What Is a Domestic Limited Liability Company?

By Larissa Bodniowycz, J.D.

What Is a Domestic Limited Liability Company?

By Larissa Bodniowycz, J.D.

A domestic limited liability company (LLC) is a business entity that operates in the state where it formed. It is a type of for-profit business structure that combines the benefits of corporations and partnerships into a single business form. Because of this, they are most popular for small businesses. While the laws that govern this type of business entity differ by state, there are many commonalities.

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A business is a domestic LLC when it does business in the same state where it formed. For example, a company created in Texas that has a shoe store in that state is a domestic entity. In order to do this, a business needs to create an LLC in the state where it plans to operate. This usually requires filing articles of organization with the department that governs businesses (usually the Secretary of State), paying a filing fee, and drafting an operating agreement. Creating a domestic entity does not require any special forms. Once you have formed your business, it is a domestic in the state of formation.

Domestic entities have ongoing obligations to their home states, such as filing annual reports, paying annual fees, and paying state taxes.

Operating in Other States

A domestic entity is not limited to operating in the state where it formed. You can conduct business in other states without having to form a new business. A company that does business in a state other than the one where it formed is automatically considered a foreign LLC in the new state.

A business can operate as a foreign LLC in more than one state. For example, if the Texas company discussed above opened a shoe store in Louisiana, it would be a foreign entity in Louisiana but still domestic in Texas.

Owners of foreign LLCs must typically register as foreign entities in each state where they conduct business, pay a nominal fee, and pay taxes on income earned in each state where they operate. Failure to comply with these obligations can result in additional fees and financial penalties.

Choosing a State

The owner can choose which state to register in, which would make that company a domestic LLC within that particular state. For many small businesses, the best choice is the state where the business has most of its operations. For example, a personal training business that has its sole facility and all its customers in California should probably form its business in California and thus become a domestic entity in that state.

There are a few advantages to registering as an LLC in business-friendly states such as Delaware, Nevada, and Wyoming. However, for many small businesses, the additional bureaucratic requirements and expenses might outweigh the advantages. For example, the personal training business discussed above would not be able to avoid paying California taxes on the income earned in California by registering in Wyoming, so the company's owner would have to deal with the requirements and expenses associated with being a domestic entity in Wyoming and a foreign business in California without significant benefit.

Before registering and forming your LLC, keep in mind where you intend on conducting a majority of your business operations, and then choose which state you prefer to operate your domestic business in.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.