Out-of-State Branches and Franchises - Are They a Good Idea?

When you incorporate your small business you establish a freestanding entity. It is then considered to be a domestic business in the state that you formed it in. What you may not know, however, is that your business is also considered to be a foreign business to any state that is not the formation state. This means that you have interstate legal issues to deal with if you want to establish a branch or franchise of your business in another state.

Crossing Borders

There are multiple considerations that you need to plan for if you want to expand your company's operations into a new state. The first is that you need to file the appropriate paperwork with the foreign states that you want to expand into. This paperwork usually includes a basic certificate of authority to do business in the state, and may also include applying for state licensure and insurance. The amount of paperwork that you will need to complete will depend on the nature of your business and the state or states that you want to expand into.

In addition to initial paperwork, you will also have on-going requirements and interactions with the foreign states. These interactions will include reporting about the business you are conducting, paying taxes and meeting licensure renewal and continued professional education requirements. These requirements can be difficult to keep up with from out-of-state, so it can be helpful to hire a manager for your out-of-state branches to ensure you are doing everything that you need to maintain foreign state compliance.

Are You Already Operating in a Foreign State?

Companies that are located near state borders have to pay close attention to their business activities to make sure that they are not inadvertently operating in a foreign state. Unintentional operation in a foreign state can occur if employees have residency in a foreign state, if they are serving customers in a foreign state, if they take orders from people in a foreign state or if they have a bank account in a foreign state. As these examples show, it is easy for border hugging companies to cross over without being aware of the legal consequences of operating in a foreign state.

Fortunately, it is easy to deal with foreign state requirements for most businesses. Since there are numerous advantages to expanding your customer base into new states it is beneficial for small businesses to take the steps required to enter these markets legally. The extra administrative costs will be compensated when higher profits and sales volumes start to roll in.

References

http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P01_4763