What Is A Domestic LLC?
With all of the information about forming a business entity, there can be some confusion knowing the difference between a domestic LLC and a foreign LLC.
Here, we will define the differences between a domestic LLC and a foreign LLC and what steps are needed to set up an LLC.
What is a domestic LLC?
A domestic Limited Liability Company (LLC) isn’t a special type of LLC, it refers to what may be considered a “general” LLC. When you register a new LLC in your home state, it is not going to be commonly called as such, but it is a domestic LLC.
The reason for the classification of a domestic LLC is because of what’s called a foreign LLC, which we will talk about more later.
Related: What is an LLC?
What is a foreign LLC?
A foreign LLC (also referred to as foreign qualification) is a domestic LLC that is doing business in a state other than where it was initially registered. A foreign LLC isn’t a specially created business entity, but instead it refers to a domestic LLC that wants to have a physical presence and operate in another state. In order to legally physically operate in another state, a filing will need to be made in the new state to receive authorization to operate as a foreign LLC.
The definition of physically doing business in another state will vary slightly, but it generally means the LLC would be opening a retail store, operating a warehouse, hiring an employee, etc. in a state that is different from the one it is registered and operates in.
For example, let’s say your LLC that sells hats was formed and operates in California. This is a domestic LLC. Business is going well and you now need more space to manufacture and warehouse the hats, and you found a great facility in Illinois. In order to legally operate in Illinois, you would need to file Form LLC-45.5 Application for Admission to Transact Business. This California LLC is recognized as a foreign LLC to the state of Illinois since it is an LLC that is registered in California. The form makes it legal to operate the California LLC in Illinois.
Every state has a form or online registration that allows an out-of-state LLC to legally operate in their state and retain the LLC’s liability protections.
Related: What is a foreign LLC?
How do you form a domestic LLC?
The process of forming a domestic LLC is pretty simple, though there are entity formation companies that can do the filing with the state.
First, you need to choose a name for your LLC and make sure it is available in the state you want to form your LLC. Each state requires a new LLC to register a unique business name.
Additionally, a company name for an LLC will need to include an approved designator. These designators typically include Limited Liability Company or the abbreviation LLC, L.L.C.
Related: How to search LLC name availability
You will also need to choose a registered agent who will be responsible for receiving important legal documents (referred to as service of process) on behalf of the LLC. The registered agent must have a physical registered office address in the state of formation and generally be available during business hours to accept documents.
Related: Who can serve as a registered agent?
Then, you will need to file Articles of Organization (called the Certificate of Formation or Certificate of Organization in some states) with the state (typically called the Secretary of State’s office) and pay the filing fee. The Articles of Organization is the official paperwork that asks for basic information about your LLC, such as the name and address of the members, contact information for the registered agent, and the purpose of the LLC.
Related: How to form an LLC in each state
After the Articles of Organization are filed and approved, you may want to create an Operating Agreement. The Operating Agreement is an internal document that outlines the ownership and management structure of the LLC, as well as the rights and responsibilities of the members. It is not required in every state, but it is a good idea to have one, even for a single-member LLC.
Related: How to create an Operating Agreement
Once the LLC is formed, there are additional registrations that may be needed for the business, such as an Employer Identification Number (EIN) with the Internal Revenue Service (IRS), business licenses, sales tax permits, etc.
What happens to a business if it doesn’t register as a foreign LLC, but operates in another state?
There can be some severe penalties for operating across state lines without registration. Most states levy fines, fees, and interest for failing to establish a foreign LLC. In addition to financial considerations, there may also be diminished liability protections for the owners, not to mention the inability to file lawsuits in the states where the unauthorized LLC was operating.