Foreign Corporation Laws

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 What is a Corporation?

Corporations are businesses that are created and regulated by state laws. Specifically, a corporation is defined as a legal entity which is separate from its owners, called shareholders. This means that the corporation itself is the only individual or entity that can be held liable for corporate obligations, for example, maintaining certain business records.

There are numerous different types of corporations. In general, corporations are classified according to certain factors, including:

  • Their tax structure;
  • The purpose of the corporation; and
  • The number of shareholders and the amount of stock to be issued.

Some of the most common types of corporations include:

  • C corporations;
  • S corporations;
  • Non-profit corporations;
  • Business corporations;
  • Professional corporations;
  • Foreign corporations; and
  • Public or private corporations.

However, when an individual mentions a corporation, they are typically referring to the 2 main categories of corporation according to tax laws, C corporations and S corporations. The main difference between these two categories is that C corporations are taxed separately from the owners, whereas S corporations are not.

There are a few other benefits to forming a corporation, including:

  • The corporation survives changes in ownership, meaning they may exist forever;
  • They are considered people, so they are entitled to certain constitutional protections; and
  • Because only the corporation itself may be held responsible for its obligations, it has limited liability.

What is a Foreign Corporation?

Foreign corporations are corporations that are incorporated in one state but are authorized to do business in one or more additional states. For example, a corporation may be formally registered in Delaware but can be authorized to do business in California, Florida, and Texas.

This type of corporation is considered a domestic corporation in Delaware but is considered a foreign corporation for its operations in other states. In some cases, the term corporation is used to describe an international company abroad which is doing business in the United States.

The term most commonly, however, refers to an American business that is operating in several different states. A foreign corporation may also be called an out-of-state corporation.

Why Would a Company Choose to Register as a Foreign Corporation?

There are many businesses that choose to register as a foreign corporation simply because it is more practical than incorporating in each state where they operate. Instead of incorporating in numerous different states, a business will typically incorporate in the state where its headquarters are located and then register as a foreign corporation in other states.

In addition, certain states maintain special governance rules or various tax incentives for companies which incorporate in their state. Two of the most prominent examples of these types of states are Delaware and Nevada, where these types of businesses incorporate.

Therefore, a company may incorporate in Delaware to receive corporate privilege tax breaks and then register as a foreign company in all other states where they have significant business dealings.

Where Would I File a Lawsuit if I Have a Legal Issue with a Foreign Corporation?

Although a company may be registered and headquartered in one state, it is typically possible to sue a company in another state where they were transacting business. Generally, if the business has an office or employees in that state, then they are pursuing business in that state.

This means that the business can be sued in that state for a claim related to their activities in that state. In the alternative, the lawsuit may also be filed in the state where the violation occurred.

Therefore, if an individual has a legal claim against a foreign corporation which is doing business in the state where they reside, they can typically file a lawsuit in their own state. This applies especially in cases where the injury occurred in that state.

When determining the proper court for a lawsuit, a court will examine all of the factors which would make a particular location convenient for each party. For example, it would likely be more burdensome for an ordinary citizen to fly to a different state simply for the purpose of engaging in a lawsuit when compared to a company representative whose job it is to travel to other states to handle lawsuits that are filed against the company.

What Does it Mean to Serve a Foreign Corporation?

To serve a foreign corporation means to deliver court documents which inform the company that a lawsuit has been filed against them. It may be difficult to serve a foreign corporation because it may not be clear where the documents should be delivered.

The majority of states required that foreign companies register with their secretary of state and then appoint a registered agent for that state. Court documents can typically be served to the registered agent of the company in that state.

Typically, this is easier than attempting to track down the president of the company in its state of incorporation. Service is often delegated to a professional document server whose job it is to serve legal papers to the appropriate individual.

In certain states, an individual can give the papers to a lawyer or to the secretary of state who will then serve the corporation on their behalf.

What Types of Corporations Get Tax Breaks?

Corporate tax laws may be very complex and confusing to understand. In addition, they may vary by state.

Certain corporations are associated with specific tax breaks or tax benefits. Corporation types that are associated with unique tax treatments may include:

  • Non-profit corporations: These corporations may be eligible for certain tax breaks, deductions and refunds based on charitable activities and charitable giving;
  • Foreign corporations: Foreign corporations, as noted above are corporations that are incorporated in a different state from the state or states of its business activity;
    • Some states, for example, Delaware offer more lenient tax treatment. These states are known as corporate haven states; and
  • Delaware and Nevada corporations: Many businesses choose to file in Delaware or Nevada to take advantage of the unique corporate laws.

What Happens if a Corporation Violates Tax Laws?

In the majority of cases, a corporation must specifically request a tax credit or deduction. It is important to note that altering a corporation’s tax information in order to make it appear eligible for a tax break may be considered a violation.

If a company is deemed to be in violation of a corporate tax law, it may prompt an investigation by a government agency. This process can involve a close examination of a company’s tax documents in order to determine if there are any issues with fraud or other forms of white collar crime.

What are the Penalties for Corporate Tax Violations?

The possible penalties for corporate tax violations may include:

  • Fines;
  • Loss or suspension of business operating licenses;
  • In certain cases, criminal charges and criminal fines; and
  • Civil damages if another party suffered losses as a result of the violation.

Do I Need a Lawyer for Issues that I have with a Foreign Corporation?

If you have any issues, questions, or concerns related to a foreign corporation, it may be helpful to consult with a corporate lawyer for advice. A lawsuit which involves a foreign corporation may be complicated because there may be overlap of the laws of more than one state.

If you are interested in creating or registering a foreign corporation, your lawyer can assist you with the creation and registration documents.

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