If your business is growing quickly, you may want to expand your operations beyond your state's borders. Here's what you need to know about the process.
- Small business expansion to a new state can be achieved without creating a new company or structure.
- Some states are more hospitable to business than others, but all have rules to follow.
- Plan ahead for a smooth expansion or relocation.
You're ready to expand your business into another state. Before you do, make sure you're properly registered with the local secretary of state, and that you understand the rules and tax requirements of doing business within the borders of the state to which you're expanding.
You might have incorporated in your home state, or you might have incorporated elsewhere. While you don't have to incorporate again, you will likely have to register as a foreign entity. To help walk you through the process, Business News Daily spoke with experts and entrepreneurs who understand the ins and outs of expanding into a new state to help you get it right the first time.
The process of expanding your business to another state
Often, expanding into another state means filing as a "foreign entity" with the local secretary of state. Although you won't have to move your company to this new location, the rules change from place to place, so it's important to do your research ahead of time.
"If you incorporate in one state but operate in another, technically the state in which you operate requires that your business 'foreign qualify' to do business in the state in which you are operating," Deborah Sweeney, CEO of MyCorporation, told Business News Daily.
There is no hard and fast rule, however, Sweeney said. Companies with a physical presence in the state, for example, might have to meet more stringent requirements than those that are wholly online-based. Since every state's rules are different, it's important to brush up on the specifics of where you're operating.
For every small business with an existing LLC or incorporation, filing as a foreign entity with the secretary of state (the name of the office varies by state) is almost always pro forma. You will need to complete an application and send documentation of your home state registration, along with a small fee.
Expanding a corporation vs. an LLC
To conduct business in a different state, it doesn't matter if your company is a corporation or an LLC (limited liability company). It does matter if you are expanding outside the United states, though, or considering an IPO, in which cases you will most likely need to be organized as a corporation. According to LegalZoom.com, most new businesses are better off starting out as LLCs. You will also need to choose between an S corporation, in which the company's earnings pass through as income to the owner, or a C corporation, in which the profits are taxed at the corporate level.
These choices are important when you are relocating a business to another state, and even expanding the business to another state as well. Some states are more hospitable to business, and some have more regulations. Josh Bauerle, self-styled "CPA on Fire," recommends relocating rather than expanding if possible. Having locations in more than one state multiplies the regulations and financial obligations and may not be necessary to conduct your business. As a CPA, he suggests seeking advice from a professional and comparing state rules carefully.
"Typically, it takes registration with a state agency, like the secretary of state, and the payment of annual fees to maintain the entity active," said Allie Petrova, founder of Petrova Law. "You can incorporate in one state and keep an address in another state, and that normally would, but may not always, require registration."
Once registered, a business is good to go, said Harold Kestenbaum, a franchise attorney.
"By [registering as a foreign entity], you maintain the original LLC in the state it was filed while adding the foreign LLC in the new state," Kestenbaum said. "This approach comes with additional paperwork and tax filing, because it's required for each LLC annually but eliminates the hassle of liquidating the old LLC in exchange for a new one."
Taxation and regulation
Naturally, the rules governing taxation and local regulations are key pieces of information to know prior to expanding to a new state. First and foremost, understanding which states' rules apply and when is a major consideration. The laws of the state where you incorporated trump your new state in certain cases, while business conducted in your new state is generally subject to the laws of the land.
"You really should be fine to incorporate in one state and operate in a myriad of other jurisdictions," Mark Billion of Billion Law said. "Just remember, what your company does internally with its investors is governed by where you incorporate. And what it does externally with its customers is governed by where you operate."
And, of course, there is always the tax code to consider. What are your tax obligations to your new state as a foreign entity? What about to your home state? Again, doing your due diligence before making the move to expand is key; understanding what your tax obligation could be once you begin operating across state lines, with regard to each state as well as the federal government, is essential.
"It depends on the level and nature of the business activity – the level of contacts with the state and state law," Petrova said. "Operating in another state often comes with income, property, employment, sales and other state tax consequences."
Moving into a new market is exciting with a great potential payoff. However, being too hasty can have unintended consequences that harm your business in the end. Always do your research, follow the rules and plan ahead for additional expenses. Expanding is the goal of any successful business; expanding properly is the goal of the wise business.