In many parts of the U.S., businesses can grow dramatically for years and never cross a state border. Think about how many metro areas can be served by one business operating in Florida, Texas or California. Each of these states is large enough to contain multiple major urban centers of its own, plus innumerable suburbs and expansion markets.
In the Northeast and Mid-Atlantic, however, things are different. Small businesses operating in the Greater Washington region, for example, can quickly find themselves doing business in Maryland, Virginia and the District of Columbia. Businesses in the New York City metropolitan region are accustomed to operating in New York, New Jersey and Connecticut. And of course, firms based in Delaware, the nation’s leading state for incorporating new enterprises, almost always do business elsewhere (including Pennsylvania to the north and Maryland to the south).
With all of this in mind, it’s essential for small business owners across the Northeast to be aware of what’s involved when adding a location or beginning to operate in a new state.
Understanding What Constitutes “Doing Business” in a New State
Generally speaking, simply selling a product or service to customers in a new state doesn’t mean you are ‘doing business’ in that state, per se (although you may owe sales tax depending upon the jurisdictional requirements).
Rather, in most cases a company has “nexus” and is considered to be doing business in a state when it owns or rents property in the new state; maintains an office or other facility in the new state; actively sells directly with its own personnel or through sales representatives or distributors based in the new state; markets and promotes itself as a business located within the new state; or employs staff (FTEs) in the new state.
Five Essential Steps to Success in Your New State
Once you’ve established that your business is, indeed, going to be actively operating in a new state, it’s time to execute five key steps:
Step One: Know Where You Are
The first step is to be absolutely sure of where you will be operating your business. This may seem silly but in fact, it’s harder than it appears. Postal addresses, school district lines and city/county borders rarely, if ever, line up. Don’t be fooled if your address is in a city but your actual jurisdiction is a township, or vice-versa. It’s possible to have an office with an address in Philadelphia, Pennsylvania (Population 1.57 million) that is actually in Tinicum Township, Pennsylvania (Population 4,091). It is also possible to be operating the reverse — with a Falls Church, Virginia address that actually places you under the jurisdiction of Arlington County (and not the City of Falls Church). You can even be in one neighborhood that puts you a state away from the other. For example, Tacoma Park is a small city within the state of Maryland, but Tacoma is the name of the adjacent neighborhood in the District of Columbia, so you could literally find yourself not realizing what state you just entered simply as you walk down the block.
One major big-box retailer opened a new store a few years ago and made quite a flourish when it donated thousands of dollars to the local police department to support their K-9 program…only to discover that they donated to the wrong local police department because the store manager assumed they were doing business in the town stated on the store’s address (and in fact, they were located in one of the adjacent townships). As you can imagine, a second donation of equal value to the ‘correct’ police department soon followed.
Step Two: Register as a Foreign Entity
The second step is to register as a foreign corporation with the new state’s government. Typically, this is referred to as a statement, designation or foreign qualification application, and is generally managed under the auspices of each state’s Department of State or Corporation Bureau. Although this can be a relatively straightforward process, it is generally advisable to execute this activity in cooperation with your CPA and your business attorney.
Step Three: Identify Additional Licensing & Appprovals
The third step is to determine what additional licensing and approvals may be required. For example, in some jurisdictions simply filing successfully for foreign corporation status at the state level is sufficient, whereas in other jurisdictions you may also need to file for a business license in the city or county you will be operating in, and possibly pay a business license fee or business operating tax. These taxes may also include a business tangible property tax (based upon the declared value of business property residing in the office or retail location you have established in the state), or an annual business license certificate fee.
Step Four: Evaluate and Plan for Taxes
The fourth step is to evaluate and plan for taxes and fees associated with your physical location. This is especially true for retail businesses securing a triple-net (NNN) lease. When a small business opens an office in a commercial building, typically the building’s certificate of occupancy is considered sufficient as an approval to allow employees to work there (in other words, the space is approved for occupancy when the original building owner or master tenant secures an overall occupancy certificate). However, when you establish a retail business and build out a space, in almost all cases this space will require its own approvals for things such as construction, fire code compliance and occupancy. Without a certificate of occupancy and all other permits, your retail space or other commercial or industrial location may not actually be usable until government approvals are completed.
Step Five: Know the Law in Your New Home
And the fifth step is to become conversant with employment laws, requirements and taxes in the new state as well as its subsidiary jurisdictions such as counties and cities. For example, what is the minimum wage? How is hiring and employment compliance different in the new jurisdiction(s)? Some cities require special hiring procedures and standards, such as not allowing employers to ask questions about a prospective employee’s prior salary or pay history, or eschewing questions about an applicant’s prior criminal convictions until after the first interview. Other cities and counties have special commuter taxes to pay for mass transit, or require employers of a certain size to provide a transit subsidy to employees as a matter of law. Make sure you know what’s what and how much is owed to whom so that you can make a smooth transition into your new state as well as the county, city or town(s) where you will be operating.
By committing to a clear and well-researched strategy for entering each new state from the start, you’ll set your business on the path to success as you achieve growth and expansion for the future.