By James Gilmer
In a digital world, your small business may be serving customers and markets in neighboring states and beyond. While this growth can be exhilarating, don’t let additional legal requirements take the wind out of your sails.
Each state has different rules for registering your LLC or corporation to “do business.” Failure to comply can result in state-enforced penalties, lost opportunities, and bad publicity. On the other hand, knowing the requirements ahead of time can result in better preparedness for opportunity and even profitability.
What are the requirements in other states?
The first thing to know when doing business in a new state is that the requirements will be different from your home state. While the details vary from state to state, most states do share some common requirements, including:
Registration of the legal entity with the state corporations official, usually the Secretary of State
Appointment of a registered agent for service of process
Rules and restrictions regarding the entity’s legal name and purpose
Annual or biennial reporting to stay in good standing
The most substantial difference when registering in a new state is that your entity will be considered “foreign,” which means “out of state.” Your business can only have one home state or domicile, which is the state where you incorporated or formed your LLC.
The process of registering the legal entity is known as “foreign qualification.” As part of that process, you are applying for authority to transact business in a foreign jurisdiction. Instead of filing articles of incorporation or organization, you will file an application for a certificate of authority. With that application, you’ll appoint a registered agent with an address in that state, submit proof of good standing from your domicile, and pay a filing fee.
By way of foreign qualification, you still have one legal entity, but you will have successfully registered to do business in another state.
Foreign qualification takes place separately in each state where you plan to do business. If your LLC or corporation plans to do business in multiple states, that means you have to be prepared to appoint a registered agent, file the required applications for authority, and maintain good standing by tracking and filing state annual reports on an ongoing basis. Depending on your business, you may have additional obligations to:
Register for and pay state taxes, such as corporation income, sales, and payroll
Apply for and maintain licenses and permits, depending on your industry, location, and activities
Because these additional requirements can be complex, business owners are encouraged to research their specific activities before registering and use the advice of legal counsel wherever possible.
When do I need to register in a new state?
Knowing whether registration in a new state is required and when it should happen, are critical pieces of information to any small business owner. After all, state registration can be expensive, time-consuming, and a drain on internal resources. Smart business owners will register proactively, but do so only when absolutely necessary.
The first thing to know is that “doing business” is a loosely defined concept. Most states provide a list of what does not constitute doing business, and leaves deciding what does constitute “doing business” to each company (and at times, the courts).
Historically, however, “doing business” has roughly equated to having an ongoing presence in a given state. Examples might include maintaining an office or warehouse, having employees, and conducting regular interstate commerce.
The subject of taxation also arises, particularly in the wake of South Dakota v. Wayfair, which can result in sales tax registration and reporting obligations for out-of-state companies with sizeable numbers of in-state transactions and sales. The thresholds established in Wayfair vary by state. Online-based businesses should take particular care to abide by the additional requirements triggered by this decision.
Registration in a new state should generally take place before transacting business, or you may face penalties and consequences. State corporation and taxation authorities can enforce late fees and additional franchise taxes at the time of application for a certificate of authority. In some states, these fees can quickly amount to hundreds or thousands of dollars.
Unregistered companies that get caught, such as via consumer complaint or government intervention, can face civil and even criminal penalties and loss of access to the courts. This stings doubly with your customers, too. You can imagine the impact this could have on both your reputation and your ability to get paid!
In cases of uncertainty, it’s best to contact your attorney or legal counsel to interpret how the laws of a given state apply to you. Doing so before you scale up your operations will help you stay ahead of any adverse consequences.
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Strategies for complying with state requirements
There’s no one-size-fits-all strategy for every business. Regardless of your model, however, you can apply a plan-do-check-act approach when expanding into any new state.
Plan: Start by looking at your current scope of activities. Are you doing business anywhere you haven’t properly registered? Then assess the overall horizon for your business. In the next 12 to 18 months, what is your growth strategy? What markets are you planning to enter? In both of these scenarios, plan to close any gaps in your compliance in order to stay ahead of upcoming opportunities. Because some state agencies can take weeks or months to approve your registrations, a longer outlook will be necessary.
Do: Few small businesses have the in-house resources to research and to pursue registration in new states efficiently. Those that do should have centralized records, key responsibilities defined, and mechanisms for tracking renewals and executive oversight. Companies that don’t have the capacity (or the desire) to handle research and paperwork outside their home state have the option of leveraging external filing services and software to track their requirements. In all cases, take action proactively!
Check: Once you’ve expanded and registered where you need to, reanalyze the original gaps. Have you taken the necessary steps to address existing issues? Are you prepared for the opportunities in your forecast? Remember, your clients and vendors may need proof of your state registration before signing an agreement or paying you!
Act: With any sound strategy, make adjustments as needed, including to any internal support systems or external vendors you’ve hired to stay compliant. As your opportunities and business priorities shift, make sure your approach to compliance is proactive and moves in tandem.
Expanding your business into new markets and states means growth and opportunity. Don’t let compliance obligations slow you down. Becoming compliant requires top-to-bottom understanding and buy-in, but by pairing compliance responsibilities with business development objectives will result in more agile responsiveness to opportunity and profitability. What are you waiting for?
Disclaimer: Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
About the Author
Post by: James Gilmer
James Gilmer is a Compliance Specialist at Harbor Compliance, a leading provider of compliance solutions for companies of all types and sizes. Founded by a team of government licensing specialists and technology trailblazers, Harbor Compliance has helped more than 25,000 organizations apply for, secure, and maintain licensing across all industries. James is passionate about helping nonprofit organizations leverage compliance to enhance their fundraising and program activities and educating the sector on compliance issues. James is also a co-founder of Berks Sinfonietta, Inc., a nonprofit chamber orchestra located in Reading, Pennsylvania.
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