Foreign Corporation - Foreign Corporation Registration Vs. Multiple Domestic Corporations

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.