There are two main classifications of LLCs: domestic and foreign. The two types are quite similar, but where they’re formed distinguishes them.
Whereas a domestic LLC is native to its state, a foreign LLC has been granted the authority to operate in a state that’s different from where it was formed. What makes this distinction a little bit more complicated is the fact that you cannot register a foreign LLC without first forming a domestic entity.
In this guide, we’ll cover the specifics of a domestic LLC, including how it’s formed, where it operates, and whether or not you need to obtain a certificate for other states. Let’s get started.
Rocket Tip: If you decide forming a domestic LLC is the right route for you, see our review of the best LLC formation services.
What Is a Domestic LLC?
The domestic LLC is the default form of a limited liability company — a business entity that combines the limited personal liability of a corporation with the flexibility of a sole proprietorship or general partnership.
The “domestic” part of the name simply means that the business operates in the same state where it was originally formed.
A domestic LLC is officially created by filing the articles of organization with your state’s Secretary of State office. The important thing to keep in mind is that you cannot register a foreign LLC in any state without first forming a domestic LLC.
Where Can a Domestic LLC Operate?
In short, a domestic LLC can only conduct business in the state it was formed in. However, there is more wiggle room with the term “conduct business” than you might expect.
Let’s say you operate a business in Nevada, and your business is registered as a domestic LLC in this state. If you start selling products from your website to customers in other states, this is still usually an acceptable business function for your domestic LLC, and you likely do not need to obtain a foreign qualification.
Where you’d start running into trouble is if you established a physical presence outside of your domestic state. For example, things like opening a retail store location in another state, opening a warehouse in another state, or even holding business meetings outside of your domestic state can get you in big trouble unless you register a foreign LLC.
I Have a Business Presence in Other States. What Do I Do?
If you have established a physical presence in a state other than your domestic state, you will need to obtain a foreign qualification in that state.
This typically means filing for a certificate of authority in your new state, which allows you to operate in that state as a foreign LLC. Thankfully, the process for acquiring a foreign qualification is usually quite simple, and requires less legwork than forming a new business entity.
Foreign LLCs generally have all the same rights as domestic LLCs do, as they’re able to enter into contracts, use the court system to sue debtors, etc. The most important thing to keep in mind about foreign LLCs is simply that you need to form one before you enter into any business activities in other states, beyond shipping a few products to customers.
If you only form a domestic LLC, you could face some harsh penalties for operating your business beyond state lines. Most states have stiff financial penalties for failing to establish a foreign LLC, and many of them will even allow entities you have contracts with to void those contracts.
Furthermore, you could be prevented from using the court system in that state, rendering you incapable of suing anyone who does harm to your business.
How Do I Form a Domestic LLC?
The process to form an LLC is rather simple, and we’ll give it a quick rundown in this space. (If you’d like more details, you can find them here).
First, you need to choose a name for your business. It must be available in your state — it cannot be the same as (or deemed to be too similar to) another company’s name. You can usually reserve your name to protect it until you’re ready to form your LLC.
You also need to appoint a registered agent for your business. They’ll accept service of process and other important government documents on your behalf. Whether you choose to serve as your own registered agent, hire a professional service to fill this role, or hire a registered agent service, you need to designate a registered agent before you can file your articles of organization.
After you’ve filed your articles of organization, you should also set up an operating agreement for your business. The agreement establishes how your business will be run, including the division of profits between members, how you’ll be taxed, how to add or remove members, and much more. It becomes the instruction manual for your LLC.
You‘ll also need to register for taxes, get any applicable business licenses, and obtain insurance as required by your state. Once your business is formed, you’ll also need to keep up with any ongoing maintenance requirements your state might have, which usually includes filing regular annual reports, at the very least.
The domestic LLC is the default form for a limited liability company, as the term “domestic” simply refers to the state in which the LLC was formed. Many businesses only ever need to form a domestic LLC, because they don’t pursue business activities outside that state to a degree where a foreign LLC would become necessary.
However, keep in mind that if you ever establish a physical presence for your business in another state — whether that means opening a retail store or wholesale facility, hosting regular business meetings in that state, etc. — the domestic LLC is no longer sufficient, and you will have to acquire a foreign qualification to remain compliant.
The difference between a domestic LLC and a foreign LLC isn’t particularly complex, you just need to know when your business needs one and when it needs the other.
Rocket Tip: As mentioned earlier, if you need help creating a domestic LLC, there are a lot of services that can help you. LegalZoom and ZenBusiness are both very popular options.