What Is a Domestic LLC? | Everything You Need To Know

Jon Morgan
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Last updated: February 29, 2024
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If you are considering establishing a business in your home state, forming a domestic limited liability company could be the best option.

With years of expertise in business and legal matters and extensive research and analysis, I present an all-encompassing guide on Domestic LLCs.

I spent countless hours consulting with legal experts and studying state regulations to provide you with accurate and reliable information.

This article aims to clarify the benefits, formation process, and legal considerations surrounding Domestic LLCs.

Quick Summary

  • A domestic LLC is a business entity formed and registered within the same state where it operates.
  • To set up a domestic LLC, file Articles of Organization, find a registered agent, create an operating agreement, and obtain an EIN.
  • The growth of 1.4 million new establishments in the year ending March 2022, as reported by the US Small Business Administration, exemplifies the burgeoning interest in domestic LLCs, showcasing their role in the modern American entrepreneurial landscape.
  • From my experience, forming a domestic LLC is a wise choice for entrepreneurs seeking to protect personal assets while enjoying operational flexibility.


What Is a Domestic LLC?

A woman talking about a domestic LLC

A Domestic LLC is a type of business entity that is formed and registered within the borders of a specific country or state.

The term "domestic" in this context indicates that the LLC operates and is recognized as a legal entity within the jurisdiction where it was established.

In the United States, for instance, a Domestic LLC is a limited liability company that is organized and operates under the laws of a particular state.

It's distinct from a Foreign LLC, an LLC formed in one state but chooses to operate in another by registering as a foreign entity.

The LLC structure is popular among small businesses due to its flexibility, ease of formation, and liability protection features.

Domestic LLC Formation Process

Busy working on computer and documents

A domestic limited liability company must take several steps before being officially recognized as a legal business entity.

1. Filing Articles Of Organization

A domestic LLC can be formed by filing the LLC Articles of Organization with the state where it is being established.

These legal documents must contain information about the company's business name, address, type of LLC, registered agent for service of process, and registered office.

LLC Articles of Organization represent the first step towards forming a domestic limited liability company.

Each state has its own Article filing requirements, and I found it's crucial to check these before submitting the forms to your local Secretary of State's office.

The legal documents also notify authorities about LLC formation and are 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 to be legally recognized and protect its 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.

2. Finding A Registered Agent

Most LLC 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
  • Contact information for each member or owner

You may also need to include additional details depending on what type of registration your form requires.

3. Creating an Operating Agreement

Smiling woman holding files about domestic llc

The business activities of your domestic limited liability company will be governed by the LLC's operating agreement, which is legally binding for LLC members (owners).

I always advise my clients to 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 of the interest in a company during future transactions.

Operating agreements are usually written with help from a business attorney specializing 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.

4. Obtaining An EIN

The next step for a domestic LLC is to obtain an Employer Identification Number or Tax ID number from the Internal Revenue Service (IRS) [1].

This identification number is important for a company planning to hire employees or conducting other transactions involving withholding taxes.

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.

5. Opening A Business Bank Account

Domestic LLCs need to have business bank accounts separate from personal bank accounts.

From my experience, keeping business and personal finances separate is not just recommended; it's vital for clarity and legal protection.

If you use your own money for LLC expenses, it will be tough, 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.

This enables the LLC to run its business efficiently without having problems with double taxation of profits or losses after filing an annual return at tax time.

You also want to ensure all members sign a written acknowledgment form when opening this bank account because it is typically considered self-employment earnings subject to hinge.

Reasons to Consider Setting up a Domestic LLC

A woman considering the reasons for setting up a domestic LLC

Limited liability companies offer personal asset protection.

This means personal assets are protected from business debts and claims against the LLC.

On top of personal asset protection, establishing an LLC can also protect your name in case of legal issues related to the corporation's actions.

Another significant advantage of forming an LLC is the tax flexibility it offers. However, the extent of this benefit can vary. For instance, states like Wyoming, Nevada, and South Dakota offer tax advantages such as no state income tax, which can be particularly beneficial for businesses looking to minimize their tax liabilities.

The process of setting up a domestic limited liability company may be time-consuming. Still, it could prove worthwhile for many individuals considering starting a small business while residing within one state.

Which State Can I Choose To Form A Domestic LLC?

The state you can choose to form a domestic LLC depends on factors such as taxation, regulations, and business needs.

Additionally, considering the business failure rate is crucial. According to data from Lending Tree, while the national average for business failure in the first year is 20.8%, states like California (13.2%) and Washington (16.7%) report lower rates, suggesting a more favorable environment for new businesses compared to Rhode Island (27.2%) and the District of Columbia (28.0%) [2].

This variance underscores the importance of selecting the right state for your LLC based on economic stability and success rates.

When you form a new LLC, you must remember that you can only conduct business in the 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 can only do business within California, even though it is considered domestic under state law [3].

When choosing where to form your LLC, you should also consider the cost and filing fee that applies when processing paperwork for creating limited liability companies. These costs can vary depending on your chosen state but range from $50 to $500.

"Many jurisdictions lack distinct statutes exclusively targeting domestic limited liability companies; however, the regulations governing foreign LLCs are typically applicable and enforced."

- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions

Additionally, you can form a domestic LLC under state law and then register with the IRS as an LLC-taxed corporation, allowing federal and state tax authorities to recognize your business entity.

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?

Holding binded documents and folders

A domestic LLC differs from a foreign LLC in its registration and operational scope.

It is formed and operates within its home state, adhering to local laws and regulations.

On the other hand, a foreign limited liability company is established in one state but operates in another, requiring additional registration and compliance with foreign state requirements.

Understanding these distinctions is crucial for business owners seeking to expand their operations across state lines or those wishing to operate exclusively within their home state.

Still, both offer their members limited personal liability protection from lawsuits brought against them personally rather than just suing the company itself.

Another major factor that comes into play when deciding whether an individual should form a foreign or domestic limited liability company is whether they want to transact business in the USA [4].

FAQs

Is an LLC a Domestic Entity?

An LLC can be a domestic entity if it is formed and operates within the borders of a specific country or state. Domestic entities can be sole proprietorships, general partnerships, or corporations for federal tax purposes.

What Is the Difference between a Domestic LLC and a Professional LLC?

The difference between a domestic LLC and a professional LLC is the special licensing and qualifications required for the latter. While it is suitable for most businesses, a professional LLC is specifically designed for licensed law, medicine, or accounting professionals.

Can I Change My Domestic LLC to a Foreign LLC?

Yes, you can change your domestic LLC to a foreign LLC by undergoing a process known as domestication. Domestication allows your existing LLC to retain its legal status while operating in a different state or jurisdiction.

Does a Domestic LLC Need to File Annual Reports?

Yes, a Domestic LLC needs to file annual reports as per regulatory requirements. These reports provide essential financial and operational information to the state authorities. Filing annual reports aids in maintaining the LLC's good standing and legal compliance. Failure to submit reports within the designated timeframe may result in penalties or dissolution.

Does a Domestic LLC Have Board Meetings?

Yes, a domestic LLC has board meetings to manage its internal affairs. During these meetings, key decisions are made, strategies are discussed, and corporate governance is maintained. Board meetings allow stakeholders to discuss the company's direction and financial performance critically.

Is a Domestic LLC a Single-Member?

A domestic LLC can be either a single-member or multi-member entity. In such cases, there is only one owner or member responsible for the company's operations and liabilities. This structure offers simplicity and liability protection, making it a legitimate option for individual entrepreneurs.

Can I Convert My Foreign Business Into a Domestic LLC?

Yes, you can convert your foreign business structure into a domestic LLC. This process allows you to benefit from domestic limited liability protection while maintaining your existing business operations and transitioning to the LLC structure.


References:

  1. https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein
  2. https://www.lendingtree.com/business/small/failure-rate/
  3. https://www.ftb.ca.gov/forms/misc/3556.html
  4. https://www.wolterskluwer.com/en/expert-insights/doing-business-in-another-state-foreign-qualification

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