By Nellie Akalp.
Are your clients interested in expanding their business to a new country? Here is a valuable guide to help you advise them as they grow their business.
If your client wants to keep their home country as their primary country of business and expand their business into another country, the first decision is whether they need to apply for a foreign qualification. Since sole proprietors and partnerships are not government-governed entities, they do not need to apply for a foreign qualification. The rules for corporations and limited liability companies (LLCs) are different: both must apply for a foreign qualification to do business in a country other than the country of incorporation.
Foreign qualification is the legal registration of a company in another country to perform work. Although the process varies from state to state, most foreign qualifications can be filed at any Secretary of State’s office. Your clients should know that doing business in the country includes the following:
- Physical presence (office space, warehouse or store)
- Purchase of real estate or building for business
- Any company representative who conducts face-to-face meetings with customers
- Have full-time or part-time employees who live or work in the state
- Any offer of services, sale of products or bidding for a contract
- Possession of a professional license (such as medical, accounting, etc.)
Again, since LLCs and corporations are legally incorporated in one state, any activity in another requires a foreign qualification.
A foreign qualified company must appoint a registered agent with a local address in the country. A registered agent is a person or company authorized to accept “service of process” (legal documents and government notices) on behalf of the company. Examples of documents include:
- Official federal and state correspondence
- Subpoenas for information
- Tax notices from the tax administration and local tax authorities
- Summons to appear in court
- Wage garnishment notices when you are ordered to withhold a portion of your employee’s wages and send it directly to the person or organization to whom the employee owes money
- Notices on the filing of corporate documents
Is there a Nexus?
Since the Supreme Court ruling in South Dakota v. Wayfair in 2018, expanding your business to sell in another state establishes an economic nexus for your customers and expands their compliance requirements. At a minimum, states can require out-of-state businesses with more than 200 transactions or $100,000 in in-state sales to collect and remit sales taxes to the state where the goods or services were purchased—even without a physical presence in the state.
Sales tax regulations and economic thresholds vary by state, so make sure your client knows what to expect. Typically, when a remote seller meets that state’s threshold, they obtain a seller’s license and register with the state’s revenue office to pay state sales tax on each taxable purchase. In most cases, sellers using a marketplace intermediary such as Amazon can rely on the intermediary to collect and remit sales tax on their behalf.
Most states also require sellers to collect and remit local taxes (either city or county), so be sure your customers know they need to obtain the proper seller’s permits and tax account licenses to comply.
Paying employees in another country
Clients who plan to have employees working and/or residing in another state must register to comply with state payroll tax regulations. Again, the procedure varies by state; however, the business must usually be registered with the National Income and Unemployment Office. After registration, the company will receive an employer account number and an unemployment insurance account number. Your client must provide account numbers when submitting applications and payments in all electronic and paper submissions.
Each state sets its own state income tax, and there may be an additional local tax for employees who work or live in certain cities or counties. In addition, the unemployment insurance tax varies from state to state and is paid only by the employer. Some states have uniform income tax rates; others have progressive, depending on income—and the same goes for unemployment taxes.
Make sure your client knows if there are state-specific taxes they must also pay or if the employee is exempt because they are in a lower-income area or protected population. Some states have reciprocal agreements that allow employees in those states to be exempt from withholding taxes.
Other licenses and permits
For clients expanding into other states, it’s critical to ensure they have all the necessary licenses and permits before taking that step. States typically give new businesses a short window of time to register their businesses with the state, so your help and knowledge will send them on the right path.
Nellie Akalp is a passionate entrepreneur, small business expert and mother of four. She is the CEO CorpNet.com, a trusted source for business incorporation, LLC filing and corporate compliance services in all 50 states. Nellie and her team recently launched a partnership program for accountants, bookkeepers, CPAs and other professionals to help their clients streamline the business incorporation and compliance process. More information at: CorpNet.com/partners.