How to plan a business expansion in 2023

By Nellie Akalp

If you’re planning to expand your business – by serving new markets, expanding your portfolio of products or services, or adding staff – you have a lot to think about. In this article, we’ll discuss some of the things entrepreneurs should consider as they strive to grow their business.

5 important 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 legal compliance requirements. However, they provide no protection for entrepreneurs’ personal assets and no flexibility for tax treatment.

Business growth aspirations drive many entrepreneurs to move from a sole proprietorship or partnership to a limited liability company (LLC) or partnership.

Justifiably! Forming one of these corporate structures creates a separate legal entity for the company. That means the owner’s personal assets (home, vehicles, retirement investments, etc.) are protected from the company’s debts and legal obligations.

Also, LLCs and C Corporations that meet the IRS’s qualifying criteria may choose to be taxed as S Corporations. In the case of an LLC, the S Corp election helps minimize a self-employed entrepreneur’s tax liabilities. The main benefit of electing S Corporation to a C Corp is that it avoids the double taxation of income distributed to shareholders.

2. Obtaining the necessary licenses and permits

As you expand your product or service lines or expand your reach to other locations or markets, you may need to apply for new licenses or permits. State and local government rules and regulations vary for different types of business activities. Examples of the possible license requirements include:

• General business license
• Sales tax permit
• Alcohol license
• Bakery permit
• Food and drink license
• Destination permit
• Music license
• Health permit
• Landscape permit
• Sign permit
• Entertainment license
• Professional licenses (e.g. accounting, lawyer, doctor, engineer)

As you can imagine, many more apply to different industries and businesses. Entrepreneurs should research the requirements for locations where they want to do business.

3. Hire employees

If you can no longer do everything on your own, or if you want to do more but don’t have the time or specific skills to achieve it, it’s time to get help. Hiring employees can take some of the administrative and operational pressure off you. Of course, adding employees to the payroll adds some new responsibilities, including:

Process salary

Here’s a summary of what most companies need to handle payroll:

• a federal tax number (EIN) of the Tax and Customs Administration
• Payroll tax registration with the state (and possibly local) tax authorities.
• 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, paid time off, tips, bonuses, commissions)
• Documentation health insurance
• Pension plan documentation
• Employee bank details (when wages are paid directly into employees’ bank accounts)
• Occupational accident insurance
• Payroll software or provider of payroll services

Payroll management, especially the proper handling of payroll taxes, is essential to ensure that employees are paid correctly and on time. In addition, it is critical to get a business in good standing with federal, state, and local tax authorities.

Employers must withhold certain taxes and other payments from employees’ wages and then file those funds with the appropriate tax authorities or organizations. Also, some employment-related taxes are paid directly by employers.

Wage deductions from employees’ wages

• Federal income tax
• State income tax
• Local income tax
• FICA (Social Security and Medicare) tax—Half of this tax is withheld/withheld from the employee’s wages and the employer pays the other half.
• Wage garnishment (e.g. alimony, child support, loans, bankruptcy payments)
• Benefit deductions (e.g. pension fund contributions, employee share of health and life insurance premiums, union dues)

Work-related taxes paid by employers

• FUTA Tax—The Federal Unemployment Tax Act is a program that provides compensation to employees who lose their jobs through no fault of their own. FUTA tax is a cost to the employer; it is not deducted from the employees’ wages.
• 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 sick leave) may exist, depending on the state or municipality. Employers should contact their local tax authorities and the IRS to determine all of their payroll tax obligations.

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4. Subcontracting to Independent Contractors

Working with independent contractors and freelancers can improve the efficiency and productivity of your business by employing people with specialized skills and expertise to perform tasks that you are not personally adept at. However, it is important to realize that independent contractors are NOT employees. Companies should not falsely treat individuals as independent contractors when they should be classified as employees.

What is the difference? The IRS has classification rules to distinguish between independent contractors and employees. Some states have even more final parameters to differentiate the two. In general, independent contractors are self-employed professionals who enter into an agreement (written or oral) with a company 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 enforced on employees by their employers.
• Typically, contractors are responsible for providing the tools and equipment necessary to complete their assignments.
• While the company paying an independent contractor can determine the goals and outcomes for projects and assignments, the independent contractor decides how best to perform the 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 companies should be aware of.

• They must request a W-9 form 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 must issue Form 1099-NEC to independent contractors to whom they have paid more than $600 in the year.

5. Expand your business out of state

What if you want to expand your business beyond your home state (where you initially established your business)? When a company incorporated in one state meets the definition of “doing business” or “nexus” in another state, it must apply for permission to operate in the new state. Usually that means completing a process called “foreign qualification.”

A company is considered a domestic entity in the state where it is originally registered and a foreign entity in any state where it is foreign-qualified.

Definition of doing business

What constitutes “doing business” varies by state. In general, states consider that a company is in 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 who work in the state
• Holds face-to-face 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
• Collection of 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
• Participate in isolated, non-repeated transactions completed within 180 days in the state

What does nexus mean?

Nexus means that a company has a physical or economic connection with a state. Determining nexus can get complicated because different states have their own interpretation of what nexus is.

General features 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 company to be economically connected 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 informed about nexus regulations in all states where they have employees, physical locations, or sell their products and services.

Where to go 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 activities in their jurisdiction. For federal tax-related information and employer issues, the tax authorities And Department of Labour websites are excellent resources.

Business owners should also consult knowledgeable legal, accounting and human resource experts when expanding a business. Every company’s situation is unique from others in some way, and trusted professionals can provide insight and information tailored to your specific circumstances.

About the author

Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author and mother of four. She is the founder and CEO of CorpNet. coma trusted resource and service provider for business formation, LLC filings and business compliance services in all 50 states.