Doing Business Across State Lines

by | June 4, 2012

When a company plans to expand its services into another state, a number of key legal considerations must be reviewed.  Below is a summary of some of the critical steps that must be undertaken by the company as it expands.

  1. Business Structure.  All entities doing business in the state must register with the state.  Corporate registration for an out-of-state entity such is accomplished by either establishing a new business entity or by registering the out-of-state entity as a “foreign entity” doing business in the state.
  2. Legal Name and Trade Names.  A search of the legal and trade names used by the company must be conducted to ensure that the company’s names are available for registration and use in the state.
  3. Licensing. Business licenses will be required at the state level and possibly at the city level where the company or its employees are conducting business.  The city license requirements are city specific and an investigation of whether a specific city license is required will be on a case-by-case basis.
  4. Ongoing Registration Requirements.  Once the entity’s presence is established in the state, the company is required to annually renew its registration with the state.  Annual renewals may also be required for city licenses.
  5. Tax Considerations.  Each state has very different taxation requirements for both businesses and individuals.  We recommend that you consult with a tax professional well versed in the state’s tax law to ensure that tax considerations of doing business in the state, including both business and employment taxes, are fully understood and applied to your accounting and payroll systems.
  6. Hiring Employees. 
    1. Registration. The state requires all employers to register with the state as an employer which includes registration with the department of revenue, department of labor for workers’ compensation and unemployment and to report all hires to the various other state agencies such as Division of Child Support.
    2. Compliance.  The state’s employment laws, such as wage and hour requirements and benefits, differ from Washington’s employment laws.  An analysis of the employment and wage and hour policies used by the company in Washington against the new state’s laws is necessary before the company’s Washington policies can be implemented in another state.
    3. Benefits.   Private third party benefits carriers have eligibility requirements for employers that may differ by state.  If the company offers private third party benefits to its employees, such as retirement accounts and medical or dental insurance, the private third party providers must be consulted regarding treatment or coverage of employees in other states.
    4. Employment Contracts.  Employment contracts, including the employee manual, should be reviewed for compliance with each state’s laws with special attention to restrictive covenants such as non-compete or non-solicitation provisions and termination policies and procedures.   The company may choose to amend its policies, and thus its employment manual, to have consistency across states or to have separate employment manuals for employees in the new state and Washington employees.
    5. Payroll Services.  The company’s payroll service provider should be consulted regarding providing payroll services for employees in the new state under that state’s tax law.
  7. Contracts.
    1. Client Contracts. The company’s contracts with its clients should be reviewed in light of where its clients are located and what law it wishes to govern the contracts.  Generally speaking, the company will prefer to have Washington law and Washington jurisdiction over disputes even when they occur in other states.
    2. Independent Contractors.  The requirements for a hired entity to qualify as an “independent contractor” vary by state.  As both state and federal taxing authorities are actively auditing companies using contractors, the company must ensure the structure of any relationships with contractors (i.e. third party consultants or subject matter experts) meet the requirements of an independent contractor under other state law and that any contract reflects those requirements.
  8. Property, Casualty, and Liability Insurance. The company’s insurance carrier(s) should be consulted regarding coverage for the new location and its activities.
  9. Professional Service Providers. The company should consider whether its current professional service providers, such as legal and accounting, are prepared to provide services regarding its activities in other states or whether local service providers must be engaged.

Ensuring you address these key issues as you plan for growth in new states.  International expansions require these considerations and many others such as export regulations and international tax compliance.  We’ll provide some thoughts on key issues in international expansion in future blog posts.