Crossing State Lines: What Small Businesses Need To Know

Many companies begin doing business in multiple states without considering how it could impact their business. Other businesses want to operate in states outside of their home state, but never do it because they are too concerned with negative outcomes. Normally they presume the negative outcome is state tax. In both cases each business needs to understand what additional considerations are created when doing business in multiple states. Let’s discuss some important information to know when making this decision.

Can I live in one state and have a business in another?

There is nothing wrong or illegal with setting up a business in a state that you do not live in. You will need to maintain a registered agent in the state that your business is incorporated or formed in. A registered agent is an address within the state to which legal documents and communication from the state can be received by the business. Some businesses choose a third party and designate them as the registered agent. They usually pay a small annual fee for the service.

Regardless of whether you form your business in the state you live or another state, if you want to operate in multiple states, you must foreign qualify. The term “foreign” in this case does not refer to operating outside of the country or internationally.  It refers to operating outside of your “domestic”, that is the state in which the entity was formed. What is foreign qualifying?It’s getting permission to do business in a state by registering with the secretary of state and paying a fee.

Can you register a business in multiple states?

As I previously mentioned, yes, you can register to do business in multiple states. Any state that isn’t your “domestic state’ needs to be registered. Remember, you are only allowed to incorporate in ONE state

State Income Tax

Some states levy a direct tax on income earned in that state. In most cases, individuals and businesses must file a state tax return for each state that they earn income.  If you live in a state, and have your businesses formed there, that state can tax all your income. Each state has their own rules to govern the percentage of income tax . There are way more states that have an income tax vs those states that don’t. Below is a list of the seven states that do not levy a state tax.

  1. Alaska
  2. Florida
  3. Nevada
  4. South Dakota
  5. Texas
  6. Washington
  7. Wyoming

Some businesses that conduct out of state business may need a deeper understanding of whether they will owe state tax. This is determined by a term called nexus. Nexus is used in a situation where a business has a taxable presence in a particular state. The factors that determine for a business having nexus can vary from state to state. From a foundational standpoint state nexus exists in the following circumstances:

  • Earning income in a state
  • Owning rental property in a state
  • Employing individuals in a state
  • Having capital assets or property in a state
  • Having solicitors or salesmen operating in a state under the authority of a company
  • Exceeding a threshold amount of taxable sales delivered in a state
  • Exceeding a threshold amount of transactions delivered to a state

Franchise Tax

If you live in a state with no state income tax this does not mean that there will be no tax implications for businesses operating in those states. Some states have what is called a Franchise Tax. This can also be referred to as a “privilege tax”.  It’s technically not based on income, but instead, based on the net worth of an entity or capital held by an entity. In reality, it is a tax for being able to operate businesses in a given state. For most cases a registered business must file a yearly franchise report even if there is zero income. Those that do not file will incur a penalty if they do not file the report. In many cases a company may not owe any franchise tax. However, if they do owe, and do not pay on time, penalties for late payment and interest will be assessed.

Like state income tax, determination of franchise tax varies from one state to another. I will use Texas and Louisiana for my examples. Let’s say in Texas your business as a retail/wholesaler has an annualized revenue of more than $1,180,000. Then the business will pay 0.375% on the company’s margin. For all other Texas businesses with the same facts, their margin tax rate would be 0.75%. Louisiana franchise tax is calculated at a rate of $1.50 for every $1,000 on the first $300,000 of capital employed in Louisiana. It will then charge $3 for every $1,000 that exceeds $300,000. As you can see, there can be large variance on franchise tax paid in one state vs another. See the links below for detailed information on Texas and Louisiana Franchise Tax.

Choosing which states to do business on strategically

Like all other business decisions, deciding which state to set up your business in or register as a foreign entity for operation purposes, must be done in a strategic manner for the greatest benefit. Here are some helpful tips that small businesses need to know. There are fees associated with registering and doing business in multiple states. In some states those fees can be significant. Also, of course, there can be significant tax implications to doing business in another state. So, whatever incentive exists to operate business in any given state must be weighed against the cost associated. A few things to consider are

  • the annual fees
  • the structure of business taxation
  • business tax rates
  • property tax costs

In some cases after accounting for the cost of doing business in other states, it may not be worth the trouble of jumping through all the necessary hurdles to do so.

Assessing the topics around what small businesses need to know before doing business in multiple states, like other issues, is one that a Molen and Associates tax advisors can assist you with. Do not hesitate to call and schedule an appointment so we can help you make the best decision for your business. For more tips and business related blog posts check out our other blogs related to business here.

Arthur Harrison
Tax Advisor, Accounting, EA





The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bookkeeping 101

As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry...

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

Request an Appointment Today

2 + 12 =

Call us at

Pin It on Pinterest

Share This




As part of the Houston Chronicle's "Best of the Best" Competition 2023

You can vote every day from March 27th to April 10th