Post By: James Gilmer, Harbor Compliance
Over the past year, the global economy—and U.S. businesses in particular—have experienced a mass transition to remote work. With many consumers unable or unwilling to make physical purchases, many of those same businesses have also seen an uptick in e-commerce.
As a result of these trends, organizations historically operating in single states or regions now find their “footprints” encompassing large parts of the country. In addition to the management challenges this presents, organizations should be aware of—and be prepared to minimize—the risk of noncompliance with state business entity requirements.
This article will discuss the common challenges faced by U.S. businesses as a result of COVID-19. It includes potential remedies and provides management with actionable insights to inform their strategy.
Business Entity Compliance 101
Each state’s requirements for registering and maintaining business entities vary. However, there are several responsibilities held in common across states:
- Registering the entity with the secretary of state and filing annual reports
- Maintaining a registered agent to receive service of process
- Registering and filing returns for franchise, sales, payroll, and other taxes
Businesses—particularly those that register in multiple states or nationally—must navigate myriad government systems, procedures, and deadlines. As a result, management should have a plan to comply as the business scales and grows.
Challenges (and Remedies) Arising from Remote Operations
Remote Employees and Online Sales
In a primarily remote era, employers can access top talent working anywhere. Similarly, following a spike in e-commerce activity, many businesses have wider revenue channels than before. While this creates tremendous opportunity, management should be aware of the business entity and tax framework required to succeed.
States typically equate “transacting business” with having a physical presence, such as having employees or an office. It may also include regular or repeated commercial activity, the definition of which recently expanded following the South Dakota vs. Wayfair, Inc. decision.
The act of doing business generally triggers the requirement to register and maintain the entity. For example, out-of-state employees may trigger the need to obtain a certificate of authority, appoint a registered agent, and register for state payroll tax accounts. Keep in mind this applies both to new hires and existing employees who move or are currently working in another state.
Similarly, sales of any kind usually trigger the need to register for sales tax. Those occurring online may create nexus in far-flung states and trigger the requirement to open remote seller and other specialty tax accounts. Registration with the secretary of state may also be required.
In both examples, for as long as activity in that state continues, the entity will have to update or implement systems to maintain those registrations.
Compliance Tip: Research the requirements of each new state where the entity will have a presence. Ideally, this occurs as part of strategic planning rather than in response to a last-minute opportunity. When registrations of any kind are required, don’t delay. With multiple agencies, registration can take weeks or months. A proactive approach will help you onboard top talent faster while minimizing the risk of late filing penalties.
Registered Agent Availability
Business entities are required to appoint a registered agent in each state. The registered agent’s job is to receive lawsuits and legal notices at a physical location and forward those documents to the appropriate individuals.
Many businesses list a company office address with an owner or manager as the designated representative out of perceived convenience or cost savings. Under normal circumstances, this may be a suitable arrangement.
Missing a delivered lawsuit can result in severe consequences for a business, up to and including default judgment. Now consider that currently, most U.S. businesses are working remotely, including many members of management.
Businesses should keep close tabs on who their registered agents are. Each state maintains a searchable database of registered entities. If your company’s listing isn’t correct, a change filing is needed to update the record officially.
Compliance Tip: Businesses, particularly those registering in multiple states, will need a registered agent that meets the requirements for each. Generally, service providers (of which there are many) are more reliable and provide more comprehensive coverage than individuals.
Regardless of who or what company you designate, ensure that you obtain their consent and file to make the appointment as soon as possible. This helps ensure your entity meets the requirements of each state and that you receive critical document deliveries.
Forming a Business Entity Compliance Strategy
While every organization has unique circumstances that inform a compliance strategy, we’ll share a few helpful ideas from our experience working with entities all across the U.S.
- Leverage technology wherever possible. It’s no longer practical to maintain information and records in physical locations. As the organization grows, tracking deadlines and other state-specific requirements become more complex. Consider cloud-based software solutions to centralize data.
- Establish clear employee roles and training. Your organization may handle business entity filings and tax returns in-house. Or, it might engage with a CPA, law firm, or another vendor for the work. Regardless, be sure to create a clear responsibility matrix and that each party understands the workflow. Of course, ensure management has a level of oversight to check progress, fill gaps, and add redundancy if needed.
- Generally, a new state means new (and different) obligations. Review the requirements of each new state carefully and plan to file entity and tax registrations as early as possible. If possible, human resources and business development teams should have a direct line with compliance and legal personnel to communicate opportunities before they arise.
While your organization may already have similar processes in place, it’s always a good idea to review any strategy periodically. After all, we’ve just experienced a year of tremendous change.
By adopting a proactive approach to business entity compliance, the organization will have established internal processes and systems. They face fewer (or smaller) speed bumps along the road to hiring employees or onboarding clients. And, they should hopefully see reduced costs from inefficiency with corresponding gains in profitability.
**Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
About the Author: James Gilmer is a Compliance Specialist at Harbor Compliance, a leading provider of compliance solutions for companies of all types and sizes. James is passionate about helping nonprofit organizations leverage compliance to enhance their fundraising and program activities and educating the sector on compliance issues. James is also a Co-Founder of Berks Sinfonietta, Inc., a nonprofit chamber orchestra located in Reading, Pennsylvania.