How a Business's Establishment Effects Taxes and Laws

You've heard the term "establishment" in reference to places like your local bar—a "drinking establishment"—or maybe a high-priced boutique. An establishment is an important concept in business because it determines things such as taxes and applicable laws. It does not always and necessarily relate to retail entities, however. Institutional land use is considered an establishment as well, provided that the institution is profit-driven.

What Is an Establishment?

An establishment is a business location for a company that is engaged in a single activity. It's a place where the business is conducted with the objective of getting paid for selling goods or services, even if no specific sales actually take place at that location.

An establishment can be:

• A factory where goods are made
• An assembly facility where goods are put together, such as an auto assembly plant
• A warehouse where goods are stored before they're shipped or sold
• A retail store where goods are sold
• An office where services are performed for compensation

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 three of these locations.

What About Home Businesses?

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 are physically distinct from any other facility operated by a business.

Establishments and Taxes

Several taxes rely on the principle of business establishments. If a business has an establishment or place of business in a state, that 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 taxes.

Establishments in Business Regulation

If your business has multiple locations in different states, you have establishments in those states, and you are doing business in those states. If you have an LLC or a corporation in one state and branches in other states, you might have to have a foreign (out of state) LLC or corporation in another state and pay taxes and other fees in there.

Establishments in Employment Law

The term "establishment" is important in employment law and labor relations because these laws apply to employees at business locations. For example, a store establishment owned by a company in one state might have different applicable labor laws than a store 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

IRS Publication 597 describes a treaty between the U.S. and Canada relating to income taxes: 

...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.

The treaty sets the right for Canada to charge income tax to a business if it has a service establishment in Canada.