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Friday, June 5, 2020

The Importance of Registering Your Business


Summary

With all of the complexities surrounding operating a business, sometimes state registrations can be confusing to taxpayers or even overlooked completely. “Doing business” standards vary from state to state, and there is no “one size fits all” when it comes to each state’s registration requirements.

Business leaders tend to be more focused on running the business than on staying compliant for state registration purposes. The downside of non-compliance is that businesses failing to properly register in a state may be subject to:

  • Substantial fees and penalties
  • Contract cancellations
  • A full assessment of tax liability
  • In some rare cases, criminal liability

In Detail

The registration requirements for doing business vary depending on the type of registration and the state. Registrations with the secretary of state, or “foreign qualification,” usually have a lower standard of doing business than registrations with the state’s taxing authority. Foreign qualification is registering with the secretary of state in a jurisdiction in which the company is not domiciled or incorporated and should be done if the company has a physical location, employees, or regular binding contracts in the state.

However, registrations with the secretary of state may automatically alert the state’s taxing authority that you have a presence in the state. They may send out a nexus questionnaire to determine if the activities in the state are considered doing business for state income or franchise tax purposes. These questionnaires should be answered carefully, as an improper answer could subject the company to an income/franchise tax filing requirement for which they may not actually be subject. Furthermore, once a nexus questionnaire has been sent back to the state, disputing the facts can often be a timely and costly matter.

Common activities which may qualify as doing business and require registration, filing and/or paying taxes include:

  • Performing services in a state (directly/indirectly)
  • Accepting orders in the state
  • Being a member of a pass-through entity doing business in the state
  • Engaging in litigation in the state
  • Making sales into the state
  • Owning property in a state
  • Securing or collecting debts
  • Selling through independent contractors

If it is determined that a company is doing business in a state, they will generally be subject to the state business activity tax. If it is found that they have been subject to a tax and have not filed or registered, late penalties, interest and fees may apply. These penalties vary by state, but in many they range upwards of $1,000 per year, and in some states these penalties may be up three times the total amount of fees, penalties, taxes and interest that would have been imposed if the company had registered in the state.

Other common penalties are a restriction on doing business in the state or even a lien. California can automatically void business contracts in the state for a lack of registration compliance, and some states, like Kentucky, find a failure to register a Class A misdemeanor, subjecting a taxpayer to potentially one year in prison.

Companies that may have overlooked their state registration requirements should focus on getting the issue resolved before the consequences become severe. Once the issue is recognized, a proactive approach to resolution is often the best strategy.


Insights

For many business owners or leaders within the business, registration with the state is often an afterthought, which can have unfortunate tax consequences. To avoid penalties or even criminal liability, make sure you review your operations to understand where your company must register.

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