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:
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:
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
Employment related taxes paid by employers
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.
When working with independent contractors, there are two tax-related forms businesses must pay attention to.
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:
The following activities alone usually do not qualify as doing business in a 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 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.
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