3 things to know before expanding your business out of state
Contrary to popular belief, the complexities of running a business don’t go away once the organization begins to grow, they actually grow with the business (about three times faster!). State and local tax jurisdictions do not help when it comes to alleviating a company’s growing difficulties, as liabilities can slip through and often fall through the cracks. When a business moves or wishes to operate in a state, parameters are in place to ensure that the business is fully qualified to operate.
Here are 3 common areas where non-compliance could easily occur, resulting in liability and possibly revocation of the privilege to do business in the state:
1) Registration of Secretary of State
2) Tax registrations
3) National and local operating licenses
Secretary of State
Typically, the first step a business should determine when doing business in a state is whether it should register the business with the Secretary of State (SOS). When expanding a business, it is essential to know under what type of entity the business is filing (LLC, companies, etc.). Any other state, other than the state of the original domicile, in which the business is registered will be classified as a âforeignâ company / LLC / partnership. SOS recordings can have different titles, depending on the state. Some common types are the âCertificate of Authorization to Do Businessâ and the âForeign Entity Certificate of Qualificationâ. It is important that the applicable registration is carefully selected and meets the requirements of the organization.
The final determinant of whether your business should register with SOS is the written activity threshold in the state in question. For example, Illinois states: “When a foreign company does business in Illinois, it must qualify to do business by obtaining authority to do business in Illinois from the Department of Business Services. of the Secretary of State (Â§13.05). The business transaction should not be confused with a distance seller meeting the economic linkage thresholds in a state, as the economic link activity alone does not generally require an SOS registration. It depends on what the state considers doing business.
If a business diversifies into a new state, taxes are inevitable. If the business has sales in the state, sales and use tax liability must be determined in advance. If the state in question has a sales tax (or a similar variation), the business must establish tax and collection responsibility for its goods and services to assess whether additional tax records will be needed.
Depending on the activity the business plans to carry on, a special tax may apply, in addition to sales and use tax. Most states have some form of fuel tax, waste materials tax, lodging tax, and personal property tax. These must be handled with care and diligence in order to avoid damage from retroactive penalties, interest and potential audits.
National and local operating licenses
State and local licenses primarily apply to businesses that expect to have an established physical location in a state or locality. If the business is only a distance seller in one state, it likely won’t have to worry about being state and local licensed, although full diligence is always recommended.
Depending on the location and the nature of the activity carried out, there are hundreds of licenses and potential renewals awaiting new activity. Some common examples are annual local business taxes, local business certificates, annual inspection certificates, and other industry-specific permits to practice. Businesses are encouraged to carefully assess the local provisions of the new location to ensure full business compliance in their new home.
Advice for the taxpayer
A good starting point in assessing whether an SOS registration is necessary is to determine whether there will be people or property in the new state. In addition, it is important to know that SOS recordings are not just a single repository; SOS registration will require annual reports and potentially create an additional statewide business tax obligation, such as state corporation tax.
Tax records, similar to SOS reports, are not something to be done blindly. It is recommended that businesses perform a comprehensive review of commercial goods and services and their taxation before entering or starting business in the new state. Failure to analyze a business’s tax liability can result in penalties and a difficult start for any business.
After the state’s tax examination of the business, business licenses must be assessed. These generally depend on the industrial sector of the business and the impact of its physical presence on the local community. Businesses should visit city and county websites for additional information regarding local taxes and professional licenses or inspections required for legal operation in that jurisdiction.