As your business grows, you may inevitably find yourself selling goods or services to customers outside of your home state, opening new facilities out of state, or perhaps even hiring out of state employees. Conducting any of these actions as well as a multitude of others may result in the need to register your business in the state, make certain filings, and pay the state’s taxes to which your business is subject. Each of the 50 states as well as the District of Columbia have their own unique requirements for registering your business and paying taxes. It is imperative to understand the state’s requirements before conducting any activities and doing so could help prevent significant financial and administrative burdens in the future.
Once you have confirmed that your actions will require registration in a new state, the next step is to register with the state’s Secretary of State (SoS). Doing so will officially allow you to conduct business in the state. In order to register, you will need to have a physical address within the state and most states also require a certificate of good standing or its equivalent from your home state. If you do not have a physical address, you can hire what is known as a registered agent to act as your in-state mailbox. For a fee, they will collect and forward you any mail that the state sends to you and in some cases, they may even make certain state filings on your behalf. Certificates of good standing can be acquired from your home state’s SoS for a nominal fee. Once you have these items, you will need to complete the actual registration application, which for most states can be done online.
After registering with the SoS, you must register your business with the state’s Department of Revenue (DoR), for tax purposes. Similar to the SoS registration, the DoR registration, for most states, can be completed online. Prior to completing the registration, we highly recommend consulting a tax professional. Each state has a variety of tax types and registering for the wrong ones could cause significant issues. Following the DoR registration, some businesses, depending on the type of business, their activities, and the state, may be required to register with other state departments, such as the Department of Labor.
Now that you have successfully registered to do business in a new state, you will need a solid record-keeping system to keep track of your activities. Primarily, you will want to be able to keep track of revenues earned in the state, payroll paid to employees working within the state, and fixed assets located within the state. Most states will use at least one, if not all three, of these factors in determining how much of your net income should be allocated to the state for tax purposes. Maintaining good records can help to eliminate a lot of the administrative burden at tax time and also reduce exposure in the event that the state decides to audit your return.
Although each state has different filing requirements, most states require the filing of an annual report with the DoS and an annual tax return with the DoR. The annual, or biennial, reports in a state like New York are relatively simple filings. These reports generally ask for the current business owners and officers, the address of the business or registered agent, and for corporations, they request stock information such as the number of shares authorized, issued, and outstanding. A fee is also required at the time of filing. The information provided is used to update the SoS public entity records which, in many states, are available online. Failure to file the states’ required reports will result in the SoS displaying outdated information about your business and may cause your business to no longer be in good standing with the state. For these reasons it is incredibly important to file these reports timely and accurately.
The annual tax return you are required to file will largely depend on the legal structure of your business. In most cases, a payment will be due with the return as the result of a net income tax, a franchise tax, an excise tax, or a different type of tax imposed by the state. As previously mentioned, most states use revenue, payroll, and fixed assets to determine your taxable income and your tax preparer will need to utilize your records of the aforementioned items to ensure that your tax return is accurate.
If you are looking to expand your business into a new state, we highly recommend consulting a tax professional to assess your business and the requirements it will be subject to in the new state. In addition to the items listed herein, a tax professional will be able to assist with other considerations such as sales tax, payroll tax and withholding requirements, unemployment insurance, nexus determination, and revenue sourcing, to name a few. We at Cerini & Associates are very familiar with the nuances of operating multi-state business enterprises and can provide you with excellent professional guidance to grow and expand your business.
Jacob Lutz, CPA
Jacob joined Cerini & Associates in January of 2013 and has been actively providing tax, compliance, and business advisory services to a wide variety of both for-profit and non-profit clients.