Safeguarding Business as a Foreign Entity with Permits & Licenses
Dec 15, 2022
When an entrepreneur comes up with a business idea, the first question about operating it in another state comes to mind: 'can I operate without registering it?' There are several answers to it, depending upon the nature of the entity. In the United States, you can operate a sole proprietorship without registering, but you must register with your local government to collect and file state taxes. There is nothing erroneous with running an unregistered business as long as it is legal and meets all licensing and tax requirements.
Importance of Permits & Licenses
Obtaining permits & licenses to operate your entity in another state can take time and effort. This is because of variability between industries and jurisdictions, and there is only sometimes a clear path forward. However, failing to obtain or renew a license can be pricey, resulting in substantial penalties, such as fines, lawsuits, and, in extreme cases, even arrest. As the outcomes of running a foreign entity without a license can be overarching and have an enduring impact on your company, it is critical that you comprehend the perils of non-compliance. Some of the negative consequences and penalties are outlined here:
Fines and Penalties
Levying fines and penalties on your unregistered foreign entity is the most common scenario. However, the fine or penalty amount depends on several factors, including the severity of the offense and what jurisdiction your entity operates in. For example, California imposes Business and Professions Code 7028 on your unregistered foreign entity. Under this, you're liable to pay $5,000 and/or be sent to jail for 6 months.
Under the Illinois Business Corporation Act, any business that operates in Illinois before registering its entity faces fines and other penalties. In addition to fees and franchise taxes, there is a penalty of $200, plus $5 per month, or 10% of fees and taxes, whichever is greater.
In other cases, the fine or penalty for an expired business license might be a flat fee. Regardless of how the fine is calculated, it can be costly to your business.
Going behind the bars
In some jurisdictions, conducting a business without obtaining permits and licenses is considered fraudulent and results in being arrested, especially in cases where companies are involved in the medicine domain where licenses are mandatory. This can result in a disastrous scenario where a business loses money due to closure and is fined for not having a license but then has to pay legal fees to defend or expunge the record of the person arrested on top of that.
Shutting down of business
Obtaining a new permit or renewing an existing license seems like a small task, but it is crucial to keep the business running. Failing to do so can result in the closing down of your entity in another state. Let's take an example of a company headquartered in Los Angeles but runs multiple retail stores across New York and Texas. One of the stores in NY had their license due for renewal. The department sent the notice directly to the store, but the store manager should have notified the HQ and Legal. This resulted in the store being shut and the loss of business to the competitors in that region.
It may seem extreme that a license that might have only cost $100, $200, or maybe $1,000 could cost you your business. But unfortunately, it is a real consequence that a company might face.
Missing out on golden opportunities
Obtaining licenses and permits is a real deal for almost any business. They add credibility and help you win over customers' trust, resulting in the expansion of trade. But, if you are operating an entity without these permits and licenses, you may lose out on some great opportunities to open a new store or operate as a foreign entity in another state.
For example, you have a construction business in one state and are ready to bid to renovate a swanky corporate office in a neighboring state. If the company asks for your documents, and you do not have a license to construct in their region, you lose out on an opportunity that would have helped you grow outside your home state.
Lack of proper licenses & permits causes delays in several forms. For example, in the case of manufacturing units, you have come up with a brilliant idea sitting in your home state. As a pilot project, you want to launch a product in another state to see if the market is equally receptive. But you can't go ahead since you have not obtained due permits and licenses from the prospective state. As a result, your project is delayed, and your competitors are keeping a close eye on your activities and see this as an opportunity to launch a similar product to capture the market in your aspiring state.
Another delay could be in the process of obtaining licenses and permits. Suppose you have started operating your business in New York without registering as a foreign entity. In that case, it can cause delays of up to six months to obtain the permits and licenses. The New York State Tax Commission requires you to either furnish the tax details you might have paid to obtain a license or an Application for Authority that you have not been doing business in NY before registration.
Being sued or shut down for not having proper licenses or permits to run an entity is like a negative PR that ruins the reputation that you might have in the market. This intangible loss is either beyond repair or takes massive money and time to recover. Imagine being questioned about the quality and standards you have built in years or maybe months and losing out on consumers to your competitors merely because of a lack of licenses. Loss of trust in your brand can have a devastating impact on the business and can take years to rebuild the same.
Staying compliant with the laws in a state is the key to avoiding these pitfalls. You can do this by consulting legal professionals when you open your business, obtaining all the necessary licenses for your industry, and staying on top of renewals so that none of them expire. A great way is to invest in a cloud-based platform like Traact that offers assistance with tracking licenses and permits. It also helps you effectively manage your entities across all your operating states. Our dashboard lets you streamline the entire license, permit, and tax registration process. In addition, we handle renewals to ensure that your business is always in compliance and that you never have to face any of these consequences.
Interested in knowing more about the services we offer? Book a free demo today.
What is the difference between a license and a permit?
Licenses are permanent, while permits are temporary and restrictive. Even after obtaining a license, a person may still need permits to start a business, which requires occasional inspection and adherence to safety regulations.
What is compliance tracking software?
Compliance software is utilized to track, monitor consistently, and audit business operations to confirm that they adhere to relevant legal, industry, and security regulations, organizational policies, and consumer standards.
Why is compliance monitoring important?
Monitoring is essential for ensuring that your organization's operations are functioning correctly. It also helps to detect any areas of noncompliance with both internal policies and external regulations, whether they are accidental or intentional.