Top Considerations When Growing Your Small Business Across State Lines

4 Mins read

With the results of the latest Wells Fargo/Gallup Small Business Survey showing that 84 percent of small businesses expecting a good year, many of them will be eagerly planning their next move. For most SMEs, this means mapping out their plans for business growth either online, in-state or for some, to across state lines.

Expanding a small business beyond its home state can open up a completely new and possibly lucrative market in terms of maximizing your business’ sales and revenue, the taxation burden, and the availability of skilled labour. However, making such a move comes with its own set of rules and regulations you need to be aware of. Whether it is the tax requirements or employee insurance laws, growing your business out of state calls for formidable research, preparation, and adaptation.

Fulfil The Legalities Of Expanding To Out Of State Business Operations

If you are looking to expand your business into another state other than the state of incorporation, chances are that you will need to secure permission. For most businesses, this means securing a foreign qualification i.e. registering as a foreign entity with the selected state. While every state requires businesses to be foreign qualified if they operate as out of state businesses, the rules vary according to individual state regulations.

For instance, businesses registered outside of Illinois are required to secure a certificate of authority issued by the Secretary of State. The entire process takes between 15-21 days and requires businesses to have a certificate of good standing from their home state.

Small business owners that are expanding to another state should also be careful of liability separation. Expanding your business to new markets always comes with its own inherent risks and unpredictability. Making sure you and your other businesses (in your home state or other operating states) are protected should your new venture suffer losses or go bankrupt (as about 15 percent of new businesses do).

Registering as an LLC in the state normally takes care of this. A final note on foreign qualifications: be clear on whether you need one or not. As a general rule of thumb, having a physical presence or chunk of business activity in the state would normally qualify your business for one.

Clarify Your In And Out Of State Tax Obligations For Both In-Store And Online Sales

In addition to the legal requirements, businesses must fulfill when entering a new state, there may also be variations in their taxation computation and reporting. The federal rules and guidelines remain intact for any business looking to expand to another state. However, for 2020, there have been some notable changes that may apply to you including the changes in state and local tax deduction (SALT). Now, small businesses and fliers are limited to $10,000 in SALT deduction depending on the individual state tax changes.

There are also varying property tax rules to account for. States like Michigan charge property taxes at 65 percent for industrial businesses and 23 percent for commercial businesses. In other states like Arizona, property tax is assessed and calculated individually by a county assessor. In New York, your business property tax is calculated using the property’s market value, applicable assessment ratio and New York’s tax rate (which are Class 1 – 21.167%; Class 2 – 12.473%; Class 3 – 12.536%; Class 4 – 10.537% for tax year 2019/2020).

Satisfy Federal And Individual Regulations On Additional Employment

Finally, if you are planning on hiring employees in another state there may be some state employee regulations you need to satisfy as an employer alongside the generally recommended insurance options for small businesses. While all companies are required to have disability and unemployment insurance, other classes like workers’ compensation insurance will have specific guidelines according to state. In Michigan workers’ comp insurance is required if you employ 1 or more workers for 35 or more hours per week (full time) for 13 weeks or longer during a year.

As a private employer, if you employ 3 or more part-time employees at the same time, you are also required to get workers’ compensation insurance. However, a stark contrast is the state of Texas where worker’s compensation is optional unless you have a contract with government organizations. To access these guidelines, you can visit the individual state website you plan on operating in. 

Calculate The Appropriate Sales Tax By State For Ecommerce Purchases

There are also other variables to consider such as eCommerce and sales tax, which varies according to state and is collected in 45 states. The general rule is that if you can prove to have a sales tax nexus to another state besides your home state, you are legally obligated to charge sales tax to buyers in the said state. You will also need to check if the product is taxable in the said state you are expanding to.

So in basic terms, if you have a significant connection to another state and your product is taxable, then you will need to charge sales tax. A significant connection may take the form of a physical location in the state, ownership/rental of warehouses and inventory located in the state or the presence of any employees affiliated with your business. Each state’s individual tax code will guide you on what their criteria for creating a sale nexus.

Lastly, there will also be some product categories that carry a reduced sales tax rate. For instance, in Illinois, the sales tax on qualifying food, drugs, and medical supplies is 1 percent instead of the general 6.3 percent sales tax. It is important that you take note of exceptions like this since it will have an impact on your year-end reporting and accounting process. 

Taking your business into new markets can be an exciting and unpredictable time. The uncertainty of foreign market conditions and regulations can easily seem like a reason not to. However, with the right information and tools, expanding your business across state borders becomes much easier and can be the first step to taking your business internationally one day.