Because the international reach of the internet has impacted every business in some way, it is likely that the scope of your small business goes beyond the boundaries of your state.
You may be conducting interstate business in a myriad of ways. Perhaps you are a freelancer working for a client across the country. Maybe you own an e-commerce shop and you ship items around the United States every day. In a more traditional sense, you could be considering a second location of your brick-and-mortar store in another state.
Even if you are a sole proprietor, you may technically run an interstate business. However, there are several factors to consider depending on the scale and goals of your company.
Defining ‘Doing Business’
If you operate an online store or perform freelance services, you probably don’t have to do anything special if you ship to other states or have clients located elsewhere. Making money from people or companies in other states does not legally require you to incorporate there—that would place an extraordinarily high burden on freelancers.
However, as the connection between your business and a specific state strengthens, you will want to look into that state’s regulations to see if you need to register with the state’s agencies. For example, hiring a remote worker in another state is a much weaker connection than opening another office there, but there could be cases where you would still need to incorporate.
Regulations differ from state to state. Famously, state governments compete to attract businesses to their borders. For peace of mind, it’s always smart to check the rules for the states where you do any business. Typically, you will find relevant small business registration regulations with a state’s Department of Revenue, Secretary of State, and Department of Labor.
Situations to Consider
If you are thinking about opening a physical office, store, or restaurant in another state, you will need to register with that state. This process is called “foreign qualification.”
You may have already incorporated your business in a state that is not your home state, perhaps for tax reasons. But if you conduct most of your business from your home state, you will need to register for a foreign qualification there. Generally, it is recommended that you incorporate in your home state if you have fewer than 5 shareholders.
Even if you have an online business, you may need a foreign qualification. If you are incorporated in Nebraska but own and operate a warehouse or other shipping facility in Oregon, you probably need a foreign qualification in Oregon.
You probably need a foreign qualification f you have waged (W2) employees or pay payroll taxes in a state. Other factors may include the location of your bank accounts and where you have a physical presence. If you find yourself taking frequent face-to-face meetings in a state, you might need to file a foreign qualification as well.
Research Different Agencies
States usually have several agencies involved in the operation of small businesses. Check with the Small Business Administration or local Chamber of Commerce groups for detailed, state-by-state information about what you need to do to set up your business in a specific state.
To register and incorporate your small business, you will have to get in touch with the Secretary of State. Payroll withholding and sales tax remittance can usually be set up with a state’s Department of Revenue. If you have waged employees, many states will require you to register with their Department of Labor.
You may also need to be aware of business licenses or business-specific taxes you. Many cities have agencies you have to register with, too.
A state typically wants to know 3 details: your intention to do business in the state, the nature of your business, and your contact information.
Strength of Nexus
The concept of “strength of nexus” will be your guiding light when determining where your business should be registered. Strength of nexus describes how strong the connections of your business are to its surroundings. For example, if you open an office in a state, there is a very robust strength of nexus between your business and the state.
Again, different states have different definitions of nexus. If you have a remote employee working from his or her home, one state may simply require employment taxes. However, another state may require annual reports or even sales tax from products sold in that state.
The Secretary of State is usually in charge of overseeing foreign qualification filings. Corporations and limited liability companies (LLCs) are only considered domestic in the state where they were formed, which is why they are considered “foreign” for other states, even though they are American-operated.
Occasionally, the office might require a certificate of good standing from the state where the business was formed. Therefore, you want to ensure that you closely follow the regulations in your business’ home state—things like paying taxes and holding the proper business licenses—before you plan to go interstate.
Without a foreign qualification, you can be fined and found liable for back taxes. Importantly, you cannot file a lawsuit or defend against lawsuits in a state without a foreign qualification.
Beyond initial fees, there are usually annual costs to keep a foreign qualification in good standing. Because of this, you want to have as few foreign qualifications as possible.
Some states require annual reports, and only so-called “registered agents” or “resident agents” can file these reports. A registered agent is an individual or business legally residing in the state. This entity will have to accept mail and file documents.
If you cannot be the registered agent, you want the person or company you designate to be reliable and responsible, as they will serve as the company’s contact in the state. There are companies dedicated to being registered agents, and some legal or accounting firms offer registered agent services.