Expanding to a new state is a big milestone for a business owner. It’s a whole new level of possibilities but a big step up in responsibilities as well. That’s why it’s so important for business owners to understand the right way of expanding their business into a new state. From understanding different demographics to dealing with surety bonds and insurance, these are the things you’ll need to know when taking your business interstate. Keep these factors in mind as you navigate this exciting process in our uncertain times.
What It Means to Operate an Interstate Business
Expanding your business into a new state means that you’ve incorporated your business in one state but intend to pursue operations in another. If you’re planning to do any of the following things in a state other than the one where your business was incorporated, and you’re not moving the whole business, you’re probably operating an interstate business:
- Buying real property
- Hiring employees
- Selling your products or services via a permanent sales staff
- Manufacturing goods
It’s worth noting that in our eCommerce-heavy world, the definition of what qualifies as an interstate business is murkier than it’s been in the past. Plenty of businesses sell to customers in other states without having any legal presence outside their home states, although, as we’ll discuss later, they still may have to collect sales tax.
However, if you have permanent plans to expand operations outside your state, what’s the next step? It’s time to learn about foreign qualifications, an essential regulatory process for interstate businesses.
What Is Foreign Qualification?
Most business owners don’t want to incorporate an entirely separate business when expanding operations into a new state. Foreign qualification is the legal process that allows businesses to extend their operations into new states without re-incorporating, and it’s standard practice for almost all interstate businesses. In this case, the term “foreign” means from another state, not from outside the U.S.
Most businesses need a foreign qualification before they can hire employees, buy property, or do almost anything else related to establishing permanent business operations in the new state. States require businesses to undergo foreign qualification to ensure the state government has all the necessary information to regulate it and enforce the law.
Foreign filing processes differ from state to state. Usually, you’ll need to provide the name and address of a registered agent within the state who can receive legal and tax notices. Most businesses will also need a Certificate of Good Standing from their state of incorporation. This certificate simply states that your enterprise is a legitimate business that pays its taxes.
It’s possible to complete the foreign qualification process yourself, especially when familiar with legal documents. However, for most businesses, it’s a good idea to have an attorney help you with the process—they’ll understand the best way to guide you through the requisite legal hurdles. Businesses at the stage of multi-state expansion are usually large and complex enough to need an attorney’s services anyway, so use this opportunity to find a reliable small business attorney if you don’t already have one.
Understanding the Requirements
Every U.S. state has laws that regulate businesses, and these laws can vary significantly from one state to the next. Before you make any concrete plans to expand into a new state, it’s important that you first understand how that state regulates businesses like yours.
Of course, this can work to your advantage: Maybe you’d like to take advantage of lower taxes in one state by incorporating there, even if you have a bigger market in a neighboring state. But it can also be a shock to business owners who find out that their products are subject to more stringent labor and environmental or other regulations in the new state.
A thorough understanding of the expansion state’s laws will protect you from unpleasant surprises. Many businesses choose to hire experts in these fields and draw on their wealth of knowledge. Some essential legal knowledge bases that many interstate businesses use include:
- Environmental protection
- Consumer and employee safety
- Financial transactions
- Real estate
Insurance and bond requirements are two more areas that you especially shouldn’t neglect when considering an interstate expansion. Almost every business needs insurance, and many also require certain kinds of surety bonds, both subject to very different laws from state to state. If you’re asking, “Wait, what is a surety bond again?” right now, read up on the subject—it’s an important type of legal instrument that financially guarantees your business’s obligations.
Taxes deserve a word on their own because they’re among the biggest and most complex issues you’ll likely have to deal with when moving a business to an interstate model. While there’s not enough room to cover every potential tax issue here, watch out for a few big ones.
First, remember that even very small businesses may have to collect sales tax when they sell products or services across state lines. Be sure to check the laws in both states, as each state gets to set its own rules on whether to collect sales tax from online transactions.
The second thing to know is the concept of a “nexus.” It’s a legal concept that establishes whether a business has enough interests within a territory to be taxed there. Take some time to learn about whether your business is a nexus, as it establishes many things about how it will be taxed in the expansion state.
Understanding the Territory
Knowing your market and customers is just as important as knowing the law about interstate expansion. Business owners should be aware of market factors that could affect their success in the new state, including:
- Established competition
- Demographic differences
- Seasonal demand patterns
- Differences in dominant culture and values
- COVID-19 transmission patterns
If you know that any of these factors are in play, it probably means you need to adjust your marketing and operations plans to work around them. These aren’t factors to tweak at the last minute, either—they should be part of your expansion plan from the early stages. Ultimately, an expansion plan with a strong vision and attention to detail will be your greatest tool in setting up a successful interstate expansion.