What Is a Domestic Limited Liability Company?

A domestic limited liability company (LLC) is a business entity that operates in the state where it was formed. It is a type of for-profit business structure that combines the benefits of corporations and partnerships into a single business form. It's a favorable business entity because it offers limited liability protection, tax benefits, and management flexibility.

If you're embarking on your entrepreneurial journey, it's important to understand the ins and outs of limited liability companies and how they compare to foreign LLCs.

Domestic vs. foreign LLCs

Let's take a look at domestic vs. foreign LLCs. While a domestic LLC is an entity that conducts business in the state where it was established, a foreign LLC refers to one that has business activities in other states aside from the one where it was originally formed.

For example, a domestic LLC formed in California can only do business in California. However, if that domestic LLC wants to expand its business to Nevada, then it can apply to become a foreign LLC in Nevada and legally run its business beyond California's borders.

Pros and cons of domestic vs. foreign LLCs

There are some advantages and disadvantages to consider when deciding between a domestic and foreign limited liability company.

With a domestic LLC, you only need to comply with one state's rules and regulations, meaning less paperwork and fewer legal obligations. This can also make it more affordable to maintain a domestic LLC because you only have to pay the filing fees for one state. However, sticking with this kind of limited liability company can be limiting since you can't expand to other states. You miss out on business opportunities in other regions and can't take advantage of potentially more favorable business laws in other states.

Now, let's review some pros and cons of expanding your business operations with a foreign LLC. Because you must register your LLC with each state, you must file out additional paperwork and pay each state's filing fees. It also means you must comply with each state's business regulations, which could become an administrative burden. However, as long as you're compliant, you get the advantage of conducting business in other areas and choosing states with more business-friendly regulations and tax benefits.

Can domestic LLCs operate in other states?

A domestic limited liability company is not limited to operating in the same state where it was formed. You can conduct business in other states without having to form a new business entity. You can also operate foreign LLCs in multiple states. For example, that California domestic LLC can become a foreign LLC in Nevada, along with Oregon, Utah, and New Mexico.

Owners of foreign LLCs must typically register as foreign entities in each state where they conduct business. This process is called foreign qualification and involves submitting business formation documents with the Secretary of State's office in each respective state. If you'd like help navigating the foreign qualification process, LegalZoom can help file your paperwork.

Now, just as you filed articles of organization to form your domestic LLC, you must file the foreign LLC equivalent, which is often called the application for certificate of authority or application for registration as a foreign LLC. You must also pay the filing fee, which will vary depending on the state, but the average foreign LLC filing fee is $186. Typically, there is an option for in-person, mail-in, or online filing.

Once the respective state approves your business formation documents, your business will officially be a legal entity in that state. Your foreign LLC must follow each state's regulations and tax obligations. Failure to comply with these obligations can result in additional fees and financial penalties.

How to choose a state for your LLC

The business owner can choose which state to register in, which would make that company a domestic LLC within that particular state. For many small business owners, the best choice is the state where the business has most of its operations. For example, a business that has its sole facility and all its customers in California should probably form its business in California and thus become a domestic entity in that state.

That said, there may be some advantages to forming in a different state or registering as a foreign LLC. There are many factors to consider when deciding which state is best for your business, such as the state's regulations regarding business taxes, legal protections, state-based fees, registered agents, and incentives.​

Business taxes

Most LLCs use a pass-through taxation structure, which means the business doesn't pay income taxes. Instead, the LLC members pay their share of the LLC's income taxes on their personal income tax returns.

However, some states offer more favorable tax implications than others. For instance, Alaska has no income taxes or sales taxes. In comparison, California charges an annual franchise tax of at least $800. Therefore, some small business owners may choose a specific state for tax purposes.

Legal protections

Legal liability protection is one of the advantages of forming an LLC. Because your LLC is a separate entity, you can keep your personal assets separate from your business assets.

It's important to note that the extent of that liability protection may vary from one state to the next. For instance, Nevada has some of the strongest asset protection laws in the country, making it an attractive option to some.

State-based fees

All states require LLCs to pay filing fees when forming their business entities. These fees vary by state, and the cost may sway your decision. For example, Kentucky charges one of the lowest fees, $40, while Massachusetts charges one of the highest fees, $500.

Furthermore, some states require domestic limited liability companies to pay annual report fees or registration fees. Massachusetts charges LLCs a $125 fee to file annual reports, and Virginia charges a $50 annual registration fee. Meanwhile, states like South Carolina, Ohio, and Texas don't have any annual payment requirements.

Registered agents

Every state requires you to appoint your own registered agent or hire registered agent services. However, each state can set its own registered agent criteria. What's more, you may need a registered agent for every state in which you register your business.

Incentives

Some states may have incentive programs or laws that could benefit your particular business. For instance, if you're starting an eco-friendly LLC, you may want to select a state that offers incentives or credits to green small businesses. Or, if you're establishing a tech company, you might choose a state that has passed technology laws that support your business endeavors.

FAQs 

Can a domestic LLC have multiple members?

Yes, a domestic LLC can have multiple members. This is known as a multiple-member LLC.

In contrast, if it's a one-member managed LLC, then it's called a single-member LLC.

Can you change the state in which your LLC is registered?

Yes, there are several ways to transfer your LLC to another state. For instance, you can go through foreign qualification to register your LLC in another state or set up a domesticated LLC, which involves filing articles of domestication in the new state and dissolving the business entity in the former state.

Does a domestic LLC need a registered agent?

Yes, all domestic limited liability companies need registered agents. Your registered agent must be available during normal business hours and have a physical address in the state in which you're forming your LLC.

How do I form a domestic LLC?

There are several steps involved in establishing a domestic limited liability company.

To form your LLC, you must explore name availability in your state, select an appropriate business name, appoint a registered agent, file articles of organization, acquire business licenses and permits, and apply for an employer identification number for tax purposes. We also recommend drafting an operating agreement, obtaining a certificate of good standing, and opening a business bank account to separate your business assets from your personal assets.

LegalZoom offers LLC formation services that make establishing your business a breeze.

Should I establish a domestic or foreign LLC?

It depends on various factors, such as what your business does and where it operates. If your business solely operates in one state, then the easiest option is to establish a domestic one. However, if you'd like to conduct business in multiple states and take advantage of different state incentives, then a foreign LLC may be the better choice for you.