Foreign corporation

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 jurisdiction other than where it was originally incorporated.^[1] 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.^[2]

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 bank, 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.

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 more favorable corporate governance regulations), or registered in Nevada (because of more favorable 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 company, while the separate corporations are referred to as subsidiaries. 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, 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, as of 2007, 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, as of 2007, 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 Bermuda, 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.

International equivalent

Most countries require corporations incorporated elsewhere which establish a branch or place of business in their territory to register with the host country government. In the United Kingdom, and many jurisdictions which derive their company law from English law, such companies are known as "overseas companies".^[3]

See also

• Flag of convenience (business)

Notes