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The prospect of expanding into a new state is exciting for any small business owner. But while you may be focused on getting your new location up and running as smoothly as possible, it’s important to not lose sight of any new compliance responsibilities. Otherwise, you and your business may be faced with serious consequences, such as hefty fines and loss of limited liability protection.
Sandra Feldman, Publications Attorney at CT Corporation, discusses some of the requirements you may encounter when doing business in a new state (also known as foreign qualification). These range from filing with the state, dealing with tax laws, and applying for licenses and permits.
Greg Corombos: Hi, I'm Greg Corombos. Our guest this week on Expert Insights is Sandra Feldman, Publications Attorney at CT Corporation. Just a few weeks ago, she joined us to explain the most important things you need to know about your LLC. Today, Sandra joins us to discuss how a small business can expand into a new state and remain legally compliant. And Sandra, it's always good to have you with us. Thank you.
Sandra Feldman: Thank you, Greg. You know, nothing makes me happier than hearing about a small business that's been so successful, the owners are expanding into one state. Now, I know they have a lot on their plate, getting the new location up and running. But it's really important to remember that whenever you start doing business in a new state, that means it's going to be a whole new set of state laws that have to be complied with. And if business is conducted without complying, there can be some substantial penalties that can really hurt the expansion's chance of succeeding. So in this podcast, I thought I'd point out some of the state laws that small businesses may have to deal with when they expand.
GC: So what kind of state laws are you talking about that small business owners have to comply with?
SF: One state law that needs to be mentioned, is the state business entity statute. In the case of most small businesses, that means the state limited liability company or LLC law. Although for some, that means the state business corporation law. And that's important for every business that's not owned by individuals, but that's owned by an LLC or a corporation. And particularly, if that LLC or corporation was formed in a state other than the one it's expanding into. I think I can explain that a little better by giving you an example. Let's say I want to open a restaurant here in New York, near our headquarters. Now, I don't want to own the restaurant myself, because then I'd be personally responsible for its debts and liabilities. So instead, I form a New York LLC. And that LLC owns the restaurant and therefore is liable for its debts. I own the LLC. And now I look across the Hudson River, and I see a great space in New Jersey where I can open a second restaurant. Well, I don't want to own that one myself either, because now I'd be liable for its debts. So I'll have my New York LLC own that New Jersey restaurant, too. But that means my New York LLC will be doing business in the state other than its state of formation. And that's where the state business entity law comes in. Because the LLC and cooperation laws of every state say that no LLC or corporation formed under another states laws can do business in their state until it applies for and receives authority to do so. And LLCs and corporations doing business in a state without authority are subject to penalties. The LLC or the corporation can be fined. And in some states, the people doing business on its behalf can be fined, too. Also, it won't be able to maintain a lawsuit in that states' courts. Meaning, among other things, it can't enforce its contracts in that state until it receives authority to do business there.
GC: Well that begs the question then Sandra, how does an LLC or a corporation actually receive authority to do business in a state that it's expanding to?
SF: State laws differ, but in general it requires filing an application for a certificate of authority with the Secretary of State or whatever state agencies in charge of business entity filings. And that application will have to be accompanied by a Certificate of Good Standing from the state of formation. And the LLC and corporation laws also require the LLC or corporation to appoint and continuously maintain in the state a Registered Agent and a Registered Office. Also, it'll have to file an annual report with the filing office and pay an annual fee; and failure to file the report or pay the fee will also bring monetary penalties and can result in the state revoking the authority to business there.
GC: What other laws come to mind here? What other laws do small business owners have to comply with when they expand?
SF: Expanding into a new state can also subject the business to the state's tax laws, and one of those is the state income tax law. So if the business earns income in the state, and that state has an income tax, then taxes have to be paid to the state's tax department. Who pays depends upon who owns the business. If it's owned by individuals, and obviously those individuals have to file a return and pay the state tax themselves. But if they formed an LLC or a corporation, like me and my restaurant, who pays depends upon how the owners of the LLC or the corporation decided to have it taxed for federal income tax purposes. So if the LLC or the corporation doesn't pay federal income taxes, but its income passes through to the owners, who pay their share of the tax on their own federal income tax return, the same would be true for the state income tax. Or if the LLC or corporation pays federal income taxes itself, it would pay the state income taxes as well.
GC: Sandra would be really nice if businesses only had to pay income taxes. So what other state taxes do they need to be aware of?
SF: I'm afraid there are others. Another state tax law to be aware of is the sales tax law. If the business is selling taxable goods or services to consumers in the new state, it will have to register with the tax department, get a sales tax certificate, and then charge, collect and remit the sales tax to the state. It could be other taxes depending upon what the business is doing. There could be property taxes, certainly employment taxes, if the business will have employees, and even other taxes. But consulting with a tax professional is probably a good idea. Particularly because I doubt I have to tell anyone that there are penalties for non-compliance with tax laws.
GC: What other laws do you think folks need to hear about to here, Sandra? We've talked about tax laws, we've talked about obviously making sure that you're on good legal ground to do business in the state that you're expanding to. What else are folks to be aware of here?
SF: They should probably also be aware of business licensing laws, because just about every business needs at least one business license. And depending upon what the business is doing, it could actually need several. And licenses and permits can be required not only by the state, but by the city or county where the business is located. And there are penalties for doing business without a license. There are fines, which can be hefty. And the business may even be prevented from enforcing contracts that it entered into without the required license. Ironically, I was on my way to the office reading the New York Post on the subway. And the Post had this article about a New York City law that requires any business with a sign greater than six square feet in total area to obtain a permit from the Department of Buildings. So apparently, all over the city you have these business owners ripping down their awnings and their signs to avoid what appears to be a pretty stiff penalty for having a big sign without a permit. There's one more state law that I wanted to point out, and that affects individuals LLC and corporations that are doing business under an assumed name, which you might also know as a doing business as or DBA name And if business is going to be conducted under a name other than the business owners' legal name, that name has to be registered with the state. And with some states, registered with the county or city. And the legal name of an LLC or a corporation is set forth on its certificate of authority. And of course, there are penalties for doing business under an unregistered assumed name. GC: Sandra, excellent advice as always. And like you said, these are good problems to have because if you're expanding into another state, it means something's going really well for your business. So making sure you have all your ducks in a row, legally and otherwise, is always a smart thing. And I know folks will be happy to have this advice. Thanks for your time today.
SF: Thank you, Greg. I hope I provided some useful information to small business owners. And indeed I wish them the best of luck with their growing businesses.
GC: Fantastic. Sandra Feldman, Publications Attorney at CT Corporation. I'm Greg Corombos reporting for Expert Insights.
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