February 2016

Multi-State Business Owners

We often encounter clients who have incorporated or organized their business in one state but have since expanded or are seeking to expand their operations into other states.

Expansion is a great opportunity for business owners to grow their customer base and their revenues at the same time. However, there are three primary issues to consider if your business grows beyond the borders of your home state.

1. Authority to Operate: Similar to registration in your home state, new states want to know if you decide to do business there. Most states require that out-of-state businesses apply for a Certificate of Authority (or similar document) from their Secretary of State and pay registration fees (typically ranging from $100-$300) before beginning operations. The Certificate should be obtained as soon as the business could reasonably be qualified as "doing business" in the state, because failing to register could result in fines as well as prevent you from availing yourself of the state's laws (e.g., pursuing legal claims in its courts). Once registration is established, annual reporting requirements may also apply.

2. Taxes: A business must pay taxes in states where it has a connection, also known as "nexus". Each state evaluates nexus for income tax purposes using varying criteria. The most important factors are often (1) generation of revenue in the state (sales), (2) sending employees, service people or independent contractors into the state (payroll), and (3) locating property such as inventory, offices, or warehouses in the state (property). Nexus is also used to evaluate sales tax obligations, although a sufficient physical presence is often the determining factor. Particular care should be given to sales made over the Internet, because special rules apply and vary from state to state. If contacted by a state to provide information or complete a questionnaire regarding your activities, it is important that you seek proper counsel before responding.

3. State Laws: Employers must comply with all state and local laws. Your company may be familiar with these laws in your home state, but you will need to adapt to those applicable in new states. Similarly, licensing laws vary and must be evaluated in any new territory. Finally, company contracts with clients should be reviewed and include clear statements as to which state's laws will apply to the contract.

Expanding your business is exciting, but it also requires diligent inquiry into the similarities and differences with your home state. Our firm regularly advises multi-state business owners and would be happy to discuss yours upon request.

Expanding your business is exciting, but it also requires diligent inquiry into the similarities and differences with your home state. Our firm regularly advises multi-state business owners and would be happy to discuss yours upon request.