New entrepreneurs are often confused by the difference between a domestic limited liability company (LLC) and a foreign” LLC.
This article will explain what is meant when an LLC is referred to as domestic vs. foreign and how it affects the rights and obligations of the owner.
What is a domestic limited liability company?
A limited liability company (LLC) is “domestic” to the state in which it was formed (i.e., the home state). But it’s “foreign” to all other states where it plans to do business.
For example, an LLC formed in Nevada is “domestic” for Nevada purposes. However, to New York, it’s considered a “foreign” LLC.
The word “foreign” often misleads people into thinking it refers to a business structure formed in a different country. This is not the case. Foreign LLC only refers to an LLC formed in a state other than the subject state.
Essentially, every LLC is both a domestic LLC and a foreign LLC.
You’re simply putting the new state on notice that your LLC has begun to transact in that state. States are pleased to receive this notice because it means they can expect additional tax revenue from your small business in the form of an income tax or sales tax.
Is a domestic LLC a single-member LLC?
Whether an LLC has one or multiple members doesn’t affect its domestic or foreign LLC status. An LLC’s status as domestic or foreign is determined by reference to the state in which the LLC was formed.
Can a domestic LLC operate in another state?
Yes, but you need to understand the formalities of “doing business” in another state. Because this triggers the requirement to register in the new state as a foreign LLC.
Whether your LLC is “doing business” in another state depends on the facts and circumstances and the law of that state.
Sometimes it’s evident when you conduct business in another state. Your LLC has a physical presence there.
For example, if you operate a cleaning business in Oregon but decide to open a second location in California, your LLC is doing business in the neighboring state. And you’ll need to register as a foreign LLC.
However, in the digital age, it can be more challenging to determine your “foreign qualification.”
States used to focus on the extent of a business's physical presence within its borders to decide whether registration as a foreign LLC was necessary (i.e., office, storefront, employees, etc.).
But with so many booming online businesses, authorities are now refocusing on economic presence within their state.
For example, if a substantial portion of your revenue is generated by selling goods to customers in a particular state, you may be doing business in that state. This can create the so-called “economic nexus,” which prompts foreign LLC and sales tax registrations.
How to create a domestic LLC step-by-step
The process of creating a domestic LLC is straightforward. But it does differ slightly from state to state. So be sure to check with your state for particular filing requirements.
Below is a general outline of the steps involved in forming a domestic LLC.
1. Get a business name. First, choose a company name for your legal entity. States have several specific naming requirements LLCs must meet. The primary purpose of these rules is to avoid confusing the public.
You should also check if your selected name is available on each Secretary of State website. Most states allow you to reserve the name for a fee if it’s available.
2. Appoint a registered agent. Each state requires a new business to appoint a registered agent on behalf of the LLC. The purpose of a registered agent is to receive important mail and notice of lawsuits filed against the LLC.
A registered agent is usually a person over 18 years old or a business entity with an address in the state. Some company formation services also provide such services.
3. File articles of organization. Each state has an LLC formation document that must be filed for incorporation. In some states, this document is called Articles of Organization. In others — Certificate of Formation or Certificate of Organization.
This document contains basic information about the LLC, including the name and registered agent information. There’s a filing fee associated with the document that varies from state to state.
4. Prepare an operating agreement. The operating agreement of an LLC is similar to the by-laws of a corporation. It’s a contractual document that establishes the rights and obligations of the members of the LLC (even if there is only one).
Typically an operating agreement contains provisions regarding the identity of the members, capital contributions required, distributions from the LLC, allocations of income and expenses among the members, voting rights, reporting responsibilities, and dissolution procedures.
An operating agreement may or may not be required by a particular state. Where an operating agreement is not required or is not required upon formation of the LLC, the state LLC laws will govern the operation of the LLC.
If you do have an operating agreement, it’s a private document that you should keep with the books and records of the LLC. It doesn’t have to be filed with the state.
5. Open a business bank account. As soon as your LLC is formed, you should open a bank account for the LLC to receive revenue and pay expenses. To do so, you’ll need an employer identification number (“EIN”) from the IRS. You can easily apply for an EIN online.
6. Register for state and federal tax purposes. Each state has specific requirements to register with various tax authorities within the state.
Most common are sales and use taxes. Also, each year an LLC has to file an annual report with the state and pay an annual fee (sometimes referred to as a minimum tax) to maintain good standing.
7. Obtain necessary business licenses. Depending on the type of business you do, you may have to get certain LLC business licenses in the state in which you operate. Cities and counties may also have licensing requirements.
For example, if you’re a real estate broker, salon, law office, etc., you must ensure you have the proper licensing to carry on that business. Each license usually has a filing fee associated with it.
- A domestic LLC is formed in the state where it’s doing business. It’s a foreign LLC to all other states except the one in which it was formed.
- If your LLC is doing business in a state other than the one in which it was formed, then it must register as a foreign LLC in that state.
- To form an LLC in your home state, choose a name, appoint a registered agent, and file articles of organization with local authorities.
- Registering an LLC as a foreign LLC in another state is a similar process. The LLC should verify that the business name is available in that state, appoint a local registered agent and file the required documents registering the LLC as a foreign LLC with the new state.
- Failure to register as a foreign LLC can result in taxes, penalties, interest, legal costs, and inability to access the courts in the foreign state.
This material is provided for informational purposes only. The provision of this material does not create an attorney-client relationship between Paul Donovan and/or Donovan Legal PLLC and the reader and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel. Do not take action in reliance on the contents of this material without seeking the advice of counsel.
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