If you consider establishing a business that will operate in your home state, then it may be time to consider filing for a domestic limited liability company.
A domestic LLC is a new business entity created by one or more people who reside in the same state where they plan to do business.
It means that if you have been thinking about starting your own business and living within the same state, then there may be some benefits associated with establishing a limited liability company.
The process of setting up a domestic LLC differs from state to state. This means that each individual must research their respective states' guidelines on setting up an LLC before proceeding with the necessary steps.
Reasons to Consider Setting up a Domestic LLC
Limited liability companies offer personal asset protection.
This means that personal assets are protected from business debts and claims against the LLC.
In relation to this, a sole proprietorship does not offer personal asset protection because, in this case, personal and business property is essentially the same thing.
On top of personal asset protection, establishing an LLC can also protect your personal name if it becomes involved with legal issues related to the corporation's actions or decisions taken within its structure, such as marketing strategies or financial dealings regarding accounts receivable/payable management.
The process of setting up a domestic limited liability company may be time-consuming. Still, it could prove worthwhile for many individuals who have been thinking about starting their own small business while residing within one state only.
A domestic entity is a legal entity that is created and exists under the laws of one state, which means it cannot be registered in any other jurisdiction.
Establishing an LLC should only be considered when you have significant assets or plan on carrying out business within your home state to limit legal responsibilities while protecting personal funds from being used directly for company expenses.
What State to Choose for a Domestic LLC?
When you form a new LLC, you have to keep in mind that you can only conduct business in that state where the LLC is registered.
For example, suppose you are a California resident and want to create an LLC in your state. In that case, this entity will only be able to do business within California even though it is considered domestic under state law.
When choosing where to form your LLC, you should also consider filing fees that apply when processing paperwork for creating limited liability companies. These costs can vary depending on which state you choose, but they tend to range from $50-$500.
Most states don't have specific statutes that apply solely to domestic LLCs, but the rules for foreign LLCs still apply.
Additionally, you can form a domestic LLC under state law and then register with the IRS as an LLC taxed as a corporation, allowing your business entity to be recognized by both federal and state tax authorities.
This option is only available if your company has members who are U.S. citizens or permanent residents, so keep this in mind when choosing where to form your LLC.
How Is a Domestic LLC Different from a Foreign LLC?
Domestic limited liability companies are created under the laws of a specific state.
A foreign LLC is required to file for foreign qualifications before doing business within that state. In contrast, a domestic LLC doesn't need to be qualified until they start conducting business there.
The business structure of both domestic LLCs and foreign LLCs is that of a limited liability company. However, under most states' laws, a foreign limited liability company is considered a foreign corporation and must file for foreign qualifications.
Foreign limited liability companies can only transact business within their state if it is qualified to do so by filing a foreign qualification with the Secretary of State's office in that specific state.
Domestic limited liability companies have no such requirement as long as no physical presence or transaction is being conducted within any particular state.
The difference between domestic and foreign LLCs mainly lies in the fact that one needs to be qualified before conducting business.
Still, both offer their member's limited personal liability protection from lawsuits brought against them personally rather than just suing the company itself.
One other major factor that comes into play when deciding whether an individual should form a foreign or domestic LLC is whether they want to conduct any business transactions in the USA.
In most cases, it would be more beneficial for an individual who plans to conduct business within U.S. borders to form a domestic limited liability company instead of one that is foreign because of the additional requirement of being qualified with each state's Secretary of State office before doing so.
Domestic LLC Formation Process
Before the LLC is officially recognized as a legal business entity, every domestic limited liability company needs to take several important steps.
Filing Articles of Organization
A domestic LLC can be formed by filing the Articles of Organization with the state in which it is being established. This document needs to contain information about the company's business name, address, type of LLC (limited liability company), registered agent for service of process, and registered office.
Articles of Organization represent the very first step towards forming a domestic limited liability company.
Each state has its own Article filing requirements, which you should check before submitting the forms to your local Secretary of State's office.
This document notifies authorities about LLC formation and is considered a public record in most states. Once registered, Articles are available for viewing online at both federal and state levels.
A domestic LLC must file Articles of Organization with their home state in order to be legally recognized and protect the company's owners from personal liability for business debts or obligations, just like a corporation.
This document is also responsible for legal action against an LLC entity, such as filing a lawsuit for breach of contract or personal injury.
Finding a Registered Agent
Registered agent service is an individual or business that agrees to receive important legal documents on behalf of the LLC and makes itself available during standard business hours.
Most registered agents are lawyers, but some states allow companies with professional agent certification to act as registered agents for LLCs in their state.
Once you have decided on which type of company will serve as your registered agent service, you must provide them with specific information to begin receiving all essential mailings at their official mailing address.
Usually, this includes - Business name (LLC) - Principal office location - Name, and contact information for each member or owner.
You may also need to include additional details depending on what type of registration your form requires.
Creating an Operating Agreement
The business activities of your domestic LLC will be governed by the LLC's operating agreement, which is legally binding for LLC members (owners).
LLC owners must create an operating agreement to provide information on how their LLC will run its business.
This document helps them avoid legal disputes and clarify what they expect from each other as co-members of the LLC.
It also keeps track of member contributions and ownership percentages so that LLCs can pass through tax losses or gains accordingly when selling part interest in a company during future transactions such as buying out another partner or transferring stock interests upon death.
Operating agreements are usually written up with help from a business attorney who specializes in small business formation matters. Still, there are some examples you can look at if you want to write your own version first before hiring one to assist you.
Obtaining an EIN
The next step that must be taken when forming a domestic limited liability company is obtaining an Employer Identification Number or Tax ID number from the IRS if they plan on hiring employees or conducting any other types of transactions where withholding taxes are involved.
You can also do this through their online EIN application.
EINs are immediately issued when filled out through the IRS website. An LLC won't be able to pay taxes, file tax returns, or hire employees until an EIN is obtained.
Opening a business bank account
Domestic LLCs need to have business bank accounts separate from personal bank accounts.
If you use your own money for LLC expenses, then it will be very difficult, if not impossible, to write off those expenses on state and federal income tax returns later.
Your operating agreement should include procedures for how the co-owners can contribute funds or loan money to the company so that they can run their business efficiently without having problems with double taxation of profits or losses after filing an annual return at tax time.
You also want to make sure all members sign a written acknowledgment form when opening up this account because it is typically considered self-employment earnings which are subject to hinge.
FAQs
Is an LLC a Domestic Entity?
Suppose you form an LLC in the state where you first begin to conduct business, and this is the only state where you operate as an LLC, that LLC is considered a domestic entity. Domestic entities can be either sole proprietorships, general partnerships, or corporations for federal tax purposes.
What Is the Difference between a Domestic LLC and a Professional LLC?
The only difference between a domestic LLC and a professional LLC is that PLLCs require special licensing.
Domestic LLCs are not required to obtain any specific licenses to operate their business, whereas PLLCs must be properly licensed with the state in which they will conduct business.
This is likely because states want professional businesses that deal directly with consumers (such as lawyers and doctors) to have some kind of minimum training or qualifications before offering services.
Can I Change My Domestic LLC to a Foreign LLC?
Your domestic limited liability company can only become a foreign LLC if it starts doing business in other states.
If you want to change your LLC's designation from domestic to foreign, you will have to register with the Secretary of State in the state where you want to start your new company.
Does Domestic LLC Need to File Annual Reports?
Annual reports are required depending on the state where you set up your company (LLC).
Annual reports are required to keep your company active and not revoked. You can find the specific details of the annual report requirements for each state on the individual Secretary of State's website.
Does a Domestic LLC Have Board Meetings?
Although LLCs are not required to hold annual business meetings in the state where they register, many still decide to hold business meetings at least once a year.
Do I Need to Publish My LLC in the Newspaper?
Some states (like New York) require all LLCs to publish a notice of formation in the local newspaper, and others (like California) require you to publish your LLC name periodically over time.
Even if it's not required by law where you live, we strongly recommend publishing your blog post online because search engines love fresh content.
Is a Domestic LLC a Single-Member?
A domestic limited liability company can be either a single-member or multi-member entity. Pass-through taxation is characteristic of LLCs regardless of the business structures they choose. However, LLCs can also opt for corporate taxation when they file taxes through an S Corporation or C Corporation.
The domestic LLC is a very popular choice for small businesses because it offers more flexibility than a sole proprietorship.
Conclusion
The decision to set up a domestic LLC is not something that should be taken lightly.
You'll want to consider all the benefits and drawbacks before registering your business as a domestic LLC, which may require legal advice from an experienced attorney who can provide you with information on how this type of entity will work for your small business.
Before you decide to form one, do your research and inquire about all the requirements so that you know what to expect.
