Many businesses spend their entire lifecycle operating in a single US state. Eventually business growth leads to selling products and services in multiple states. The leap from one state to many dramatically changes the admin, compliance and accounting costs. A one state business is the ideal client for business advisors and preferred by business owners. If your business has desired growth, then setting up for business in another state is just the next thing to take on.
Another State Another Business
Doing business in another state is like staring a whole new business. Let's say a group of founders incorporates US Enterprises, Inc. in Delaware with the intention of going national. They plan to grow by expanding into adjacent states. After one year US Enterprises, Inc. registers to do business in Maryland and Pennsylvania. All the work their advisors did to set it up in Delaware has to be done all over again in the 2 new states. The only difference between staring a new business called East Coast Enterprises, Inc. in Maryland and registering US Enterprises, Inc. in Maryland is the name. Otherwise the amount of work is the same.
Registration Basics
Businesses either register as a domestic company or a foreign company. The first state where the business registers is the state of birth and thus it becomes a domestic company in that state. US Enterprises, Inc. is a domestic Delaware company. It would become a foreign company when registering in states 2-49. In summary:
a) Domestic company: first state of registration and the only state
b) Foreign company: registrations in all subsequent states
c) All business entities are registered with the Department of State
3 Common Entities
The following forms are used to create 3 common business entities with the departments of state:
1) Corporations are created with Articles of Incorporation
2) Limited Partnerships (LP's) are created with a Certificate of Limited Partnership
3) Limited Liability Companies (LLC's) are created with a Certificate of Organization
Versions
The 3 entity types are either the domestic version or the foreign version. US Enterprises, Inc. filed a Domestic Articles of Incorporation in Delaware and then it filed Foreign Articles of Incorporation in Maryland and Pennsylvania. There are slight variations in the registration names. For example, a state usually refers to a foreign registration as a Foreign Certificate of Authority. For the most part there's a lot of consistency in the naming conventions from state to state. Make sure you have a virtual mailbox and virtual registered agent (see below) BEFORE registering your business here.
The Other Departments
Compliance wouldn't be the same without having to register with multiple departments. Here are the 3 most common Departments:
1) Department of State (already mentioned)
2) Department of Labor and Industry (unemployment compensation)
3) Department of Revenue (registration multiple tax types)
Lots of Accounts
Many states have an online business registration form unifying the departments within one application. Online business portals are becoming more user friendly but the 3 departments are typically managed separately. US Enterprises, Inc. would have to set up and manage 3 departments with 3 states or 9 online profiles. In addition, they could have 3 or more tax types with each department of revenue totaling 9 in 3 states.
Nexus
The term nexus is used in many different contexts but generally means a connection linking two or more things. Economic nexus with taxing authorities gets created when a company does business in another state based on their definition. The almighty compliance burden flares up because every state has different definitions of nexus. Nexus also applies to 3 or more tax types tripling the compliance even further. Here is an excellent guide to help with nexus.
Tax Types for Nexus
1) Sales tax
2) Corporate income tax
3) Franchise tax
4) Other taxes (e.g. gross receipts)
2 Reasons
Every business needs to keep nexus in mind. A business considers nexus for these 2 Reasons:
Reason #1) Existing multi-state business considers annual ongoing compliance
Reason #2) A company doing business in another state considering first time compliance
2 Questions
Every business also considers nexus by asking these 2 Questions:
Note: Both questions are asked for each of the 2 Reasons
Question #1) Do we have to comply?
Question #2) If so, how do we comply?
Lots of Other Questions
A business may have nexus for sales tax but not for income tax so navigating nexus requires answering lots of questions. When should a business register in another state? Does one sale in another state create nexus? Should a business wait to register until it meets nexus requirements? Nexus can be very complicated and require a nexus or SALT (state and local income tax) expert to navigate the complexity for larger businesses. The scope of nexus deserves a blog in its own right.
Bonus: States require businesses in certain industries to get licenses such as construction trades or professional services. You can't get the license without getting registered for business so licensing takes some of the guesswork out of nexus.
Compliance Considerations
Intentions are a big part of registering for business in other states. For example, US Enterprises has been crushing it in Pennsylvania so they are ready to hop over the Ben Franklin Bridge and start doing the same in New Jersey. They will consider both Reason #1 & #2 and Question #1 & #2 because they expect to create nexus and want to comply. Alternatively, South Philly HVAC started getting service calls from New Jersey customers. South Philly has the capacity and takes on the work so they consider Reason #2 and ask both Question #1 & #2 hoping they can do business in NJ without compliance. US is embracing the nexus and South Philly wants to avoid compliance.
Registered Agent
Registered agent services provide one main function, an address for service of process. A business uses the service so others know where to sue them. The registered office address on Certificates of Authority and Certificates of Formation are publically searchable providing transparency between a corporation and its stakeholders. Some states require a registered agent and some states don't, however if you have nexus in a state with no office then you need a registered agent. You MUST get a virtual registered agent, one that scans letters into a virtual mailbox and provides compliance resources, otherwise you can't be a paperless company. You can read our blog on this topic here.
Registered Agent Rule: A business should have a registered agent for every state in which it's registered including the home state. Certificate of Authority or Formation = Registered Agent.
Employees
When a business pays employees in multiple states it has to comply with Department #2 and Department #3, Tax c., Labor and Industry and Revenue for employer withholding. Getting set up is one thing and ongoing management is another so it always makes sense to use a payroll service with just ONE employee. There is just too much compliance to be cost effective on your own. Our two best payroll partners are Gusto and Wagepoint.
Moving Forward
Doing business in another state is a big commitment even when you have periods of no activity. It's like buying a second car and having all the maintenance while it sits in the garage. These are the things you have to do for more business and after awhile all the compliance is second nature. Every time you add another state the admin, compliance and accounting costs goes up and the best way to manage it is to outsource it. Your accounting, bookkeeping and back office should be managed by the experts in the same way it only makes sense for payroll. The Ultimate Paperless Back Office™ by invizibiz is your business' outsourced no brainer solution and your virtual bookkeeping services partner. We hope you're wildly successful in all 50 states and beyond. Good luck.