CPA_Practice_Advisor_April_2020 - 33

A YEAR IN THE LIFE: PAYROLL ACCOUNTANT

What to Know When Your Clients Want to Expand
Their Businesses to Another State
By Nellie Akalp

ARE YOUR CLIENTS looking to expand their businesses to another state? If
so, that's a great indication of success and they'll probably turn to you for
financial guidance to help them. However, they may also need advice on how
to legally operate in the new state different. Here's what you need to know.
WHEN TO REGISTER
Your clients need to submit a Certificate of Authority
Foreign qualification is the process of registering a
business in another state in order to conduct business. Whether or not the client needs to register
depends on a number of factors, and unfortunately
most states won't specify exactly which activities
constitute doing business. In general:
■ Will your clients have a physical presence (office
space, warehouse or retail store) in the state?
■ Will your clients conduct in-person meetings with
clients or customers in the state?
■ Is the business structured as limited liability company (LLC), corporation or limited partnership (LP)?
■ Will the business have any employees living/working
in the state?
If the answer to any of these questions is yes,
your clients need to file a foreign qualification in
the states in which they intend to conduct business.

WHEN NOT TO REGISTER
Not all business activities require foreign qualification. For example, if your clients are freelancers or
consultants and most of their work is conducted
online, they do not need to file a foreign qualification. E-commerce businesses are different because
there are sales of products involved and often a
warehouse with products located in the state.
In most states, the following business activities
also don't constitute transacting business in a state:
■ Defending or settling a lawsuit
■ Dealing with internal LLC or corporate business such
as member meetings
■ Having a bank account in the state
■ Selling through independent contractors
■ Securing or collecting debts
■ Conducting an isolated transaction that is completed
within 180 days and not repeated

HOW TO REGISTER
Most states have similar procedures to file a foreign
qualification and it starts at the Secretary of State's
office in the state in which you want to register.

application and pay the fees. The client may also
have to show the business is in good standing in
its home state, which may require documentation.
Next, conduct a name search in each state to
make sure the business name is legally available. If it
is not, the client will need to use a "fictitious name"
(or Doing Business As/DBA) in that state.
Once your client has foreign qualification, will a
registered agent need to be appointed? A registered
agent (also known as statutory agent or resident
agent) is a person or entity with the authority to
accept service of process (legal documents and
notices) on behalf of a business. A registered agent
can handle in-state responsibilities such as:
■ Official federal and state correspondence
■ Subpoenas for information
■ Tax notices from the IRS and local tax authorities
■ Lawsuits
■ Summonses to appear in court
■ Corporate filing notifications
To find a registered agent, check the website
of the state to which you're expanding. Many list
registered agent services in their state.

THE RISKS OF NOT FILING FOR
FOREIGN QUALIFICATION
Failing to foreign qualify when it's required can
cause significant issues for a business, including
being penalized for operating illegally.
Some of the penalties include:
■ Fines and interest for the time the company was
conducting business in the state and was not
foreign qualified
■ Payment for missing filing fees.
■ Payment of back taxes.
■ Ineligibility to sue in the state, because an entity
can't bring suit in a state where it isn't registered.

HIRING OUT-OF-STATE EMPLOYEES
California's new AB5 law has made it harder to classify workers as independent contractors and other

states may follow. Consequently, your clients may
find they need to hire out-of-state employees-and
that means paying employer taxes in other states.
Your clients will need to register with the
employee's state tax agency, obtain a state income
tax withholding number (and unemployment
insurance number) and withhold income taxes for
that state. If the employee lives in one of the states
without a state income tax (AK, FL, NV, NH, SD, TN,
TX, WA, WY), your client will still need to pay the
federal income tax.
The business will also need to be registered
with that state's labor department and be compliant with rules for employees in the state including
minimum wage, labor laws, disability insurance,
worker's compensation and more. Have your clients
contact their payroll provider when they are ready
to hire out-of-state as these companies are familiar
with handling multi-state workforces and know the
regulations in each state.

COLLECTING SALES TAX
Whether or not you have a physical presence
such as a warehouse in another state, having an
out-of-state employee signifies enough presence
so that you need to collect and pay sales tax in
that state. Having "nexus" in a state means having
a connection and when it comes to having sales
tax nexus in a state, the law considers whether
the business has a physical location in the state,
resident employees in the state, property (including
intangible property) or regular sales people. In addition, in 2018 the Supreme Court determined states
can now base sales tax collection requirements on
economic activity alone (dollar amount or number
of transactions).
Once your client has determined there is sales
tax nexus in a particular state, the client will be
required to collect sales tax for all taxable transactions from that state and will pay sales tax to the
state's department of revenue. Sales tax return
forms declaring all transactions will also need to
be filed. ■
Nellie Akalp is a passionate entrepreneur and business
expert. She is the CEO of CorpNet.com, a resource and
service provider for business incorporation, LLC filings,
and corporate compliance services in all 50 states.

APRIL 2020 ■

www.CPAPracticeAdvisor.com

http://www.CorpNet.com http://www.CPAPracticeAdvisor.com

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