How To Expand a Business Across States

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If you’re an entrepreneur who’s looking to expand your operations beyond your original borders, congratulations. You’ll soon be a multistate company on its way to becoming a national enterprise.

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But before you muscle out Walmart, make sure you’re ready to handle the legal hurdles, tax considerations and cost of out-of-state expansion.

Here’s what you need to know.

Get Organized and Protect Yourself

If you’re a sole proprietor or if you’ve been operating informally, don’t do anything until you organize and register your business as a legal entity. The IRS recognizes the following business structures:

  • Sole proprietorships
  • Partnerships
  • Corporations
  • S corporations
  • Limited liability company (LLC)

“For most business owners, an LLC is the way to go,” said Christopher E. Collins, a partner with the law firm Yugo Collins, PLLC. “A business owner can actually create the LLC online in most states by visiting their state’s state corporation commission website. Simply pick an available name, pay the fee — usually around $100 — and provide some basic information.”

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Collins estimates that most businesses can be up and running with their assets protected in 15 minutes or so.

“Make sure to set up bank accounts in the LLC’s name once it is established and have the LLC enter into contracts going forward,” he said. “The business owner can still sign for the LLC solely as its president without incurring personal liability.”

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Hire a Tax Attorney, at Least for the First Year

Expanding your business to another state can complicate your taxes into a jumble that even the most astute business owners would have trouble untangling. Tax considerations might even compel you to restructure your business into a different legal designation. The following is just a taste of what’s in store.

“An LLC can save money on self-employment tax by choosing to be taxed as an S corporation,” said David Reischer, attorney and CEO of LegalAdvice.com. “However, an S corporation frequently pays more tax than an LLC because of the extra payroll taxes and state corporate taxes that are often required. Furthermore, any salary that an S-corp pays to its members is subject to state unemployment and disability tax. A solo entrepreneur without any employees may want to file as an S-corp and not as an LLC so long as the owner does not take any salary due to the business being unprofitable.”

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Follow the SBA’s Formula for Successful Expansion

The Small Business Administration (SBA) created an outline for business owners who are considering expanding to new locations — out of state or otherwise. Visit the SBA for more information about the following steps for successfully expanding your business’ reach:

  • Update your marketing plan: Identify your target customers in your new location and consider what gives you a competitive advantage there. Estimate your new marketing costs and be as thorough in updating your marketing strategy as you were in building your initial plan.
  • Review your finances: The next step is to forecast your estimated revenue and expenses for your new location. Now is the time to examine your balance sheet to ensure you can cover the costs of expansion and to pursue loans or other funding if you can’t. 
  • Get licenses and permits: The process for securing the necessary licenses and permits in your new state will be similar to the process you already went through in your current state, but rules and regulations vary from one place to the next. If you have federal permits, make sure expanding to a new state doesn’t violate the terms of your agreement. Finally, visit your state’s website to see if your city, county or state government requires you to get a new permit or license.
  • Get foreign qualification: You might be required to file for foreign qualification, which is a process that informs your new state that your business is actively operating there. If you are required, you’ll have to file a certificate of authority and perhaps a certificate of good standing from your current state.
  • Pay new taxes: As previously stated, expanding your business to a new state comes with all kinds of tax considerations. That includes the taxes you’ll have to pay to the state and the sales tax you may or may not have to collect on the state’s behalf, including for online sales.

How Do I Know If I Need Foreign Qualification?

According to Zen Business, your LLC or corporation is considered to be a “domestic” entity in the state where you registered it. You’ll need a foreign qualification to do business in another state, but the concept of “doing business” can change from one state to the next.

Generally, you’ll need to file for foreign qualification if you plan to:

  • Have a physical presence like a store or office, purchase property or conduct in-person meetings in the state
  • Pay payroll taxes in the state or have employees who live or work there
  • Ship products from the state, offer products or services there, bid on contracts there or apply for business licenses or permits there
  • Collect sales tax or earn significant revenue there
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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.

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