What is a Domestic LLC?

If you registered your Limited Liability Company in the state where you live and you are conducting most of your business in this state, your company is known as a Domestic LLC. It is licensed by the state to do business there and expected to uphold all the laws and regulations imposed by the state.

While the definition of a Domestic LLC is straightforward, it’s important to understand there are variations on this type of business structure, such as a single-member or multi-member LLC or a member-managed or manager-managed LLC. And, depending on its purpose and how it’s registered, a Domestic LLC also could be considered a Professional LLC, Low-profit LLC, or Series LLC.

Before we get into the various types of Domestic LLCs, however, let’s review some LLC basics and clarify the difference between a Domestic LLC and a Foreign LLC.

An LLC Refresher

A Limited Liability Company is a popular type of business entity for some very good reasons. As you probably know, one of the biggest advantages of this type of business entity is the liability protection it offers for its owner or owners, who are called members.

Unlike a Sole Proprietorship or General Partnership, an LLC is a separate legal entity from its owners. That separates the assets of the business from the personal assets of the owners and protects the owners if the LLC is sued or can’t pay its debts. That, of course, is a huge advantage for owners, and one of the most compelling reasons for forming an LLC.

Another advantage of an LLC is the flexibility in how it is taxed. As the owner of an LLC, you can decide if you want to be taxed as a Sole Proprietorship, meaning that all profits, losses, and tax responsibilities are passed through to your personal tax returns and taxed at your individual rate. Or you can elect to be taxed as a Corporation, which in certain instances may lessen your tax burden.

Tax options for an LLC are beyond the scope of this article, so be sure to do some additional reading. I’d also advise you to consult an accountant, tax attorney, or other qualified tax advisor, as the tax treatment you choose can significantly affect the profitability of your business.

With an LLC, you’re not limited to how many members you can have. That makes it easy to expand the business and take advantage of the financial contributions of new members. You’re more likely as an LLC to be able to attract investors or procure loans, and LLC status also increases business credibility among prospective customers and suppliers.

Domestic vs. Foreign LLC

Just to be clear, domestic and foreign in this context refer to the state in which a business is created, not another country. As you’ve read, if you register your company in your home state and conduct business there, it’s considered a Domestic LLC.

If for some reason you register the company in one state but conduct business in another, however, the company will be considered a Foreign LLC in the state where you’re doing business. So, if you register your business in Arkansas but all your business is conducted in Texas, you’ll need to register as a Foreign LLC in Texas, a process known as foreign qualification.

Some people register a company in a state other than where they live and plan to conduct business because they believe the other state is business-friendly in terms of taxes or legal and privacy protections. Certain states, including Delaware, Nevada, and Wyoming, have this reputation.

Another reason you’d have to register as a Foreign LLC is if you expand from your home state to conduct business in another. What it means to conduct business varies from state to state, so you’ll need to do some research to determine whether you need to register.

Generally, doing business in another state doesn’t mean simply selling your products or services to customers there. But if you operate a store, office, manufacturing facility, or distribution site, you’ll most likely need to register as a Foreign LLC. You’d also probably need to register if you open a bank account in a different state, own business property there, or use salespeople or distributors to sell your products or services.

Once you’ve registered your business as a Foreign LLC, you’ll need to comply with all the laws and regulations of each applicable state. These regulations vary significantly from state to state, meaning you’ll need to be diligent about researching various rules and timelines.

Most small business owners won’t need to worry about foreign qualification, as they are registered and operate in their home state. If you plan to expand your company into other states, however, you will need to register in those states as a Foreign LLC.

Different Types of Domestic LLCs

As mentioned, there are different types of Domestic LLCs. If you own and operate the business on your own, you have a single-member LLC. If you have one or more partners, your business is considered a multi-member LLC.

Regardless of how many members, your LLC must file formation paperwork, normally known as Articles of Organization with the state. You’ll also need to submit annual reports and comply with other regulations to remain in good standing with the state.

If you’re the owner of a single-member LLC, you’re automatically considered the manager of the business. If an LLC has multiple members who all participate in running the company, it’s called a member-managed LLC. If those members decide they’d rather have someone outside of the company run the business and they hire a manager, however, their business is now called a manager-managed LLC.

There also are different varieties of Domestic LLCs, separate from the number of members or how they are managed, including:

• Professional LLC – This is a business for professionals such as doctors, lawyers, or engineers. Some states, but not all, require professionals to operate within this structure. Known as a PLLP, it provides the same flexibility and protections of a standard LLC. If a professional is found liable for personal malpractice, however, the PLLC does not protect their personal assets.
• Series LLC – This type of LLC consists of an umbrella, or parent company, with one or more sub-LLCs referred to as cells. Each cell operates as a separate business. A Series LLC is popular among real estate investors and other companies that operate multiple lines of business.
• Low-profit LLC – This is a relatively new type of LLC, and currently only available in a dozen or so states. They’re gaining in popularity, however, and worth a look. A Low-profit LLC is required to provide a product or service that’s beneficial to the public. Examples include affordable housing developers, arts centers, certain newspapers, some types of investment funds, and farmers’ markets. This type of LLC is a for-profit business and not tax-exempt. Making a profit, however, must be a secondary goal to providing a public service.

There also are some relatively rare types of LLCs, such as an anonymous LLC or a restricted LLC, but they’re permitted in only a few states and are not widely prescribed to. One thing to note is that these variations are not unique to Domestic LLCs, but also apply to Foreign LLCs.

A Final Word

Starting and running any type of business necessitates understanding what is required to get it registered and keep it operating in compliance with all applicable laws and regulations. If you have a Domestic LLC, you’ll need to follow all the laws of your state. If your business expands and you must foreign quality in other states, be aware that laws vary significantly from state to state and be sure to understand what is required in every jurisdiction.

If you feel uncertain about regulations or how to proceed, do not hesitate to contact a qualified professional for help.