Domestic LLC vs. foreign LLC: what you need to know

At first, the difference between a domestic LLC and a foreign LLC can be confusing. In short, your LLC is domestic in the state where you form it and foreign in any other state where you register to do business. Both are among the main types of LLC you’ll come across.

You might be wondering if foreign qualification rules apply to your business. Which states consider you “doing business in” them? And if you don’t need to register as a foreign LLC in another state, could you still owe sales tax there because of nexus?

Each state has its own rules, but many of them are similar. When you know what they are, it takes the guesswork out of knowing if and when you must register your LLC in another state.

Domestic vs. foreign LLC at a glance

Item	Domestic LLC	Foreign LLC
What it is	Your LLC in the state where it was formed	The same LLC, registered in another state where it does business
Filing	Articles of organization (called a certificate of formation or organization in some states)	Foreign registration, often called an application for authority or certificate of authority
Typical extra documents	None	Certificate of good standing from your home state
Registered agent	Required in the home state	Required in each state where you register
Ongoing filings	Home state annual report and fees, where required	That state’s annual report and fees, on top of the home state’s
Federal tax status	Domestic for IRS purposes	Still domestic for IRS purposes if formed in the U.S.

What is a domestic LLC?

LLC stands for a limited liability company; it’s a business entity you create by filing articles of organization with your Secretary of State. Registering an LLC helps protect your assets in cases of litigation and debt by separating them from those of the business.

A domestic LLC is an LLC in the state where it was formed, also known as its home state. Your LLC stays domestic in its home state even if it later does business in other states.

Operating within your state

If your LLC only does business within your home state and has no physical presence in another, you only need to deal with your home state’s rules.

For example, suppose you live and form an LLC in Florida and open a coffee shop in your home state only. In that case, your business is a domestic LLC operating within your state.

How to set up a domestic LLC

Each state has its own rules and regulations for setting up a domestic LLC, but most require you to take the following steps.

1. Decide which state to form in, usually the state where you live and run the business.
2. Choose a business name for your LLC (you can’t use a name already registered within your state, and you should avoid names that infringe a trademark).
3. Designate a registered agent with a physical address within your state.
4. File your articles of organization with your Secretary of State.
5. Pay your state filing fee (costs vary from state to state).
6. Publish a notice of LLC formation in a local paper (only a few states, such as New York, Arizona and Nebraska, require this).
7. Apply for and get your Employer Identification Number (EIN).
8. Create an operating agreement (required in a few states and advisable everywhere).

When you create a domestic LLC, you’re subject to all laws and taxation relative to your state. As each state has different regulations for licenses, permits, and taxes, check with your Secretary of State’s office and the Small Business Administration before you trade.

What is a foreign LLC?

A foreign LLC is an LLC registered to do business in a state other than its home (domestic) state. “Foreign” here means out of state, not out of the country.

States require you to register with them as a foreign LLC to meet their rules and requirements, comply with business standards, and collect and pay taxes.

While you’ll only file articles of organization in one state, you can file a foreign LLC registration in several. Each state charges its own fee, and most ask for a recent certificate of good standing from your home state. The foreign LLC guide lists each state’s fees.

Expansion or doing business in another state

When considering expansion or doing business in another state, you need to know the implications of registering as a foreign LLC, the process, and the business benefits.

You must also ensure you’re legally trading and have adequate protection to avoid any risk of damage to your brand reputation and personal finances.

But first, do you need to register?

Do you need to register?

You determine whether you must apply for foreign LLC qualification by confirming that your business activities qualify as “doing business in” another state.

There are many factors to consider. And as each state you do business in has its own rules, you need to check with the relevant Secretary of State’s office to confirm which steps you must take.

However, the following questions apply to most states and can help you determine if you are “doing business in” another state and need to register.

What does “doing business in” mean?

Doing business means engaging in regular business activities in another state as part of your everyday business routine.

You might need to register as a foreign LLC if you answer yes to one or more of the following questions.

1. Do you employ one or more people in another state?
2. Does your business have an office, store, warehouse, or distribution center in another state?
3. Do you regularly meet clients or perform services in person in another state?
4. Does your business own or lease property in another state?

There are variations in state rules that determine acceptable activities. Most states list activities that don’t count on their own, such as holding a bank account, one-off transactions, and selling to customers across state lines while running your business from your home state.

However, those sales could still create sales tax nexus.

What happens if you don’t register?

Penalties vary by state. They commonly include fines, back fees and taxes for the years you operated without registering, and losing the right to sue in that state’s courts until you register. Your contracts usually stay valid, but the fix costs more than registering on time.

What’s sales tax nexus?

Nexus is a connection to a state that obligates you to collect that state’s sales tax from buyers and pay it to the state.

The circumstances that create sales tax nexus vary from state to state, and the rules change over time.

One constant that triggers sales tax nexus is a physical business presence in a state, such as an office, store, inventory, or employee. E-commerce has made nexus compliance more complicated, especially for sellers who store inventory in third-party warehouses.

For example, if you register an LLC in Florida, sell online, and store products in a warehouse in another state with a sales tax, you might have to collect and pay sales tax on products sold to customers in that state.

You could also owe sales tax without a physical presence once your sales into a state pass its economic nexus threshold. The U.S. Supreme Court allowed these thresholds in South Dakota v. Wayfair (2018). Many states use $100,000 in annual sales, some also count the number of transactions, and a few use higher amounts.

How to address tax nexus

First, establish if the state has a sales tax, then see if its nexus threshold is based on total dollar sales, number of transactions, or both.

Next, determine if your business has passed the threshold. If the answer’s yes, follow these steps.

1. Register your business with the relevant state’s tax authority.
2. Begin collecting sales tax on all applicable products (not all products are taxable).
3. Charge the correct rate, including any local sales taxes.
4. File all sales tax returns by the due date.
5. Pay all collected and owed sales taxes.

Registering for sales tax is separate from registering as a foreign LLC. You may need one, both, or neither in a given state.

What happens if you fail to address the nexus?

As an LLC business owner, you’re responsible for knowing about and complying with sales tax obligations in any state where you have nexus.

If you don’t collect sales tax, your business could be liable for the uncollected tax plus interest and penalties, paid out of your own pocket.

Domestic vs. foreign LLC in the eyes of the IRS

The IRS uses “domestic” and “foreign” differently from the states. For federal tax purposes, an LLC created or organized in the United States is domestic, regardless of the state of registration or how many states it sells in. A business organized under the laws of another country is foreign (26 U.S.C. 7701).

For example, if you register an LLC in the state of Ohio, you’re a domestic LLC for IRS purposes, regardless of whether you trade in another state.

If you own a company registered in the United Kingdom, it stays a foreign entity for the IRS even if it registers to do business in a U.S. state. To have a U.S. domestic LLC, you’d form a new LLC in a U.S. state. Our guide for non-U.S. residents explains how.

Should you set up a foreign LLC?

Any domestic LLC owner whose business activities count as “doing business in” another state should register there as a foreign LLC, because operating without registering can lead to penalties.

Remember, you’re responsible for knowing the foreign registration and sales tax rules in every state where you operate. For e-commerce business owners, it’s advisable to get advice from an accountant who handles multistate sales tax.

For new business owners, the registration, ongoing, and legal costs of working in multiple states can add up. If you’re moving your business rather than expanding, you may be better off moving your LLC to another state than keeping two registrations.

Key takeaways

Every state has its own laws and regulations. Whether you count as “doing business in” a state depends mostly on a physical presence there, such as employees, an office or property.

Sales tax nexus is a separate test that also varies by state, and you can be found liable simply by selling products and passing a financial threshold.

It pays to do your due diligence before expanding into other states, so before you do, ensure the benefits make it worth your while.

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