What’s the Difference between a Domestic LLC and a Foreign LLC?
When forming an LLC and filing the Articles of Organization (in some states referred to as the Articles of Formation or Certificate of Organization) a common question that comes up is what’s the difference between a Domestic LLC and Foreign LLC?
What is a Foreign LLC?
A common misconception with the term Foreign Limited Liability Company (LLC) is that it is a company in a different country, when in fact it is U.S. based. “Foreign” in this case means there is an LLC in one state that intends to transact business in a different state. Regardless of the business entity, in order to be physically present and do business in another state, a filing will need to be done in order to get approval to legally operate.
What constitutes doing business in another state?
Some common things that are considered as “doing business” in another state may include:
– Owning real estate for business use in another state.
– Employees working for the business in another state. This can also include contract workers in some states.
– A distributor, sales agent, or a manufacturer’s representative taking sales orders in other states. An LLC transacting business through online sales, drop-shipping, or having third-party fulfillment doesn’t typically require filing as a Foreign LLC. There will likely be tax registrations but not a registration with the Secretary of State.
– A physical location such as an office, distribution center, manufacturing facility, warehouse, or retail store in another state.
– While not common, in some situations, just having a bank account or mailing address in another state can be considered doing business by some states.
For example, if you have an LLC in Florida where the principal office is located, and then operate a warehouse in California, you would need to register as a Foreign LLC with the California Secretary of State. This goes for each state where the LLC is “doing business”. Failure to register in each state could result in fines and penalties from the “foreign” state.
Related: What is a foreign LLC?
How to register as a Foreign LLC
Every state has different filing requirements for when an LLC has to register as a foreign entity. Be sure to check with the Secretary of State (or similar agency) first before filing.
Registering as a Foreign LLC is like registering as an LLC in your home state. Instead of filing the Articles of Organization (or formation paperwork), the LLC would file as a foreign entity, often with the Secretary of State, and pay the filing fee.
Obtaining foreign qualification often requires much of the same information as a Domestic LLC. Some of this information could include:
- LLC name
- Domestic identification number
- Business activities
- Name and street address of the registered office address
- Contact information for the registered agent
- Contact information of the members and managers
- Type of management (member-managed or manager-managed)
- The business purpose of the LLC
- Certified copy of a Certificate of Good Standing and/or Certificate of Existence from the home state of formation
- Foreign Registration Statement
The filing fees for a Foreign Limited Liability Company will vary from state to state but are usually the same or higher than the domestic Limited Liability Company.
In addition to the registration fee, the Foreign LLC will often have annual reporting requirements, and pay an annual fee and franchise tax. A franchise tax is not a tax on a franchise like McDonald’s but is a tax for a business entity (not just LLCs) for the privilege of doing business in that state.
What is a Domestic LLC?
A Domestic LLC is a Limited Liability Company that is formed and operates in the state where it will be doing business. The Domestic LLC is what most people are forming when starting a business. Not every state uses the LLC designation but is the standard filing.
Before there can be a Foreign LLC, there must first be a Domestic LLC.
Related: What is a domestic LLC?
How to registering a Domestic LLC
Domestic LLC registration takes place by filing the Articles of Organization (referred to as the Articles of Formation or Certificate of Organization in some states) with the Secretary of State (or similar agency depending on the state). There must be a registered agent (who is typically an LLC member) that has a physical address in the state to receive official notices.
Related: How to form an LLC
The filing fees for an LLC will vary from state to state. See our page on LLC fees by state.
To sum things up, before you form a foreign LLC, the Domestic LLC has to first be established. While you don’t have to form an LLC in the state you reside in, it’s usually best to register there. There are exceptions, so talk to an attorney or accounting professional before considering forming out-of-state. Depending on the state the primary company has formed, some language in the operating agreement may be needed to allow the LLC to establish a Foreign Limited Liability Company.
Next, if you plan to substantially transact business in another state, check with that state’s Secretary of State office, a formation company, or attorney to see if that activity is enough to trigger the filing requirements of that state. The state requirements and requirements to register as a Foreign LLC will vary by state. Some states such as New Mexico do not require foreign registration for a one-time transaction.