So you’re ready to expand your growing business into another state. Before you do, though, you need to ensure your compliance with any applicable laws and set your business up for success. To walk you through the process and help you get it right, we’ve compiled the ins and outs of expanding into a new 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 entire company to this new location, the rules vary from state to state, so it’s important to do your research ahead of time. Here are some steps you’ll likely need to take.
You have 49 states to choose from when expanding your business, but don’t expect to operate the same way in another state. Not every region will have the exact same market landscape as the one you’re used to working in. Decreased demand, a smaller customer base, well-established competition and more could keep your business from succeeding in a new area. [Related article: The Best States for Small Businesses]
Research is key to helping ensure your company has every opportunity to thrive in a new environment. Before committing to the expansion, make a plan for how you’ll adapt to the market in the new state. Update your marketing to resonate with a different target audience, and budget appropriately for any changing costs in buying ads, funding payroll and other expenses.
As you expand into a new state, consult your payroll service provider to figure out how the change could affect your employee wages. Don’t yet have a payroll service provider? Visit our overview of the best payroll software providers to find the right fit for your business.
Researching the ideal location for expansion is only half the battle. Next, you have to adjust your financial objectives to consider the new market. A well-structured business plan can help. You can use it to outline your product or service’s advantages over competitors’, plan marketing campaigns and develop a valuable road map for your business. If you created a business plan before opening your first location, you should tweak it to fit your new locale.
“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,” said Deborah Sweeney, vice president and general manager of online acquisitions at Deluxe Corporation.
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. Because every state’s rules are different, it’s vital to brush up on the specific regulations of where you’re operating.
For any small business with an existing LLC or incorporation, filing as a foreign entity with the secretary of state (the name of the office varies) is almost always required. You will likely need to complete an application and send documentation of your home state registration, along with a small fee.
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 significant 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,” said Mark Billion, principal at Billion Law. “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 crucial, and 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. [Learn what to expect when it comes to small business taxes.]
“It depends on the level and nature of the business activity – the level of contacts with the state and state law,” said Allie Petrova, founder of Petrova Law. “Operating in another state often comes with income, property, employment, sales and other state tax consequences.”
Of the overall process, Petrova said, “Typically, it takes registration with a state agency, like the secretary of state, and the payment of annual fees to maintain the entity active. You can incorporate in one state and keep an address in another state, and that normally would, but may not always, require registration.”
Before you commit to expanding your business across state lines, do a lot of research on the new location to adapt to the market and local laws.
You need precise timing to grow your business in a way that doesn’t harm it. While it could be important for a company to expand its operations, it’s an expensive process. Developing into another state before your organization is ready could leave it hemorrhaging profits and requiring external financial assistance. Conversely, states and their markets change over time, and waiting too long to change with it could cause your business to get left behind.
To avoid either situation, keep an eye out for certain markers that signify your company’s readiness to advance.
To conduct business in a different state, it doesn’t matter if your company is a corporation or a limited liability company (LLC). 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. 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 relocating a business to another state, and even when expanding the business to another state as well. Some states are more hospitable to business, and some have more regulations. Josh Bauerle, founder of JDB Business Solutions, 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.
Still, if you do choose to go the expansion route with your LLC, once registered in the new state, a business is typically 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,” he 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.”
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 a wise business. Learn more about choosing the right business location.
Adam Uzialko contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.