Domestic vs. Foreign Limited Liability Company

What is an LLC?

A limited liability company, also known as an LLC, is a business entity that protects the owner(s) from personal responsibility for its debts or liabilities. It also provides the advantages of pass-through taxation. 

For more information on what an LLC is and how to form one, please visit our Limited Liability Company (LLC) page. You can also figure out whether a Single-Member or Multi-Member LLC is better for you. 

When deciding to start and form your LLC, you may find there is more to it other than choosing between a single-member LLC or multi-member LLC. You will find there is a difference between a domestic and foreign LLC depending on where you do business. A foreign LLC, contrary to how it sounds, does not necessarily mean a business that operates or originates from a different country - although it can.

What is a Domestic LLC?

Domestic LLCs operate or do business in the state in which they're formed. If the LLC decides to do business in other states as well, it will still be considered a domestic LLC in its home state. There is no specific designation as a domestic LLC; however, if an LLC is registered and operates in one state, it is considered a domestic LLC.

What is a Foreign LLC?

A foreign LLC is a company formed in one state but does business in other states or countries than the one in which it was formed. In order to do business in a different state, you may need to “foreign qualify” your business in that state, making it a foreign LLC. 

This often occurs when one state might have business-specific or tax-friendly laws or rules that make it better, so business owners will form in one state but the LLC still wants or needs to do business in another. However, in every state the LLC does business, it must register in that state, making it subject to the laws of that state. 

For example, if an LLC is formed and operates in Florida, it is considered a domestic LLC in the state of Florida. If it decides to expand to Georgia and Alabama, it will be considered a foreign LLC in Georgia and Alabama but still a domestic LLC in Florida. This distinction between domestic vs foreign LLC is for tax purposes and is a separate classification from the LLC’s set up as single or multi-member. 

How do I Register as a Foreign LLC?

The process to begin starts with filing a Certificate of Authority with the state you need to form a foreign LLC in. Each state can refer to this by different names so it is a good idea to research exactly what form you will be required to complete. States may also require additional documentation for this filing, such as a Certificate of Good Standing from the state where your business is formed or incorporated. 

As with most filings, each state will have its own filing requirements and fees associated with this. Most states fall into the current range of $100 to $300 to file this qualification.

An important thing to note is there are penalties if you do not file a foreign qualification for your business. These include:

  • Fines
  • Losing the ability to file lawsuits in the state(s) where you needed a foreign qualification
  • Back taxes
  • Interest can be applied on top of your filing fees and taxes

If you have any questions about whether a foreign qualification is needed, it is suggested you speak with an attorney to help you make that determination. 

What does “Doing Business” Mean?

The words “doing business” can seem vague, so we have provided a few examples of what it means below.

  • Having a business bank account in the state
  • Selling product/services through a party tied to the LLC (a distributor or agent) 
  • Owning real estate in the state 
  • Having a physical office, manufacturing/distribution facility, or store in the state
  • Holding meetings in the state
  • Transacting business in the state

Remember, as mentioned above, this term can be unclear so this may not be a complete list as state statutes, along with court decisions, have their own guidelines they use when they consider “doing business”.

Remember, “Foreign” May Have Different Meanings

The term “foreign” can have different meanings depending on who is defining it. For example, when it comes to tax purposes, according to the Internal Revenue Service (IRS), the terms “domestic” and “foreign” have other meanings than what we've just described. 

When it comes to taxes, the IRS states that a domestic LLC or corporation is an entity that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. 

Using the same example from above, if an LLC is formed and operates in Florida, it is a domestic entity. If the LLC decides to branch out and do business in Georgia and Alabama, it will still be considered a domestic entity to the IRS in this context.

A foreign entity is a business that was formed or organized outside of the United States or under a foreign country’s laws.