Foreign Entities

A foreign entity is an active, legally formed entity that is registered to do business in a jurisdiction (such as a U.S. State, or a country) other than the one where it was originally incorporated. We will use the word state to refer to separate jurisdictions, where the typical example would be of a foreign corporation is one that is incorporated in one state of the United States, then is authorized to do business in additional state(s). For example, a company that is formed in the state of Delaware would be viewed as a "foreign" company in other states where it gets qualified to do business. However, an entity could be incorporated in one country and authorized to do business in one or more additional countries, depending on whether corporations are registered at the federal level of a country, or at the sub-federal level, such as at the State or Province level of a country. Similarly, a company formed in the United Kingdom would be "foreign" if it wishes to be registered to do business in the state of Nevada or any other state. Other known names are to Qualify to do Business or ask for Authority to do business.

Companies that do business in several states within the US have to "foreign qualify" and must register for a Certificate of Authority in that state and pay the applicable state filing fees.

 

In order to apply for authority, there are mandatory documents from where the entity was originally incorporated, such as:

• Certificate of good standing, existence or status

• Copy of your company's registration document. (Note: Some states require a Certified Copy of the document. In such case we will inform you.)

 

The use of foreign entity registration allows a company to operate in multiple jurisdictions as the same organization in all of them. The only alternative would be to register a separate entity in each jurisdiction, and separate every operation according to the particular jurisdiction to which the operations are taking place. This would mean, for example, an entity operating in 5 U.S. states would have to have separate domestic entities in each of the five states, as opposed to having a single entity registered in one state, and being registered as a foreign entity in the other four.

The two basic ways to form an entity which operates in multiple jurisdictions are:

• To operate as a single entity having one jurisdiction to which it is a domestic entity and register as a foreign entity in all other states, or
• To create one primary entity (or parent entity that owns the stock of all the other entities, and each of the other entities is registered as a domestic entity in each state where it operates. The parent entity (or parent company) is usually referred to as a holding company, while the separate entities are referred to as subsidiaries. If the parent company owns all of their stock, they would be referred to as wholly owned subsidiaries of the parent company.

Operating a company as a holding company and separate entities in each state, or operating as a single entity with registrations as foreign entities in all the other states than its home state, is a matter of choice for the company's directors and officers depending on how it operates, damage liability and tax consequences. An entity 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 entity having foreign entity status in other states is because of corporate governance rules which dictate that the rules of the state where the entity is a domestic entity apply for certain provisions such as voting rights, officer and director protection, and liability for misconduct. Another reason for operating as a holding company with separate domestic entities 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 entity in that 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.

Subsidiary

A subsidiary, in business, is an entity which is controlled by another entity. The controlled entity is called a company, Corporation, or Limited Liability Company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that an individual cannot be a subsidiary of any organization, only an entity representing a legal fiction as a separate entity can be a subsidiary. This is because individuals have the capacity to act on their own initiative; a business entity can only act through its directors, officers and employees.

The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex. A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a group, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. When ownership is not shared, so that a subsidiary is wholly owned, it is called a branch. A subsidiary is different from a branch in that the former is jointly owned by the parent company and others while the latter is completely owned by the parent company. Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.

 

The following are common reasons why companies have subsidiaries, but no list can ever be exhaustive:

• Risk: Many businesses use subsidiaries to manage risk. This is achieved usually by setting up a subsidiary corporation to undertake the higher risk venture. If that venture subsequently become subject to litigation or liability, legally the subsidiary corporation would be liable and not the parent (unless the parent made guarantees, in which case the parent is liable for the guarantees it made).
• Acquisition: When one company acquires another, the one acquired becomes a subsidiary of the acquiring company.
• Regulation: Law may require a company to conduct certain activities through a distinct entity. Examples include banking or the operation of utilities such as electricity or telecommunications. As subsidiaries are distinct legal entities, this ensures full disclosure of the financial results of these businesses and insulates them from the other activities of their group.
• Territoriality: A group, particularly a multinational one, may create subsidiaries in many jurisdictions simply to prevent someone else doing so to the confusion of their customers.
• Taxation: Taxation is still largely conducted on national lines. Multinational businesses may therefore establish subsidiaries in each jurisdiction to bring together all their activities in that jurisdiction.
• Control: The word "control" used in the definition of "subsidiary" is generally taken to include both practical and theoretical control. Thus, reference to a body which "controls the composition" of another body's board is a reference to control in principle, while reference to being are able to cast more than half of the votes at a general meeting, whether legally enforceable or not, refers to theoretical power. The fact that a company has a holding of less than 51% which, because the holdings of others are widely dispersed, gives effective control is not enough to give that company 'control' for the purpose of determining whether it is a subsidiary.