How to Set up a Local Entity: Step-by-Step Guide for Businesses

A local entity is also known as a foreign entity. Both terms describe a business location in a state (or country) other than where the business is based. It does not apply to a subcontractor or sales representative operating in another state. This is an important distinction for companies looking to expand into new markets.

This article expands on the definition of a local entity and explains how to set one up.

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How to Set up a Local Entity: What to Prepare Before Getting Started

Operating a business in another state can be challenging, particularly if you want to establish a physical location. Every state has different laws, regulations, and fees for setting up shop in their territory. Cities and towns may require a business license. You may also be liable for state taxes. These questions all need to be answered before you move.

Start by gathering the required documentation. Despite the differences between states, some of the paperwork is universal. For instance, you’ll need a corporate registration from your local Secretary of State’s office to prove the existence and name of your business. They should have one on file with your articles of incorporation.

You’ll also need the following:

• Proof of Registered Agent: A registered agent is responsible for receiving all legal correspondence in the state you’re doing business in. When you register, you’ll need proof that you’ve hired a registered agent in your new state.

• List of Officers or Members: C-Corporations and S-Corporations have officers. Limited Liability Corporations (LLCs) have members. You’ll need a list of these when you apply for a local entity registration.

• Certificate of Good Standing: A Certificate of Good Standing states that your business is up to date on registrations and fees in your home state. The new state you’re operating in will require that before you can open.

• Certificate of Authority: The Certificate of Authority is issued by the state you’re moving to. It confirms your legitimacy and gives you the right to conduct business. It typically takes five days to two weeks for it to be approved.

Online processes for retrieving or filing documents are typically faster than asking for them in person. Emails may also be faster than phone calls. State and local government agencies typically have heavy call volume. You could be on hold for a long time if you try to call them. The answers you need may be on their website.

How to Set up a Local Entity: Step-by-Step

Double-check your documents to ensure you have everything you need. Find the Secretary of State’s Office where you’re opening your new business location. They handle corporations and foreign entities. Search their website for any information they have about what you;’re trying to do, and then complete the following steps:

Verify That You Need to Register a Local Entity

Most states require you to register as a local entity, but not all. Check with the Secretary of State’s Office for their requirements. Their website should have a “foreign entity” page containing registration instructions and fees. If not, reach out to them by email or phone to inquire. Do not open your business there until you know the answer to this.

Check For Your Business Name in the New State

The business name you use in your home state may not be available in the state where you’re moving. There are several places you can go to search for this. The best one is the Secretary of State’s Office. You could also search the United States Patent and Trademark Office (USPTO) for a business operating under the same name.

Obtain a Certificate of Good Standing

The Secretary of State’s Office issues the Certificate of Good Standing in the state you’re moving to. It comes after you’ve filed the previous paperwork before opening your new location. This certificate is essentially your permission to do business in the state. You’ll also need it to register with the state Department of Revenue. We’ll explain that below.

Hire a Registered Agent in Your New State

Your registered agent is the individual or company responsible for receiving legal correspondence on behalf of the company. Registered agents must be based in the state where your offices are located, so you can’t use the same agent you have in your home state. This should be your first step after obtaining a Certificate of Good Standing.

Register with the Department of Revenue

Researching tax laws before opening a location in another state is a good idea. Some states have no state tax, and some have significantly lower taxes than others. Knowing how much you’ll need to pay and where to pay it is essential to success. Find out where the local Department of Revenue is and register with them if necessary.

When Don’t You Need to Register as a Local Entity?

There are some scenarios in which registering a local entity is unnecessary. For instance, you can hire abroad without local entity registration, but the other nation may have other rules and guidelines to follow. This same regulation applies to states. Employees and contractors are not entities. Here’s a list of registration exclusions:

Exclusion #1: Just Visiting

Showing up at a trade show or business conference does not constitute setting up in a new state. You are classified as a visitor and exempt from registering as a business. There may be a requirement to get a permit if you’re selling goods or services, but it will be only for the time you’re in the state. There are no registration or permit requirements if you’re not selling.

Exclusion #2: Foreign Employees and Independent Contractors

Take a quick look at the IRS webpage on employees and independent contractors. You can hire a foreign employee without local entity registration. You can also contract work with an existing business within the state where you want to operate. Only businesses opening a physical location in the state are required to register as a local entity

Exclusion #3: Collecting Debts

Collecting debts by mail or phone from a resident of another state doesn’t classify as operating a business within state lines. A simple guideline is to be physically present in the state before being categorized as a local or foreign entity. Communicating by phone or email to collect or negotiate a debt doesn’t fit that description.

Exclusion #4: Initiating Legal Actions

The rules on legal actions are the same as those for debt collections. Suing another business or an individual may require a locally licensed attorney, but your business remains an outside entity. You should hire a local attorney if you’re moving to a new state or opening a satellite office. Their familiarity with state laws can be helpful.

Exclusion #5: Opening a Business Bank Account

Many businesses use an out-of-state or digital bank for checking or funding. This also does not classify as being a local entity. The bank is located in another state. Your business is still based in your home state. There are no registration requirements for that relationship. Only your accountant and the IRS are interested in where your bank is located.

Benefits of Setting up a Local Entity

Operating in another state without the full legal protection and tax benefits of having a local entity can be costly. Being part of the state where your customers live builds local credibility. A non-registered office or retail location could raise red flags for folks who might otherwise purchase your products or services. Losing them reduces your revenue.

Another benefit of setting up a local entity is avoiding fees, fines, and penalties. In most states, this is a state requirement, not a suggestion. Bypassing this requirement could result in civil penalties and the assessment of missed filing fees after the fact. Those are not expenses your business needs to deal with when operating in a new state.

The long-term benefit of registering a local entity is the goodwill you can build with state and local governments. Corporations that are in growth mode could need any number of government services. This can include trash removal, utilities, and government vendor contracts. Those might not be available if you’re not registered.

Local Entity Example

Retail and restaurant chains often expand across state lines as they grow. This does not apply to franchises that are independent businesses. The local entity rule applies when a corporate office wants to open a new location. Common examples of this are McDonald’s, CVS, Target, and Walmart. Each is registered as a local entity in several states.

Of course, this rule doesn’t just apply to multi-billion dollar corporations. Smaller companies must also apply for local entity registration when they open an out-of-state location. If you’re not ready for that, consider hiring a local sales representative or independent contractor to start doing business on your behalf. That can help you build your brand.

Alternatives to Hire a Foreign Employee Without Local Entity

An “Employer of Record” (EOR) could be an alternative solution if your business wants to establish a local entity to hire new employees. An EOR is a third-party company that employs workers on your behalf. They make it much simpler to expand into another country because they know the local workforce's customs, laws, and practices.

Employers of record are also available to move to another state, not just another country. Several websites have listings for EORs, which may be called Professional Employer Organizations (PEOs). The local Secretary of State’s Office or City Hall may also have a list of EORs or PEOs they frequently do business with.

Discover Wise Business: An Easy Way to Manage Business Finances in Multiple Currencies

Wise Business is an easy way to open a business account in another state or abroad. Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks.

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Doing business in multiple states or countries presents several challenges to business owners and corporate decision-makers. Registering as a local entity eliminates some of those problems, and using the right payment processing tools solves a few more. We hope this article can help you do both so your business can be successful.