Certificate of Authority: What Is It And Why Does It Matter?
If you plan to conduct business in another state and establish a foreign limited liability company, you'll need a certificate of authority to obtain legal rights. Foreign LLCs are becoming an attractive option as the certificate authority market is poised to grow from $167 million to a whopping $282 by 2028.
While the legal proceedings for obtaining a certificate of authority vary from one state to another, the basic requirements are similar. To help you out, we've created a comprehensive guide to Certificates of Authority, their types, and why businesses may need one.
Further in the article, we'll delve into the steps to acquire a Certificate of Authority and when you should apply for one.
Short Summary
- A Certificate of Authority is a crucial document that a company needs when it wants to do business in another state.
- This certificate is important because it helps with legal matters, allows the business to grow, saves money, builds trust, and may even lead to tax benefits.
- To get a Certificate of Authority, the company typically needs to check if its name is available, choose a registered agent, get a Certificate of Good Standing, and pay the required state fees.
- Whether or not a business needs this certificate depends on various factors, such as having an office in that state, employees there, or holding regular meetings.
What Is a Certificate of Authority?
Certificates of Authority are legal documents that showcase your company is authorized to conduct business in a state other than the one in which you're registered. The certificate provides other states with all of your organization's essential info, including the company name, date, and legal status.
Moreover, the document's name can vary in different states, like a foreign qualification, application to transact business and authority application; however, it remains the same for all types of business entities, including corporations and LLCs.
Furthermore, most states have particular criteria for determining when a business requires a certificate of authority. For instance, out-of-state corporations intending to conduct business in New York may need a Certificate of Authority.
What Information Does a Certificate of Authority Include?
The information on your Certificate of Authority can vary from one state to another. However, most of these include:
- Business name and date
- State of incorporation
- Name and location of the registered agent
- Name and Address of directors or members (depending on the entity type)
- Financial information and issued shares of stock
- Business purpose clause detailing the type of business you intend to undertake
Understanding the Types of Certificates of Authority
There are two primary types of Certificates of Authority, each with its unique benefits and requirements. Here's a detailed overview:
- Conducting Business in Another State
A foreign qualification is a must for companies wanting to legally conduct business in a state other than their home state. The document shows that you're authorized to establish your operations in another state.
However, different states require distinct compliances for foreign qualification, and individuals seeking the certification must abide by the foreign state's rules, tax laws, and compliance requirements. For instance, business owners planning to create their startup in New York State must file Articles of Organization and foreign qualify to conduct business legally.
What's more, many states use different criteria to define what 'doing business' means. While this can vary, most states agree an enterprise is conducting business if:
- It has employees working and a physical location in a foreign state
- It is liable to pay sales tax on its goods and services
- It holds in-person meetings with clients and makes contracts
How Do You Apply to Conduct Business in Another State?
To conduct business outside your home state, you'll have first to understand the requirements and legal proceedings of the particular state. In most states, you'll have to file a form with the Secretary of State or a similar agency responsible for legalizing and regulating businesses.
Moreover, the form's name will vary depending on the type of business and the foreign state. For example, corporations filing for California might use the 'Statement and Designation by Foreign Corporation' form, whereas those applying in Florida fill out the Application for Authorization to Transact Business.
After that, you'll have to pay the state fees, provide certified copies of filed articles and amendments, and send a signature from your registered agent. Furthermore, depending on the particular state, the Secretary of State might request an up-to-date Certificate of Good Standing.
Once the foreign qualification process is complete, the state will grant the business approval and issue a certificate!
Why Should You Get a Foreign Qualification?
A Certificate of Authority can help businesses expand operations to other states without forming a new corporation or foreign LLC. Moreover, these require relatively less paperwork and are more affordable than registering a new company.
What's more? The certificate authorizes your company to apply for essential licenses to collect and report taxes in the foreign state's jurisdiction. Besides, it ensures you're in compliance and stay safe from potential fines and lawsuits.
- Industry-Related Certificate of Authority
Many states require businesses to obtain a Certificate of Authority to operate in a specific industry. Let's discuss a few examples:
Tax Certificate of Authority
Organizations that sell goods or services that are subject to taxes must obtain a Tax Certificate of Authority. With this document, the organization can legally collect taxes and accept sales tax exemption certificates.
Additionally, a business entity that operates in multiple states must own a Certificate of Authority to collect sales tax in each area. To apply, individuals or businesses will have to issue the certificate and pay filing fees to get assigned the certificate with a sales tax identification number.
Keep in mind that you'll have to renew your tax certificate periodically to ensure compliance and avoid hefty penalties.
Insurance Certificate of Authority
If you're an entrepreneur planning to start an insurance company, you'll need to obtain a Uniform Certificate of Authority Application (UCAA). Generally, these come in two varieties, including a Certificate of Authority for opening a business or expanding to another state.
However, if you need clarification on what type of application matches your requirements, you can verify by checking the foreign state's insurance business licenses and tax board.
Why Do I Need a Certificate of Authority?
The purpose of a Certificate of Authority can vary depending on the type you apply for and submit. However, it's most important for businesses seeking foreign qualifications as it authorizes your business to conduct operations.
Besides this, a Certificate of Authority proves that your business operates in compliance with the foreign state's requirements.
What Are the Benefits of a Certificate of Authority?
Now that we've discussed the basics, let's dive into how a Certificate of Authority benefits your business:
- Facilitates legal proceedings and mitigates penalties by serving as proof that your business meets legal requirements
- It helps you save costs on establishing an incorporation in every state.
- Promotes business growth without requiring incorporation as a new company
- Aids in accessing favorable tax breaks in multiple states and collecting sales tax
- Allows you to gain brand trust and expand your reach to new states for new collaboration opportunities and increased revenue
- Provides flexibility to explore markets and opportunities beyond your home jurisdiction without violating local laws
Besides, issuing a Certificate of Authority reflects your business's growth, ensuring you're on the path to success.
How Do You Get a Certificate of Authority: Step-by-Step Guide
To possess the authority to conduct business outside your home state, you'll have to acquire your Certificate of Authority by following several steps. These include:
Step # 1: Confirming Name Availability
Start by conducting an intensive name search to identify if your organization's name is available in the state's Articles of Incorporation. If no other business entity is registered with a similar name in the Secretary of State, you can reserve it.
However, if it is unavailable, the Secretary of State can qualify your organization as a 'Doing Business As.'
Step # 2: Appointing a Registered Agent
Appointing a corporate lawyer or registered agent to act on behalf of the company takes the stress of receiving and filing legal documents off your shoulders.
That way, they'll receive progress for your business and keep you up-to-date.
Step # 3: Obtaining a Certificate of Good Standing
Most states will require proof that your organization meets the operating agreement in the state they initially registered. Thus, you must issue and file an updated Certificate of Good Standing.
Remember that your company can lose its 'good standing' by failing to file for taxes and annual reports.
Step # 4: Filing Application And State Fees
The next step is to fill out and submit your application and pay the relevant fees. Ensure you spend time researching the payable fees of different states or consult your registered agent to execute this step on the company's behalf.
Before filing your application, check your desired state's laws to identify which documents they require. Most states will request you to provide the following:
- Business name and date
- Names and addresses of employees
- Location of the registered agent
- Entity type and corporate bylaws
- Financial info and authorized shares
Lastly, you'll have to wait one to two weeks or pay extra for the expedited filling of your application.
When Should I Apply for My Certificate of Authority Application?
Companies and individuals will need a Certificate of Authority when they meet a foreign state's distinct criteria for 'doing business.' A state's rules can vary depending on the types and amount of activities that require this certificate.
Thus, many states only provide lists of activities that don't constitute 'doing business' within it. As a rule, most states check if you have a physical address, employees, binding contracts, and regular meetings to determine if you are operating in that state.
So, to ensure you fit the 'doing business' criteria in a particular state, we recommend checking its website or seeking help from an experienced lawyer.
Are There Any Penalties for Not Obtaining a Certificate of Authority?
Business entities that fail to acquire a Certificate of Authority may not gain the legal right to conduct legal proceedings and maintain a lawsuit in a foreign state. For instance, if a customer from another state violates a contract, you would not be about to sue them.
In addition, you might have to face hefty fines and back taxes from when you were doing business in a foreign state without a Certificate of Authority. So, it's best to go through the complex process of obtaining a Certificate of Authority to ensure full compliance.
Conclusion
A Certificate of Authority is a crucial legal document that authorizes a business the right to operate in a state other than its home state. With this valuable tool, your business ensures compliance and can enjoy expanding and operating successfully across state lines.
However, before applying for a Certificate of Authority, ensure you do your homework and seek legal guidance. Remember the steps we discussed when applying for your certificate to ensure a hassle-free process.
Ultimately, the Certificate of Authority serves as an investment opportunity in the growth and sustainability of your business.
Frequently Asked Questions
How Much Does a Certificate of Authority Cost?
The filing cost for a Certificate of Authority can vary based on the business type and state. So, research the requirements and state fees of the foreign states you want to operate in.
Is a Certificate of Authority the Same as a Tax Certificate?
A Certificate of Authority is a document that allows entities to conduct business in a different state from their home state. On the contrary, the foreign state issues a Tax Certificate to grant your business the legal authority to collect sales tax.
Why Do You Need a Certificate of Authority?
Most companies apply for a Certificate of Authority to conduct business operations outside the state where they're initially registered. In addition, organizations must obtain this certificate to enjoy favorable tax breaks and avoid penalties.