How To Expand Your Business Into Other States: A Primer On State Compliance Requirements
When running a business in the United States, it can be difficult to understand all of the various legal requirements. After all, each state and territory independently registers and oversees businesses that operate within their borders. While there are plenty of similarities, each state has unique requirements that can present challenges for even the most experienced business owners.
Entrepreneurs and first-time business owners should make understanding these requirements part of their planning process. And, as their business grows, they should develop strategies to ensure their business is compliant in each state.
Registering the Legal Entity
When you first decided to start a business, you likely either incorporated or formed an LLC. You may have formed your business where you live and work. Or, perhaps you chose a popular state like Delaware or Nevada. That state is known as your “domicile” or your home state. As your company grows, you may be required to register outside your domicile if you meet that state’s definition of “transacting business.”
The process of registering your LLC or corporation in another state is known as “foreign qualification.” In every state, your business will submit an application for a certificate of authority along with proof of good standing from your home state and a filing fee.
As part of the foreign qualification process, you will also have to appoint a registered agent that lives in that new state. The registered agent’s job is to receive time-sensitive legal and government notices on behalf of your business and forward them to you. That means if you formed a New York LLC and need to register as a foreign LLC in New Jersey, you will need a New Jersey registered agent in order to register successfully.
The process of foreign qualification varies in each state. You will find filing fees that range from $50 in Hawaii to over $750 in places like Texas. Timing is a big factor, too. States like Colorado approve your registration nearly immediately, but others like Arizona can take weeks or months.
Tip: Be sure to understand what it means to transact business in other states. Give yourself plenty of time to get registered before a critical project or opportunity.
Registering for State Tax Accounts
Just like in your home state, your business will be subject to taxation as it expands into other states. Of course, your specific tax liability (or “nexus”) will vary depending on your entity type, your activities, your income, and many other factors. But, it’s important to know how to open the correct tax accounts in order to operate.
In many states, simply registering the legal entity through foreign qualification automatically opens a state franchise or income tax account. California, Texas, and Pennsylvania all work this way. But, this isn’t always the case. In the District of Columbia, for example, all legal entities that register in the District must separately apply for that franchise tax account.
Companies that sell products (even online) or hire employees may be subject to additional sales and payroll taxes. This requires the business to register with a state department of revenue to open the appropriate sales and wage withholding accounts. For businesses that are also subject to unemployment tax, you should be prepared to file a registration with a separate agency, typically the department of workforce development.
The process of registering for state tax accounts can be anything but straightforward. Many states have online registration portals that allow businesses to apply for multiple tax accounts at once. Others, however, still require paper forms to be mailed! And, like foreign qualification, the process of registering for tax accounts can take weeks.
Tip: Research the tax requirements as proactively as possible. Businesses are generally required to have the proper tax accounts in place before they begin operating. Be sure to apply and take the necessary steps so that you can start selling, hiring, and growing!
Obtaining Licenses and Permits
When you first set up your business, the chances are high that you researched and obtained the necessary licenses and permits to operate. Expanding your business into another state is no different. Most states (and even many city and county governments) require businesses to obtain licenses and permits before they begin operating.
Business licenses can take smany forms. They may be general licenses to operate, or they may be specific to your industry or your location. If you operate your business from home, be aware that many jurisdictions have home-based business license and zoning requirements.
The biggest challenge to licensing compliance is knowing when a license is required. With so many types of businesses (and literally thousands of government agencies), the task can feel overwhelming. The most important thing to remember is that most business licenses are issued at both the state and the local levels. As your business grows, do your homework. Contact the relevant agencies in the new state, down to the municipal level. Tools like the permit finder provided by the SBA are great online resources. In all cases, find out what (if anything) is needed in order to do business legally in that state or locality.
Tip: There is no one-size-fits-all approach to obtaining business licenses. You can expect to spend significant time researching your requirements. However, doing this up-front due diligence helps avoid the potentially hazardous consequences of running an unlicensed business.
When it comes to expanding your business into other states, compliance requirements present a significant hurdle. However, the challenges most businesses face can be resolved through proper planning. While some opportunities truly arise at the drop of a hat, there is no downside to being prepared.
With your management team, legal counsel, or (for the solopreneur), over a cup of coffee, review your business development forecast over the next 6-12 months. Examine where your planned activities will take place. Identify where your business needs to register or take action to comply. Then, don’t wait. The upfront investment in obtaining the proper registrations and licenses will help your business grow faster and turn a profit sooner. What are you waiting for?
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