and include a certificate of good standing from its state of incorporation (in our scenario, Delaware).
What happens if the startup fails to obtain its license to do business in Ohio? It faces a forfeiture of between $250 and $10,000, as well as being forced to pay any annual franchise taxes it should have paid, plus interest at 6% per year, for all the years during which it was doing business without being properly licensed.
Finally, this issue of qualifying to do business is of great importance to companies seeking angel investments, venture capital funding, or a merger or acquisition. Any financing or M&A transaction will require the company to represent and warrant that it is duly qualified to do business in any state as required by law. It is best to have all of these foreign qualifications taken care of in a timely manner, rather than scrambling to make the filings at the last minute. Having to do multiple filings while finalizing the terms of a financing or merger will delay that transaction, and will raise concerns about sloppiness and compliance issues throughout the company’s business.