Foreign vs. Domestic LLCs

Need to Understand Foreign vs. Domestic LLCs? We Have You Covered.

A limited liability company (LLC) is the first step to be considered when you are looking to form and protect your small business and assets. Whether you want to form a domestic limited liability company or a foreign LLC, is the next question you may want to answer depending on how you want to conduct your business.

No need to worry, we’ve got you covered on everything involving the difference between foreign vs. domestic LLCs. People often get easily confused about these LLC types and which is the correct one to establish for their business. Let’s eliminate the confusion and bring you clarity.

What Is a Domestic LLC?

A domestic LLC is a business entity that is set up and conducts business in the state where it was formed, often referred to as the home state. The “domestic” designation means that business transactions happen within the “home” state. The “LCC” stands for “limited liability corporation,” which helps protect, or limit, loss to the owner’s personal assets by keeping them separate from the assets of the business. This business type is also subject to laws and taxation of the state where it was formed. If you form your LLC in a particular state and also conduct all of your business in the same state, you have a domestic LLC.

Forming a Domestic LLC

To form a domestic LLC, these are the general steps required:

1. Choose a name for your LLC and make sure that it is not already registered to another business in your state by conducting a name search.

2. Find a Registered Agent within your state. Your Registered Agent will receive and process legal papers and correspondence related to your business on your behalf.

3. File your formation documents with your Secretary of State. These formation documents will include your Articles of Organization or Articles of Incorporation.

4. Check the requirements of your state and see if you will need to publish a notice in your local paper announcing the formation of your LLC.

5. Pay your registration fee, which will vary depending on the state.

6. Create an Operating Agreement, which establishes the rules and guidelines on how your LLC will be governed.

7. Get an Employer Identification Number (EIN). Having an EIN is an important part of the process in getting your business running. It will also allow you to open up a bank account for your LLC and will also allow the state to track your business taxes.

What Is a Foreign LLC?

A foreign LLC is created when you’ve formed your LLC in one state (a domestic LLC) and want to expand to do business within another state. “Doing business” in another state can mean that you want to have a physical presence in that state, you want to have employees in the state, you want to sell directly from the state or create a significant number of contracts, you want to do banking in the state and more.

Often times people think the term “foreign” means that your LLC is located internationally in a different country. However, it simply means that your business is foreign to another state outside of your state of formation. For example, if you register your LLC in Colorado and do business there, you have a domestic LLC. If you want to also do business in Texas, your Colorado LLC will be considered a foreign LLC in Texas.

When to Form a Foreign LLC

If you’re forming your LLC in your home state but want to expand your operations and conduct business in a different state as well, you’ll need to make sure that you file for a Foreign Qualification. Being registered as a foreign LLC will typically allow you to:

•             Establish a retail store or office where you can sell your product or service in another state.

•             Staff up and hire full-time employees.

•             Open up a business bank account.

•             Transact business and hold meetings in another state.

If you plan on registering as a foreign LLC in another state, you will need to file for a Foreign Qualification. Requirements for forming a foreign LLC in another state may vary and depend on the state’s specific laws, but the general steps for filing a Foreign Qualification are:

1. Perform a business name search to see if your current business name is already in use in the state you’re expanding to. If it is, you’ll need to use a fictitious name instead.

2. Assign a Registered Agent that is based in that state. A Registered Agent will act on your behalf and file and manage all the necessary documentation.

3. Get a Certificate of Good Standing, also called a Certificate of Authority, from your home state. This shows that you have met all requirements for your domestic LLC, such as paying taxes and filing annual reports.

4. File your Foreign Qualification form, which typically will ask for your business name, address within the state, address of where your domestic LLC is located, name and address of your Registered Agent, names of your LLC members and more. 

You probably will not need to form a foreign LLC in case you have a one-time client or business transaction in another state. Having a foreign LLC is generally for businesses looking to expand and grow outside of their domestic territory and have a continuous presence in a “foreign” state. Failure to register as a foreign LLC when planning on working in another state and conducting long-term business will result in fines and penalties.