Doing Business In Multiple States
With all the virtual productivity and communication tools making it easy to work from just about anywhere, you may be based out of New York but have clients in California. The thing is that the exact state of where your company is operating out of can be fuzzy. As a small business owner, you may work with clients, companies, and remote teams from all over the country.
Where it gets particularly tricky is whether you’ll need to incorporate or file an LLC in another state. While you may not unwittingly be going against the law, not properly filing your business in another state when it’s legally required could have you dinged with penalties or leave you unprotected by state laws. Here’s what you need to know if you’re running a business in multiple states.
Which State to Register In
You can register in your home state or another state. Whichever state you decide to register in, you’ll need to fill out the necessary paperwork, comply with the laws and pay taxes in that state. While some small business owners choose to file their corporation or LLC in their home state, others may opt to register in a different state — if it makes business sense to do so. For instance, certain states are known to be “business friendly,” and have lower filing fees, taxes or a simpler filing process.
If you do business in a state other than the one where you’re incorporated, you may need to file in another state. For instance, if you are incorporated in a state other than your home state, you may also need to register in your home state.
This is called “foreign qualification.” The term may be confusing, as it sounds like you’re conducting business in Gibraltar. The reason why it’s called “foreign qualification” is that corporations and LLCs are considered domestic only in the state that they are registered. So if you file for an S Corporation in Pennsylvania, it’s only considered domestic in Pennsylvania and it’s foreign in, say, California.
You may need to file for a foreign qualification if your small business:
• Has a bank account in that state
• Accepts orders in that state
• Has W2 employees in that state
• Applied for a business license in that state
• Has a physical presence in that state (i.e., you run a restaurant or retail business)
• Pays payroll taxes in that state
• Frequently conducts in-person meetings with clients in that state
If you’ve answered yes to any of the above, chances are that you’ll need to register for a foreign qualification. Otherwise you run the risk of losing access to that state’s court system. What this means is that if you get sued by a company in that state, since your company isn’t recognized as a business there, you can’t defend the lawsuit. Conversely, you won’t be able to file a lawsuit. You may also face penalties or fines.
When You Don’t Need to File a Foreign Qualification
There are a few instances when you don’t need to file a foreign qualification, which include:
Doing interstate business. For example, if you run an online store, and ship your goods all over the country, you won’t need to file a foreign qualification. However, let’s say you operate a warehouse in California, but use that warehouse to ship goods primarily to your home state of Kentucky. Then you’ll need to file a foreign qualification in California.
You’re a freelancer who has clients in different states. If you’re a freelancer and have clients all over the country, you won’t need to file an LLC in each state where your many clients are located. However, if you frequently meet with a client in a single state, then you may have to file a foreign qualification.
The rules when running a business in multiple states can be nuanced and tricky. If you have questions or need help with filing a corporation or LLC for your small business in multiple states, Incfile can help walk you through the intricacies of starting your company.