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What is a Certificate of Authority?
A certificate of authority is a legal document that allows an entity to legally conduct business in a state—other than where it was initially registered as an S Corp, non-profit, C Corp, or LLC.
The document’s name can vary based on a state. It can be referred to as a Qualification Certificate, Application for Authority, Application to Transact Business, or Application for Registration, but is popularly known as Foreign Qualification.
When you talk of Foreign Qualification, the term ‘foreign’ here refers to other states—without necessarily going international. Typically, the document is the same regardless of the type of business in question.
Types of Certificates of Authority
However, you can also use the term Certificate of Authority to refer to a few different things. We will discuss a few types of Certificates of Authority to give you a more detailed overview of what they are.
Type 1: Conducting Business in Another State
Here, we discuss the foreign qualification obtained when a business wants to conduct operations legally in another state outside its initial formation. For example, suppose a business entity filed articles of association in Nevada. In that case, it will need a Certificate of Authority to conduct business in California.
The different states set distinct compliance requirements for foreign qualification, and businesses seeking certification must abide by the rules and the regulations. Individual states also use different criteria for defining ‘conducting business.’ Still, generally, an enterprise is said to conduct business in a state if:
- It has a physical address in that state
- Holds meetings with clients in that state
- Has employees working or living in that state
- Is liable for sales tax on the goods and services it sells in that state
- It regularly makes contracts with parties in that state
However, this is by no means the comprehensive criteria for determining whether an entity conducts business. Moreover, the criteria for doing business can vary in different statutes.
Type 2: Industry-Specific Certificates of Authority
In some states, you may need a Certificate of Authority to conduct business in a specific industry or if you want to meet a particular purpose. We will explain a few examples of Certificates of Authority under this category.
Example 1: Insurance Certificate of Authority
Suppose you want to start an insurance company. In that case, you need to obtain the licensing to operate in the insurance industry legally. Here, your business may request the certification from two different perspectives.
- During the primary application. The request for a Certificate of Authority when opening the company in a particular state
- When expanding the business. The request for certification to provide insurance services in states other than where you registered the company
Example 2: Tax Certificate of Authority
In most states, businesses that sell goods or services subject to sales tax must obtain a Tax Certificate of Authority. The certificate gives the business the authority to collect taxes. They can also issue and collect exemption certificates on sales tax.
The business will have to apply for the certificate from the tax authority and pay a fee. It gets assigned the certificate with a sales tax identification number upon approval. The certificate is renewable periodically.
If the business has multiple locations within the same state, each location must have its license and display it prominently at the site.
Here is an article that also defines the Certificate of Authority.
Purpose of a Certificate of Authority
The purpose of a Certificate of Authority varies depending on the type. However, it is of utmost importance for a foreign qualification to operate in multiple states.
The document's primary purpose is to help your business legally conduct its operations in different states. It is proof that the entity operates lawfully and in compliance with the state’s requirements. A company that lacks the certificate cannot conduct business in other states.
Image via Pexels by Karolina Grabowska
Do I Need a Certificate of Authority?
If you plan to expand your business operations to other states, it’s a significant milestone for your business. First, however, you need to take a couple of steps, and obtaining a Certificate of Authority is one of them.
Each state has different laws and regulations, so you will have to apply for the certificate in the specific states you want to venture. Otherwise, you will not have the right to sell goods or provide services in these states, which is the most significant reason you need the certificate.
Also, it’s important to note that if you carry out activities that constitute conducting business in a particular state without a Certificate of Authority, you could be liable for tax backs, penalties, and fines.
Additionally, your business may not start or maintain a lawsuit or carry out legal proceedings in a court of law. That means you will not have the right to enforce contracts or recover damages.
Here is an article about the Certificate of Authority.
How To Get a Certificate of Authority
Give your company the authority it needs to conduct business outside its home states. Generally, you acquire a Certificate of Authority upon application and payment of fees. The fees and other jurisdictional requirements vary based on the state.
Here are four basic steps for Foreign Qualification.
Step 1: Confirm availability of the name
A name search helps you know if the company’s name in its articles of incorporation is available in the state of qualification. The availability here means no other entity uses a similar name in the Secretary of State’s records.
If it is available, reserve it so that no other business registers under the name. If it is not available, the Secretary of State can qualify your company as a ‘ doing business as ’ (DBA).
Step 2: Appoint a registered agent
Registered agents or corporate lawyers will act on behalf of your business in the foreign state. You must appoint a professional agency that will receive progress and other important communication on behalf of your business.
Step 3: Order a certificate of good standing
Many states will require proof that your company is in good standing in its registered state. Here, the Certificate of Good Standing proves that the company meets the operating agreement in the home state. A business can fall out of good standing by failing to pay taxes or file annual reports.
Step 4: File application documents and pay the fees
Once you’ve clear about the name status of your company and have a registered agent, you can file the application and pay the necessary fees. Research the fee payable in specific states since the amounts differ. Your registered agent should have the experience and expertise to handle this step and execute it on behalf of your company.
The application document should include a range of company information like:
- Company name
- Date of incorporation
- Physical location
- Name and location of registered agent
- Name and address of members or officers
- Name of authorized shares and listings of stocks
- Financial information
- Type of business the company will carry out and corporate bylaws
However, the above is not a comprehensive list of the required information. The requirements vary from one state to another.
Benefits of a Certificate of Authority
The primary benefit of Foreign Qualification is that your business can operate in another state legally. It is an excellent opportunity for expansion and growth. Besides that, other advantages include:
- Ability to start and maintain legal proceedings
- Your business avoids penalties and fines
- Your business wins the trust of clients
- The business can remain an LLC
- The business saves the cost of incorporation in every state
Get Help With Foreign Qualification
While the foreign qualification process appears straightforward, there are several legal implications. As a result, seeking legal assistance can help you with the guidance you need and avoid possible complexities in the process of qualification.
Post a project today and receive bids from qualified attorneys to help you.
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Legal services cost too much, and are often of low quality. I have devoted my law practice to providing the best work at the most affordable price—in everything from defending small businesses against patent trolls to advising multinational corporations on regulatory compliance to steering couples through a divorce.
Jo Ann J.
Jo Ann has been practicing for over 20 years, working primarily with high growth companies from inception through exit and all points in between. She is skilled in Mergers & Acquisitions, Contractual Agreements (including founders agreements, voting agreements, licensing agreements, terms of service, privacy policies, stockholder agreements, operating agreements, equity incentive plans, employment agreements, vendor agreements and other commercial agreements), Corporate Governance and Due Diligence.
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Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Don G.
Texas licensed attorney specializing for 22 years in Business and Contract law with a focus on construction law and business operations. My services include General Business Law Advisement; Contract Review and Drafting; Legal Research and Writing; Business Formation; Articles or Instructive Writing; and more. I am able to draft and review contracts, and have experience with, contract law and business formation in any state. For more insight into my skills and experience, please feel free to visit my LinkedIn profile or contact me with any questions.
Meghan P.
I am a licensed attorney and a member of the California Bar. I graduated from the University of Dayton School of Law's Program in Law and Technology. I love IP, tech transfers, licensing, and how the internet and developing technology is changing the legal landscape. I've interned at both corporations and boutique firms, and I've taken extensive specialized classes in intellectual property and technology law.
Charlotte L.
I hold a B.S. in Accounting and a B.A. in Philosophy from Virginia Tech (2009). I received my J.D. from the University of Virginia School of Law in 2012. I am an associate member of the Virginia Bar and an active member of the DC bar. Currently, I am working as a self-employed legal consultant and attorney. Primarily my clients are start-up companies for which I perform various types of legal work, including negotiating and drafting settlement, preparing operating agreements and partnership agreements, assisting in moving companies to incorporate in new states and setting up companies to become registered in a state, assisting with employment matters, drafting non-disclosure agreements, assisting with private placement offerings, and researching issues on intellectual property, local regulations, privacy laws, corporate governance, and many other facets of the law, as the need arises. I have previously practiced as an attorney at a small DC securities law firm and worked at Deloitte Financial Advisory Services LLC. My work experience is dynamic and includes many short-term and long term experience that span across areas such as maintaining my own blog, freelance writing, and dog walking. My diverse background has provided me with a stong skill set that can be easily adapted for new areas of work and indicates my ability to quickly learn for a wide array of clients.
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Adam B.
With over 25 years of experience in the technology sector, I am a strategic business counsel, outsourced general counsel, and a leader of high-performing legal teams aimed to help maximize the efficiency of all stakeholders. I recently joined the renewable energy space with the addition of a new client on its way to becoming the first Chinese battery company to build a battery manufacturing presence in the US beginning with a 1+ GWh cell and pack plant, and a domestic anode and cathode plant. In my most recent full-time role, I served as the Sr. Director and Assistant General Counsel at SMART Global Holdings, where I served as the general counsel for the HPC and AI division of this publicly traded holding company, comprised of four companies, before becoming the global head of the commercial legal function across all portfolio companies, including two multinational industry leaders. During much of my career, I provided outside legal services on a recurring basis for several years advising several high growth start-ups and venture firms as well as house hold names, and also led one of the country's fastest growing infrastructure resellers and managed services providers. My core competencies include contract review, commercial negotiation, legal operations, information security, privacy, supply chain and procurement, alliances and channel sales, HR, and general corporate. I am passionate about leveraging my legal skills to achieve business solutions, supporting innovation and growth in the technology sector, and helping maximize the commercial flow and efficiency at growing companies. I hold an undergraduate business degree, a JD, a MSBA Taxation, and certifications from the California Bar Association, Six Sigma, and ISM.
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