Foreign vs. Domestic LLCs and Corporations: What’s the Difference?

U.S. businesses can operate in one or several states, depending on where they are doing business. A business can register in an individual state, either as a domestic or a foreign limited liability company (LLC) or corporation.

What’s the Difference Between a Domestic LLC or Corporation vs. a Foreign LLC or Corporation?

Home State vs. Additional States

Business registration in the U.S. is a state system, and a business that wants to operate in a state must register with that state.  

A domestic business is a business organized in the U.S. under the laws of a state. The business is considered a “domestic” corporation or LLC when it conducts business in that state; think of it as the business’s “home” state. A business is considered foreign when it originates in one state but wants to conduct business in another state. The additional state is a foreign LLC or corporation. 

 For example, if you register your business under Oregon's business laws, you are registering as a domestic LLC or corporation. If you then start doing business in Washington, you register as a foreign LLC or corporation in Washington.

Certificate of Good Standing

Many states require a certificate of good standing before they will allow a corporation or LLC to register as a foreign entity. The certificate of good standing shows that the business certifies that it is in good standing in its home state, including having legal status in court hearings and no outstanding liabilities that could affect its credit rating. A business registering as a domestic LLC or corporation doesn’t need a certificate of good standing.

State Taxes

State taxes vary by state, so the state where you have domestic corporation or LLC might have different taxes than the state where your business is a foreign corporation or LLC. For example, some states don’t have income taxes, and each state income tax rate is different. In addition, some states have other business taxes in place of or in addition to income tax: 

• Gross receipts tax on gross sales
• Franchise tax, similar to income tax
• Excise taxes on activity or use of a specific product
  

State Fees and Filing

Each state has business forms and it must file certain types of reports by specific dates, and it must pay fees for filing these forms. One common report filed by most states is an annual or biennial report, often with filing fees. Florida, for example, has fees for an annual report, a late annual report, and an amended annual report. It also has fees for reserving a business name, dissolving a business, and making photocopies.

Don’t confuse a foreign corporation or LLC with a company that does business in a foreign country. The IRS calls these entities “foreign persons,” including foreign corporations and foreign partnerships, and the U.S branch of a foreign corporation or partnership. These foreign persons are subject to U.S. income tax regulations.

What “Doing Business” in a State Means

In order to know if you must register an LLC in a different state, you need to know the meaning of the term "doing business." Each state wants to know who is doing business in their state, for tax purposes.

 In general, you are doing business in a state if you have a tax nexus in that state. A tax nexus is a connection with a state for tax purposes, and each state has different regulations for establishing a tax nexus. You may have a nexus in a state if

• You have a business bank account in the state
• You sell in the state through a distributor, an agent, or a manufacturer's representative
• You have an office, manufacturing or distribution facility, or retail store in the state
• You own real property (land and buildings) or personal property (other types of business property) in the state
• You transact business or hold meetings in the state.

The Bottom Line

Before you expand your business beyond your home state into a second or additional states, get help from both a licensed attorney and a licensed certified accountant (CPA), to make sure you file all the right forms, get a certificate of good standing, and pay all the right fees. Then you will need help on a regular basis to stay up to date with all of the filings and payments you must make. 

A controlled foreign corporation must file an IRS tax report on Form 5471, along with several schedules, as part of the CFC's tax filing. The report asks for information about U.S. shareholders who owned stock in the foreign corporation.

This form is extremely complicated, so get help from your tax professional to complete this form.

Frequently Asked Questions (FAQs)