How a Business Establishment Effects Taxes and Laws
You've heard the term "establishment", maybe in reference to your local bar (a "drinking establishment") or a high-priced boutique. An establishment is an important concept in business because it determines such activities as taxes and laws.
What an Establishment Is
An establishment is a single business location for a company which is engaged in a single activity. An establishment is a place of business, a place where business is conducted. An establishment must be a place where their business activity takes place with the objective of getting paid for selling goods or services, even if no specific sales take place at that location.
For example, an establishment can be:
- a factory where goods are made,
- an assembly facility where goods are put together (like an auto assembly plant),
- a warehouse where goods are stored before they are shipped or sold, or
- a retail store, where goods are sold.
- an office where services are performed to be sold.
A branch location for a business can be an establishment. For example, if you have a home office in New Jersey, and branch offices in Pennsylvania and Maryland, you have establishments in all of these locations.
A home business can be an establishment, if it otherwise fits the definition, even if it's not your principal place of business. For example, if you store products at your home, or if you have an office at your home where you transact business, your home can be considered an establishment. The Department of Labor specifies that an establishment is:
an economic unit that processes goods or provides services, such as a factory, mine, or store. The establishment is generally at a single physical location and is engaged primarily in one type of economic activity....An establishment may also be a store, office or other physical entity that sells or produces goods or services that is physically distinct from any other facility operated by a business.
Establishments and Taxes
Several taxes rely on the principle of business establishments for their taxing authority. If a business has an establishment or place of business in a state, for example, the business has a tax nexus in that state. The state can then impose an income tax on the income of that establishment, and it can also require the establishment to collect, report, and pay sales taxes. At the local level, a business establishment that owns property must pay property tax.
Establishments in Business Regulation
If your business has multiple locations in different states, you have establishments in those states, and you are thus "doing business" in those states. That means if you have an LLC or a corporation in one state, and branches in other states, you may have to have a foreign (out of state) LLC or corporation in another state and pay taxes and other fees in that state.
Establishments in Employment Law
The term "establishment" is important in employment law and labor relations because these laws apply to employees at establishments. For example, a store (establishment) owned by a company in one state may have different applicable labor laws than a store (establishment) owned by the same company in another state. The Department of Labor uses the term "establishment" to describe business locations visited by OSHA inspectors and to define retail establishments for purposes of the Fair Labor Standards Act (FLSA).
Establishments in Treaties
Interestingly, IRS Publication 597 describes a treaty between the U.S. and Canada relating to income taxes. The treaty sets the right for Canada to charge income tax on a business if it has a service establishment in Canada:
...if you, or your enterprise, provide services in Canada, you may be treated as providing them through a permanent establishment in Canada even if you do not have a fixed base in Canada from which you operate.