Foreign corporation

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A foreign corporation is an existing corporation 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. This article uses the word state to refer to separate jurisdictions, as the typical example 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); however, a corporation 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. For the purposes of this article, therefore, the term 'state' may also represent 'country' with respect to different jurisdictions.

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 better corporate governance regulations), or Nevada (because of better 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, for example, have no state income tax.

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, 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.

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 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.