If you plan to expand your business—by serving new markets, extending your portfolio of products or services, or adding staff—you have much to think about. In this article, I’ll discuss a few talking points business owners should consider as they strive to grow their companies.
5 key considerations when growing your business
1. Forming an LLC or corporation
Many small businesses start as sole proprietorships or general partnerships because those business structures offer administrative simplicity and no statutory compliance requirements. However, they do not provide protection for business owners’ personal assets or give any tax treatment flexibility.
Business growth aspirations prompt many entrepreneurs to change from a sole proprietorship or partnership to a limited liability company (LLC) or corporation.
Rightly so! Forming either of those business structures creates a separate legal entity for the company. That means the owner’s personal assets (home, vehicles, retirement investments, etc.) receive protection from the debts and legal liabilities of the business.
Also, LLCs and C Corporations that meet the IRS’s qualification criteria may choose to be taxed as an S Corporation. In the case of an LLC, the S Corp election helps minimize a business owner’s self-employment tax obligations. The primary benefit of S Corporation election for a C Corp is that it avoids the double taxation of income distributed to shareholders.
2. Getting the required licenses and permits
If you’re expanding your product or service lines or extending your reach to other locales or market areas, you may need to apply for new licenses or permits. States and local government agencies’ rules and regulations vary for different types of business activity. Examples of the possible licensing requirements include the following:
- General business license
- Sales tax license
- Alcohol license
- Bakery license
- Food and beverage license
- Zoning permit
- Music license
- Health license
- Landscaping license
- Sign permit
- Entertainment license
- Professional licenses (e.g., accounting, attorney, physician, engineer)
As you can imagine, there are many more applicable to different industries and business activities. Entrepreneurs need to research the requirements for any locations where they will conduct business.
3. Hiring employees
If you can no longer do everything on your own—or you want to do more but don’t have the time or specific skillset to accomplish it—it’s time to get help. Hiring employees can take some of the administrative and operational pressures off of you. Of course, adding employees to the payroll adds some new responsibilities, which includes:
Here’s a summary of what most companies need to handle payroll:
- A federal tax ID number (EIN) from the IRS
- Payroll tax registration with the state (and possibly local) tax agencies.
- Employee information and tax documents (e.g., obtaining W-4 and I-9 forms from employees, and sending W-2 forms to employees)
- Salary and wage information (e.g., wages, salaries, overtime pay, paid time off compensation, tips, bonuses, commissions)
- Health insurance documentation
- Retirement plan documentation
- Employee bank information (if direct depositing wages into employees’ bank accounts)
- Workers’ compensation insurance policy
- Payroll software or payroll services vendor
Managing payroll, particularly handling payroll taxes properly, is essential for ensuring employees get paid accurately and on time. Moreover, it’s critical for keeping a business in good standing with federal, state, and local tax agencies.
Employers must withhold certain taxes and other payments from employees’ pay and then submit those monies to the appropriate tax agencies or organizations. Also, some employment-related taxes are paid directly by employers.
Payroll withholdings from employees’ pay
- Federal income tax
- State income tax
- Local income tax
- FICA tax (Social Security and Medicare)—Half of this tax is deducted/withheld from the employee’s pay, and the employer pays the other half.
- Wage garnishments (e.g., alimony, child support, loans, bankruptcy payments)
- Benefits deductions (e.g., retirement fund contributions, employee’s portion of health and life insurance premiums, union dues)
Employment related taxes paid by employers
- FUTA tax—The Federal Unemployment Tax Act is a program that provides compensation to workers who lose their jobs through no fault of their own. FUTA tax is a cost to the employer; it is not deducted from employees’ pay.
- SUTA tax—States also have unemployment programs. Most require only employers to pay into the fund, but some states also require employees to contribute.
- Other payroll taxes—Some other taxes (such as for short-term disability and family medical leave) may exist depending on the state or municipality. Employers should contact their local tax agencies and the state revenue department to determine all their payroll tax obligations.
4. Outsourcing to independent contractors
Working with independent contractors and freelancers can improve your business’s efficiency and productivity by bringing in people with specialized skills and expertise to handle tasks you aren’t personally proficient in. However, it’s important to be aware that independent contractors are NOT employees. Businesses must not mistakenly treat individuals as independent contractors when they should be classified as employees.
So, what’s the difference? The IRS has classification rules for differentiating between independent contractors and employees. Some states have even more definitive parameters for distinguishing the two. Generally, independent contractors are self-employed professionals who enter into an agreement (written or verbal) with a business or individual.
- They are not on their clients’ payroll but issue invoices to request payment for their services.
- Unlike company employees, independent contractors do not receive benefits or paid time off from their clients.
- Independent contractors are mainly in control of how and when they work, whereas those things are usually dictated to employees by their employers.
- Typically, contract workers are responsible for providing the tools and equipment needed to perform their assignments.
- While the business paying an independent contractor may set the goals and deliverables for projects and assignments, the independent contractor decides how to best accomplish their assigned tasks.
- Independent contractors are responsible for reporting and remitting their taxes (including self-employment taxes) to the IRS, state, and local tax authorities.
When working with independent contractors, there are two tax-related forms businesses must pay attention to.
- They should request a Form W-9 from the independent contractor, which identifies the individual’s personal information for tax purposes (Compensation paid to independent contractors is tax-deductible for a business.)
- Businesses should issue Form 1099-NEC to any independent contractors to whom they paid more than $600 in the year.
5. Expanding your business out of state
What if you want to expand your business operations beyond your home state (where you initially formed your business)? When a business created in one state meets the definition of “conducting business” or “nexus” in another state, it must seek authorization to operate in the new state. Typically, that means completing a process called “foreign qualification.”
A business is considered a domestic entity in the state where it’s initially registered and a foreign entity in any state where it’s foreign qualified.
Definition of conducting business
What constitutes “conducting business” varies by state. Generally, states consider that a company is conducting business if it meets one or more of the following criteria:
- Has a physical presence (office, warehouse, or retail store) in the state
- Has employees working in the state
- Holds in-person meetings with clients or customers in the state
- Has reached a certain sales threshold in the state
The following activities alone usually do not qualify as doing business in a state:
- Defending or settling a lawsuit in the state
- Collecting debts in the state
- Conducting internal business activities, such as holding LLC member meetings in the state
- Having a bank account in the state
- Selling services or products through independent contractors in the state
- Engaging in isolated, non-repeated transactions completed within 180 days in the state
What does nexus mean?
Nexus implies that a business has a physical or economic connection to a state. Determining nexus can get complicated because different states have their own interpretation of what nexus is.
General characteristics of nexus
- The company has a physical presence—such as an office, warehouse, store, or employees—in the state.
- The company has reached a certain sales threshold, with or without a physical presence, in the state. Many states consider a business to have economic nexus if it has $100,000 in sales or 200 sales transactions (or both) in the state during the year.
The rules for determining nexus change often and vary from state to state. So, it’s critical for business owners to research and stay on top of nexus rules in any states where they have staff, physical locations, or sell their products and services.
Where to turn for guidance
Most state and local government websites provide business registration, licensing, and tax information. They also post contact information for the agencies that oversee business activity in their jurisdictions. For federal tax-related information and employer issues, the IRS and Department of Labor websites are excellent resources.
I also encourage business owners to consult knowledgeable legal, accounting, and human resource experts when expanding a company. Every business’s situation is unique from others in some way, and trusted professionals can offer insight and information tailored to your specific circumstances.