Foreign corporation
Encyclopedia
A foreign corporation is a term used in the United States
for an existing corporation
that is registered to do business in a state or other jurisdiction other than where it was originally incorporated. A foreign corporation is one incorporated as a domestic corporation in one state
of the United States, authorized to do business in additional state(s); the term is also applied to a corporation incorporated outside the United States which is authorized to do business in one or more states of the United States.
To a degree, the same rules apply with respect to a Limited Liability Company
(LLC), in that it is a domestic LLC in the state where it is originally chartered, and a foreign LLC everywhere else.
For U.S. federal tax purposes, "foreign corporation" means a corporation which is not created or organized in the United States.
, but while the bank is federally chartered, it is still incorporated in a specific state.) Note that a corporation chartered in Washington, D.C.
is not the same as one that is Federally chartered; a corporation which is incorporated in Washington, D.C. is for all intents and purposes the same as one incorporated in any of the 50 states; it is a domestic corporation there and a foreign corporation anywhere else.
For example, many public corporations in the United States are registered in the State of Delaware (because of better corporate governance regulations), or registered in Nevada
(because of better tax provisions, privacy and corporate officer liability protection) and then are registered as foreign corporations in all the other states that they do business in. Thus the corporation is a domestic corporation in Delaware or Nevada, and is a foreign corporation in any other state (or country) with which it registers. There may be tax benefits as a result of choosing where a corporation's domestic jurisdiction is located. For example, Texas and Nevada have no state income tax. While Delaware does not have income tax, it does have a substantial corporate privilege tax.
Operating a corporation as a holding company and separate corporations in each state, or operating as a single corporation with registrations as foreign corporations in all the other states than its home state, is a matter of choice for the corporation's directors and officers depending on how it operates, damage liability and tax consequences. A corporation may find it more advantageous operating as separate companies in each state or jurisdiction, or it may find that operating as a single organization may make more sense.
One reason for operating as a single corporation having foreign corporation status in other states is because of corporate governance rules which dictate that the rules of the state where the corporation is a domestic corporation apply for certain provisions such as voting rights, officer and director protection, and liability for misconduct. If a corporation is sued and is considered to have operated in a fraudulent manner such as essentially acting as the alter ego of the stockholders (especially in the case of a corporation having only one stockholder) the corporation's existence may be disregarded by the court. This is referred to as piercing the corporate veil
, and is subject to the rules of the home state where the corporation is a domestic corporation. In the case of corporations domesticated in Nevada, for example, , over the last twenty years, only twice has the corporate veil been pierced, and in both cases the corporation's owners engaged in fraud.
One reason for operating as a holding company with separate domestic corporations is because of potential liability issues such as in operating facilities which have high potential liabilities in the event of accident or failure. Thus only the assets of the particular corporation in the particular state are at risk in the event of a lawsuit, as opposed to the assets of the entire corporate entity. In some cases, because of ownership rules, the laws of a jurisdiction may require separate businesses to be operated by subsidiaries in order to protect the business of the subsidiary from the operations of the parent. This is most prevalent in the case of subsidiaries which are banks or public utilities such as electric power companies.
Two additional issues deal with speed and cost. Some states allow corporations to be established over the Internet, and thus all it takes is having an address in that state and a credit card. A corporation can thus be established in as little as 15 minutes, as long as one has a registered agent
in the state to which it is to be incorporated (or an address if that state allows the corporation to act as its own agent), versus several weeks if the corporation has to be established by mail. If one is establishing many corporations, cost may be an issue. For example, , it costs over $150 to incorporate in Delaware, while one can incorporate in Colorado for $50, and both allow corporations to be chartered over the Internet.
, allowing it to save huge amounts of tax payments. Some corporations took advantage of this provision, while others did not because of concerns by stockholders as to whether it would be to their advantage to allow the corporation to move its nominal home jurisdiction.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
for an existing corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
that is registered to do business in a state or other jurisdiction other than where it was originally incorporated. A foreign corporation is one incorporated as a domestic corporation in one state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
of the United States, authorized to do business in additional state(s); the term is also applied to a corporation incorporated outside the United States which is authorized to do business in one or more states of the United States.
To a degree, the same rules apply with respect to a Limited Liability Company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
(LLC), in that it is a domestic LLC in the state where it is originally chartered, and a foreign LLC everywhere else.
For U.S. federal tax purposes, "foreign corporation" means a corporation which is not created or organized in the United States.
Federally chartered corporations
The United States does not, except for corporations chartered by act of Congress, have federally chartered corporations. (There are special rules for a federal charter for a bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
, but while the bank is federally chartered, it is still incorporated in a specific state.) Note that a corporation chartered in Washington, D.C.
Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
is not the same as one that is Federally chartered; a corporation which is incorporated in Washington, D.C. is for all intents and purposes the same as one incorporated in any of the 50 states; it is a domestic corporation there and a foreign corporation anywhere else.
Purpose of foreign corporation registration
The use of foreign corporation registration allows a corporation to operate in multiple jurisdictions as the same organization in all of them. The only alternative would be to register a separate corporation in each jurisdiction, and separate every operation according to the particular jurisdiction to which the operations are taking place. This would mean, for example, a corporation operating in 5 U.S. states would have to have separate domestic corporations in each of the five states, as opposed to having a single corporation registered in one state, and being registered as a foreign corporation in the other four.For example, many public corporations in the United States are registered in the State of Delaware (because of better corporate governance regulations), or registered in Nevada
Nevada Corporation
A Nevada corporation is a corporation incorporated under Chapter 78 of Nevada Revised Statutes of the U.S. state of Nevada.Nevada, like the state of Delaware , is well known as a corporate haven...
(because of better tax provisions, privacy and corporate officer liability protection) and then are registered as foreign corporations in all the other states that they do business in. Thus the corporation is a domestic corporation in Delaware or Nevada, and is a foreign corporation in any other state (or country) with which it registers. There may be tax benefits as a result of choosing where a corporation's domestic jurisdiction is located. For example, Texas and Nevada have no state income tax. While Delaware does not have income tax, it does have a substantial corporate privilege tax.
Foreign corporation registration vs. multiple domestic corporations
The two basic ways to organize a corporation which operates in multiple jurisdictions is- to operate as a single corporation having one jurisdiction to which it is a domestic corporation and register as a foreign corporation in all other states, or
- create one primary corporation (or parent corporation that owns the stock of all the other corporations, and each of the other corporations is registered as a domestic corporation in each state it operates. The parent corporation (or parent company) is usually referred to as a holding companyHolding companyA holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
, while the separate corporations are referred to as subsidiariesSubsidiaryA subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
. If the parent corporation owns all of their stock, they would be referred to as wholly owned subsidiaries of the parent company.
Operating a corporation as a holding company and separate corporations in each state, or operating as a single corporation with registrations as foreign corporations in all the other states than its home state, is a matter of choice for the corporation's directors and officers depending on how it operates, damage liability and tax consequences. A corporation may find it more advantageous operating as separate companies in each state or jurisdiction, or it may find that operating as a single organization may make more sense.
One reason for operating as a single corporation having foreign corporation status in other states is because of corporate governance rules which dictate that the rules of the state where the corporation is a domestic corporation apply for certain provisions such as voting rights, officer and director protection, and liability for misconduct. If a corporation is sued and is considered to have operated in a fraudulent manner such as essentially acting as the alter ego of the stockholders (especially in the case of a corporation having only one stockholder) the corporation's existence may be disregarded by the court. This is referred to as piercing the corporate veil
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
, and is subject to the rules of the home state where the corporation is a domestic corporation. In the case of corporations domesticated in Nevada, for example, , over the last twenty years, only twice has the corporate veil been pierced, and in both cases the corporation's owners engaged in fraud.
One reason for operating as a holding company with separate domestic corporations is because of potential liability issues such as in operating facilities which have high potential liabilities in the event of accident or failure. Thus only the assets of the particular corporation in the particular state are at risk in the event of a lawsuit, as opposed to the assets of the entire corporate entity. In some cases, because of ownership rules, the laws of a jurisdiction may require separate businesses to be operated by subsidiaries in order to protect the business of the subsidiary from the operations of the parent. This is most prevalent in the case of subsidiaries which are banks or public utilities such as electric power companies.
Two additional issues deal with speed and cost. Some states allow corporations to be established over the Internet, and thus all it takes is having an address in that state and a credit card. A corporation can thus be established in as little as 15 minutes, as long as one has a registered agent
Registered Agent
A registered agent, also known as a resident agent or statutory agent, in United States business law, is a business or individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons...
in the state to which it is to be incorporated (or an address if that state allows the corporation to act as its own agent), versus several weeks if the corporation has to be established by mail. If one is establishing many corporations, cost may be an issue. For example, , it costs over $150 to incorporate in Delaware, while one can incorporate in Colorado for $50, and both allow corporations to be chartered over the Internet.
Change of jurisdiction
An issue that occurred during the 1990s for some larger companies involved tax treaties which allowed a corporation to change its jurisdiction as a domestic corporation from a U.S. State to the country of BermudaBermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, allowing it to save huge amounts of tax payments. Some corporations took advantage of this provision, while others did not because of concerns by stockholders as to whether it would be to their advantage to allow the corporation to move its nominal home jurisdiction.