What Construction Businesses Should Know About Expanding Into Another State

So it looks like your next move is expanding into another state. Maybe your business is scaling, maybe personal reasons are bringing you and your business elsewhere, or maybe you want to capitalize on all the construction action happening in other states. Whatever your reason for planning to open up shop in a new state, the first step is understanding the requirements you have to meet.

Understanding these requirements ahead of your expansion will make the entire process smoother, simpler, and less expensive for your business. Don’t miss out on valuable time in a new state’s market or cut into your profits with a ton of fees and penalties by overlooking any requirements or inadvertently failing to comply with the law. We know expanding (or moving) a construction business to a new state can be a complicated process, so we put together this guide to help you understand the main steps.

Registration with the Secretary of State or Business Bureau

Before you can do business in a new state, you need to register your business with that state’s Secretary of State or Business Agency/Bureau. This varies according to the state.

Regardless of where you plan to operate, you don’t need to go through the new business formation process again. Instead, you can register as an out-of-state business. This is known as registering as a foreign entity. When you register as a foreign entity, you must file for a Certificate of Authority and pay all associated fees. This is a straightforward process you can usually complete online.

To register as a foreign entity, you must provide copies of your original formation documents and pay the associated fee. This fee varies according to the state where you are registering. In many states, you must also provide a Certificate of Good Standing from the state where you formed your business.

As a contractor, you also need to ensure you’re licensed to work in your new state. When you initially became licensed, you needed to meet certain requirements, like EPA certification and a passing score on the applicable exam.

Depending on which state you’re moving into, you might need to get re-licensed…or you might be able to operate using your existing license, provided it’s still current. This is known as reciprocity. Some states have reciprocity agreements that allow contractors to operate without becoming licensed a second time.

Once your business and license are registered, you’re legally permitted to operate in your new state.

Registration with the Proper Departments, Divisions, and/or Boards

Following registration of your business with the state, you must name a registered agent for the business. This individual is the go-to person for all legal and tax-related inquiries in the new state.

The next step is to register to pay state taxes and report your annual fees. Most states’ websites include areas for forming new businesses and registering foreign entities. In this section of the website, you’ll find information about the agencies with which you must register. Generally, these include the:

  • Department of the Treasury
  • Division of Unemployment Insurance
  • Department of Labor
  • Department of Tax and Fee Administration
  • Department of Revenue

Keep in mind that these departments’ titles can vary from state to state.

Failure to register with the appropriate departments, divisions, and boards may result in penalties and fees.

Income Tax

Most states require corporate income taxes. If you are operating in one or more of these states, you need to register for and pay the applicable corporate tax for those states.

You also need to familiarize yourself with your new state’s payroll taxes process and amounts, then ensure you’re in compliance with these requirements.

Similarly, if your business owns property in its new state, you may need to pay the applicable property taxes. Basically, despite operating as a foreign entity, you’re required to comply with the same tax requirements as any other business operating in the new state.

Sales Tax

The sales tax rate varies from state to state. In the states that don’t have sales tax, individual municipalities may impose a sales tax. This also occurs in some states that do impose a state-wide sales tax. When you bring your business to a new state, you must register to collect sales tax in that state. This is generally handled by the Department of Taxation.

Sales tax definitions and transactions can vary from state to state. For example, while Delaware doesn’t have sales tax in the traditional sense, it does impose a gross receipts tax on certain services and goods.

Employer Taxes and Insurances

When you hire new workers in your business’ new state, the rules regarding payroll taxes and insurance may be different from those that apply to any existing employees you send to work in the new state. There may also be different requirements for current workers that you send into the state depending on how much time they spend working there. These tax and insurance policies include:

  • Unemployment compensation
  • Workers’ Compensation
  • Family leave
  • Disability coverage

Familiarize yourself with the employer withholding requirements for your business’ new state. This is often found on the Department of Taxation’s website.

Legal Ramifications

Another important issue to consider is the legal ramifications of any alleged misconduct or violations that occur in your new state. Generally, civil lawsuits are filed in the jurisdiction where the defendant lives or where the alleged violation occurred. This means that if you face a lawsuit in your new state, it’s likely that the legal proceedings will be held in that state. However, that’s not always the case. It’s possible for court proceedings to occur where a company is headquartered, even if that isn’t where the alleged violation occurred.

With regard to employee protection and compensation laws, such as those related to the minimum wage and possible hours requirements, you must comply with the state law where the work is performed. For example, if you register your New York company as a foreign entity in Ohio and conduct business there, you must comply with Ohio employment laws.

Work with an Experienced Construction Accounting and Tax Advisory Firm

When you expand your business into additional states, you can be subject to different requirements than you’ve previously been accustomed to. Stay on top of these requirements, including tax liabilities and how to plan for them, by working with an accounting and tax advisory firm that understands the construction industry. At Sax, LLP, our team is uniquely equipped to serve your business’ unique needs, including working with you to develop a plan to seamlessly expand into a new state and avoid any tax or compliance surprises.

Ready to learn more? Contact us today to schedule your initial consultation with a member of our firm.

About the Author

Mathew J. Giordano, CPA, MST is a Senior Tax Manager actively involved in the firm’s Tax Controversy and Dispute Resolution niche. Mathew is also involved in the firm’s State & Local Tax (“SALT”) practice and works on issues related to Nexus and Sales/Use tax. He can be reached at [email protected].

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