If you’re prepping to form an LLC, but you’re not sure what it means to be a “domestic” or “foreign” company, put that prep on hold and read this guide before you proceed.
After months of toying with the idea, you’ve decided to take the plunge and start a business, diving headfirst into the LLC ownership life.
As you prepare, keep in mind that where you form your LLC is important, as it dictates certain startup procedures. Someday your business might span coast to coast, but for now, it’s important to understand the differences between domestic and foreign LLCs.
A domestic LLC is one that’s formed in the same state as the company’s primary business location. For example, if you’re located in Colorado and you start an LLC as a means of opening a retail business in that state, that LLC is considered to be domestic.
You can’t start a foreign LLC without first establishing a domestic one. Then, you will form a foreign LLC when expanding your business into another state. A foreign LLC doesn’t mean you’re located outside the country. Rather, it denotes that your primary business is located in another state.
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds.
LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
There are domestic and foreign LLCs in the American business landscape. The term “domestic LLC” applies to any limited liability company operating in the same state where it was registered. An example of this would be an LLC formed in Florida and conducting business there.
Once you form your domestic LLC, you gain the option to expand your business to additional states using the foreign LLC structure. The foreign qualification process allows you to operate your business in multiple states without forming separate LLCs in each one. Instead, you can form one domestic LLC and use the foreign qualification process to expand it across all 50 states, if you wish.
Your domestic LLC formation process will revolve around one document: the Articles of Organization. Everything else branches off from this one important form. Be aware that not every state calls it the same thing. You might see it called the Certificate of Organization or Certificate of Formation. Just know that all three of these forms are essentially the same, with a similar purpose and structure.
There’s not a universal Articles of Organization form – each state has its own. But despite the potential differences in appearance, it will require that you provide:
Once you’ve finished the form, congratulations, because you’ve completed the most difficult part of the process! All that’s left is to submit it. Each state has different filing options and requirements, so it’s a good idea to familiarize yourself with your state’s specific processes.
Regardless of which state you’re in, there will be a filing fee ranging from anywhere between fifty to a few hundred dollars. It’s also wise to confirm your state’s filing preferences. Most states will allow you to submit the Articles of Organization by mail, in person, or online, but some require paper documents and others only accept digital submissions. Make sure you follow your state’s filing instructions to the letter or your documents might be rejected.
If this process sounds like something you’d rather not DIY, you have options. For example, some LLC owners will hire a business attorney to form their LLC. This route comes with the peace of mind that you’re receiving a high level of legal expertise. However, attorneys can charge significant fees for these services, so it can be prohibitively expensive, especially for startups on tight budgets.
Before you start slashing the budget to see where you might be able to fit a lawyer’s fees, take a look at online LLC formation services. Using a service can be a great middle-ground between hiring a lawyer and going it alone. You still get a professionally formed domestic LLC, but you also save hundreds of dollars, as formation service fees are much more cost-effective.
There you have it: the domestic LLC. Remember that no matter how eager you are to take your business nationwide, you must first form a domestic LLC before expanding into other states with foreign LLCs.
And remember, while in most states it’s not terribly difficult to draft and file your own formation documents, for many of our readers, it’s worth the money to hire an online LLC registration service. The added convenience and peace of mind are invaluable, and it’s still much less expensive than hiring a lawyer.
But follow the instructions here and we have no doubt that you’ll soon be basking in the glow of your LLC’s success.
The answer to this question lies in your personal preferences, but we can give some general pointers. An attorney will cost the most by a mile, but also provides expertise you won’t find with the other options. The DIY route is free of charge, but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.
Using an LLC service means your business will be formed by professionals who know what they’re doing, while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services our preferred option.
Using an online LLC service removes much of the hassle from the business formation process. With these services, all you need to do is provide them with the name, location, and industry your business operates in, along with some info about yourself and your registered agent.
The service then creates your articles of organization and files them with your state to create your new domestic LLC.
Absolutely. There are quite a few reputable companies offering LLC formation service these days, including the three best LLC services we discussed earlier.
In fact, while we certainly have our opinions about which ones offer the best pricing and features, every one of the incorporation services we discuss on this website is entirely legitimate and trustworthy.
In some ways, using an LLC service does protect your privacy, especially if you choose to also have that company serve as your registered agent.
This is due to the fact that, if you serve as your own registered agent, your personal address will often become part of the public record. Using a registered agent service not only provides the privacy of using the agent’s business address as your own, but it also significantly cuts down on junk mail.
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out our complete comparison guide between LLCs and corporations.
We think you should start a domestic LLC before you begin conducting business. While it is entirely legally acceptable to operate your business as a sole proprietorship or general partnership before forming an LLC, doing so subjects you to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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