Out-of-State Business Expansion: What Your Midmarket Firm Should Consider
There comes a point in every successful middle market company's existence wherein it's time to broaden the customer base, introduce new products or take advantage of new resources. Sometimes, doing so means expanding your business across state lines. However, the rules and regulations governing businesses vary between states, and the pros and cons of operating in each state may differ between industries and even individual companies. How do you make sense of it all?
Here are a few points for midmarket decision makers to consider when it comes to out-of-state business expansion:
Separation of Liability
Choosing how to operate in another state is a key decision. Opening in a second state gives middle market companies the opportunity to establish a new, separate corporation or LLC. This may be a good way to expand a higher-risk product line or service, because a separate corporation provides the benefit of separate liability from the original corporation. This protects the company assets held by corporations in other states from being seized in the event one corporation goes bankrupt.
Alternatively, companies may expand operations into another state under what's known as foreign qualification, which means running a company in a different state than the one in which it was incorporated. This requires filing a Certificate of Authority.
Beware of Licensing and Regulation Differences
If you're thinking about expanding your business into other states, prepare to deal with many licensing and permit requirements. This is especially true for middle market businesses that employ tradespeople who need professional licenses, such as electricians. In New York, for example, tradespeople can get city or county work permits, yet California requires them to hold a General Contractor license to carry out electrical work.
Contact the state business license office for more information particular to which licenses and permits are required to operate a company in your industry.
State Tax Variations
Business taxes, credits and incentives also vary from state to state. Navigating these state tax intricacies isn't for the fainthearted, but there may be significant benefits in the form of lower taxation when you open an office in another state. According to a previous article on tax-friendly states, a 2014 NCMM survey found Texas and Florida to be top destinations for middle market companies. See the Tax Foundation's handy 2016 State Business Tax Climate Index to compare taxes across states.
It's important to grasp corporate tax nexus rules, which also vary across states. Nexus is the connection or tie to a state that allows the state government to require a business to pay state taxes or collect sales tax on its behalf. This may depend on how expansion occurs (as a foreign qualification or a new business incorporation in a second state) and on state tax nexus laws.
Figuring out which other state your business should operate in depends on a number of factors particular to your situation. Here are a few things to consider as you evaluate possible states:
- The availability of a well-trained workforce suitable for your talent needs.
- Access to transportation hubs for manufacturing companies moving goods nationally or internationally.
- Whether your current health plan will meet insurance requirements in another state.
- State demographics and their effect on your market demand. How much will your customer base broaden?
Above all, start your research well in advance of expansion target dates. Deciding how to operate and learning about regulations and taxes, along with everything else you'll have to do, will likely take some time.
If your midmarket firm is already a multistate business, what do you wish you'd known before your business expansion? Share your thoughts in the comments below.
Sarita Harbour is an NCMM contributor and freelance business-to-business writer, blogger and ghostwriter. Her bylined work appears online at sites such as Forbes, Fox News, Business News Daily and CBC. Follow her on Twitter or visit her website.