LLC or Limited Liability Company is an excellent option for small businesses. Personal asset protection, operating flexibility, and tax benefits are some of the reasons why enterprises prefer the LLC structure.
To start an LLC, you’re first required to register it in your state. But what if you want to do business in multiple states? Do you need to register your LLC in all the states where you conduct business?
This is where foreign LLC and domestic LLC get into the picture. If you’re planning to start an LLC, it is essential for you to understand the difference between the two.
What is a Foreign LLC?
The term “foreign LLC” looks like something that applies to an LLC that conducts business internationally (Wrong!).
However, this is not the case. A foreign LLC is an LLC that operates in or wishes to operate in a state that is different from the state where it was formed.
In other words, the primary business location of the LLC is not in the state where it was formed. For instance, let us assume that you’ve created an LLC in Texas, and want to expand it to California as well. So, you’ll be required to register your Texas LLC as a foreign LLC in California.
The term “foreign” here means that your LLC is foreign to California.
What is a Domestic LLC?
A domestic LLC is the exact opposite of a foreign LLC. A domestic LLC is the one that is formed and conducts business in the same state. Even if you want to do business in other states, your LLC would still be considered as a domestic LLC in your home state but foreign LLC in other states.
For instance, you form an LLC in Texas and operate in Texas. If we take the same example discussed above, then your LLC in Texas is a domestic LLC while the LLC in California is a foreign LLC.
In other words, when you register your LLC in the first state, you register it as a domestic LLC. In all the succeeding states, you’ll register your LLC as a foreign LLC.
Note that you’re required to register your LLC as a foreign LLC in every state where you want to transact your business. If you do not register in every state, you will be liable to pay penalties and fines to those states.
Now that the definition of foreign LLC and domestic LLC is clear, let us now have a look at when an LLC should register as a foreign LLC.
When to Register as Foreign LLC?
You’re required to register your LLC as foreign LLC if you’re planning to do business in a state that is different from the one where your LLC is first registered. Your LLC is considered to be doing business in another state if-
- You want to sell in a different state through a representative of the manufacturer, agent or distributor
- You want to have a manufacturing unit, distribution facility, retail store or office in another state
- You want to have a business bank account in another state
- You’re planning to purchase personal property or real estate in another state
- You want to hold business meetings or transact business in another state
As you can see, it is not only necessary to register your LLC as foreign LLC in another state only when you’re conducting business in that state. Something as simple as holding a business meeting or even having a business bank account is considered as “doing business” and requires you to register as foreign LLC.
It is also important to know that not all of your business activities in a different state require you to register your LLC as a foreign LLC. The rules vary between states. For instance, in New Mexico, one-off transactions do not require you to register your LLC as foreign LLC in the state.
You can get in touch with the Secretary of State’s office or visit their website to know more. Alternatively, you can also consult a local attorney to know more about the rules and regulations of that state.
Fee for LLC Registration
Irrespective of whether you’re registering a domestic LLC or foreign LLC, you’re required to pay the registration fee. However, in most of the states, the fee for registering a domestic LLC is lower than registering a foreign LLC. Also, in some of the states, you’re required to re-register your LLC every year and pay the applicable fee for the same.
Ready to Register Your LLC?
So, if this is the first time you’re registering your LLC, you’ll register it as a domestic LLC. If you already have a domestic LLC and want to do business in any other state, you need to register your LLC as foreign LLC in that state.
Now that you’ve understood the difference between the two, you’re now one step closer to forming your LLC and taking your business to the next level.