Summary
There are five key components to state payroll and entity compliance: Secretary of State Registrations, Secretary of State Annual Reports, Franchise Tax Filings, Registered Agent Services, and Virtual Mailboxes.
For people who do not want to manage these manually, entirely on their own, there are two different approaches to solving: cobbling together different solutions, or using a platform.
Each approach has various pros, cons, and costs.
Key Components for State Payroll and Entity Compliance
Secretary of State Registrations
Secretary of State registration - also known as Foreign Qualification - is required when a company is deemed "doing business" in a particular state. The criteria for determining what constitutes "doing business" can vary significantly from one state to another, which is why it is important to understand the specific regulations and guidelines set forth by each state. These criteria can include hiring a remote employee, that employee's role, the amount of sales generated, or physical presence.
Secretary of State Annual Reports
The filing fee for annual reports is typically based on the state where the company is registered and its annual revenue or other financial metrics. This fee is used to cover the administrative costs associated with processing and maintaining the company's information on record with the Secretary of State. It is important for companies to ensure that they submit their annual reports and associated filing fees in a timely manner to maintain good standing with the state and avoid any potential penalties or consequences for non-compliance.
Franchise Tax Filings
Franchise tax is a tax levied by some U.S. states on businesses for the privilege of operating as a corporation or limited liability company (LLC) within that state. It is essentially a fee for the benefits and protections provided by the state to the business entity. Franchise tax is typically applicable to both domestic (in-state) and foreign (out-of-state) entities operating within the state's jurisdiction.
The most common franchise tax is Delaware, where many US companies are incorporated.
Registered Agent Services
The role of a registered agent is crucial as they ensure that the business stays compliant with state regulations and receives important legal notifications in a timely manner. By having a physical presence in the state, the registered agent acts as a reliable point of contact for official documents, tax forms, and legal notices that are necessary for the operation of the business. Failure to have a registered agent can lead to missed deadlines, legal consequences, and potential disruptions to the business operations. Thus, having a registered agent helps businesses maintain good standing and ensures that they are informed about any legal matters that may affect them.
Virtual Mailbox
Managing state mail can be a major hassle, and a key component of maintaining state payroll and entity compliance. Oftentimes when companies have one (or multiple) people receiving state emails in addition to physical mail going to different offices, it can be very easy for critical filing requirements to slip through the cracks. Using a virtual mailbox service to centralize email and snail mail into a single inbox is a critical solution.
Two Different Approaches to Achieving State Payroll and Entity Compliance
While some companies do attempt to manage state compliance manually, beyond 2 - 3 states the process becomes mentally taxing and operationally unscalable.
Instead, let's focus on two different approaches to getting a helping hand for state payroll and entity compliance: the platform approach and the piecemeal approach.
The Piecemeal Approach - Pros and Cons
Just like going to a restaurant and ordering a meal "a la carte" the main benefit of the piecemeal approach in state compliance is flexibility. Companies using this approach are selecting and paying for only the services their specific scenario requires.
There are two scenarios where the piecemeal approach may be preferred over the platform approach:
Small companies that have less than five employees, concentrated in 1 - 2 states. In this case, the process for achieving compliance would likely take ~5 - 10 hours per state, so while not ideal, it's certainly manageable if a dedicated person internally has the bandwidth to do the work.
Slightly larger companies that have no intention of increasing headcount or supporting remote work. In this case, the requirements to achieve compliance should be relatively low.
While the piecemeal approach does provide flexibility, that flexibility sometimes comes with a cost of management overhead.
Multiple solutions for various requirements can lead to added complexity, especially when dealing with 3 to 5 different tools or service providers. The time saved by delegating compliance tasks might end up being consumed by the effort needed to ensure seamless communication among the diverse systems and service providers involved.
Conversely, when using one single provider and a piecemeal approach, the cost of the individual solutions chosen is often higher than what can be achieved via a platform bundle.
The Platform Approach - Pros and Cons
There are two main benefits to the platform approach: centralization and usability.
Centralization allows businesses to focus on their core activities and strategic goals, rather than being bogged down by the complexities of juggling multiple point solutions. There's little worse than saving a few dollars by only paying for the 3 components you need, only to then waste hours (opportunity cost) ensuring those systems talk together.
Additionally, platform solutions are usually technology-forward, meaning they're often more user friendly and scalable than a piecemeal alternative.
These benefits often come at a total cost premium versus the piecemeal solution. To go back to the restaurant analogy, you're paying for the ability to enjoy the entire buffet.
Cost Breakdown
Here's what we've heard from people comparing a piecemeal approach to a platform approach, including AbstractOps Starter Plan:
Comparing the costs of ad hoc compliance services versus platform approaches.Note - these costs include the solutions only, and do not include the state-imposed registration and filing fees.
You may be wondering why the "Payroll Tax Registrations" line item is so much higher than the others in the piecemeal approach.
The reason is that many states' payroll registration process involves filing with TWO different state agencies - the Department of Revenue AND the Department of Labor.
Mississippi is one such state:
First, you'd register for foreign qualification with the Mississippi Secretary of State (on this site),
Then, you'd be required to register with the Mississippi Department of Revenue at this site
AND the Mississippi Department of Employment Security at a third site.
Or how about New Jersey? Not only are you dealing with state websites, but there's an added requirement:
You'd secure foreign qualification on the New Jersey SoS site.
Then, you'd register with the Department of Revenue and Enterprise Services site.
And then once you've successfully registered on the DORES ... then you'd email (?!) eastatus@dol.nj.gov AFTER running your first New Jersey payroll to register with the NJ department of labor.
Got all that? Good, because it's required.
Get Help
People growing companies with remote employees to achieve required compliance, without the aggravation.Even if you don't use AbstractOps, if you're operating at any sort of scale, we urge you to consider the time, aggravation, and potential penalties of trying to manage this process on your own.
If you're curious how AbstractOps' platform could reduce this stress, start the product demo.
