Do You Have a Domestic LLC or Foreign LLC?

A domestic LLC and foreign LLC refers to the state where the LLC is created. Let’s explore whether you need a foreign LLC.

Registering your business as a foreign LLC (also known as “foreign qualification”) is required under certain circumstances when you operate your business outside of the state in which you’ve formed your LLC. The purpose of registering is to meet the regulatory and tax requirements of the foreign state. Despite the term “foreign,” a foreign LLC operates domestically within the United States. Your LLC isn’t considered foreign in the state in which you initially registered it, only in the states where you’ve expanded its operations.

This commonly comes up when LLCs are formed in States with business-friendly tax laws but do business in their home State. It may also occur when a business starts expanding into other States. A foreign LLC is required to register with the Secretary of State in the foreign state. The LLC certificate (and other documents) issued by the home state will be needed.

Operating in a state generally means:

• Having a bank account in that state.
• Selling in that state through some party directly tied to the LLC (a distributor or rep).
• Owning property (real estate or a fleet of trucks or example) in the state.
• Having offices, facilities, or holding regular meetings in the state.

These hallmarks also vary by state and should be available at the Secretary of State’s office.

Breaking Down the Need for a Foreign LLC

A few hypothetical scenarios of when you may need to file as a foreign LLC include:

• Your retail home decor business is registered and has a brick and mortar store in Ohio, and you decide to open another store in Pennsylvania. To legally conduct business in Pennsylvania, your Ohio LLC will need a foreign qualification.
• You have formed your accounting business in Delaware, but your company’s physical location is in New Jersey. You will need to register as a foreign LLC in New Jersey to conduct business in that state.
• Your restaurant supply company is an LLC registered in Missouri, and you’ve hired a sales rep who lives in Louisiana and is actively selling your products to eateries in his state. The state of Louisiana will probably require you to file for a foreign qualification there.
• You already formed your Illinois LLC, a wholesale auto parts company, and want to have a warehouse in Michigan. You will probably need to obtain a foreign qualification in Michigan to legally run your warehouse in that state.
• You live in Texas and have incorporated your marketing consulting business there, while your business partner lives in California. If your partner is working with a majority of your clients in her home state, then you will probably need to register for a foreign qualification in California.

The above situations are just a small sampling of where and when foreign LLC registration may be required.

Realize, however, just because you’re making money from clients in other states doesn’t mean you’ll need foreign qualification. For instance, if you’re a freelance website designer or a consultant providing services to clients in multiple states, you probably won’t need to register as a foreign LLC.

Again, the rules vary from state to state, so check with the Secretary of State office in the states in which you’re looking to expand your business to determine if the requirements for foreign qualification will apply to you in your situation. Also, because rules and requirements can get confusing, I encourage you to talk with an attorney to make sure you understand your registration obligations. You can face some fines and other penalties if you start doing business in a state and fail to register a foreign LLC if required to do so. And to understand the tax implications of foreign qualification, also consult an accounting professional.

Consequences if You Don’t File a Foreign Qualification

No good comes from ignoring any foreign qualification requirements that apply to your business. It’s illegal to operate your company in a state if you fail to register as a foreign LLC when the state’s rules demand it.

The penalties include:

• Inability to file lawsuits in the state(s) in which you needed a foreign qualification
• Fines
• Back taxes for the time period you conducted business but weren’t legally registered as a foreign LLC.
• Interest will be applied on top of your filing fees and taxes calculated for the time you illegally conducted business in the state(s) in which you should have foreign qualified.

Ongoing Management of a Foreign LLCs

Just as your LLC will need to stay current with the compliance responsibilities in its home state, it will also be subject to ongoing requirements to operate legally in the states where it has foreign qualification.

A few common business compliance requirements foreign LLCs may need to keep in step with include:

• Paying state taxes.
• Maintaining business licenses and permits.
• Filing state annual reports (also called “statements of information”) or annual registration forms.

Alternatives to Foreign Qualification

Rather than file as a foreign LLC in other states, some business owners choose to expand their companies by creating separate LLC entities in the states where they want to operate. The primary differences between that approach and filing for foreign qualification include:

• Possibly more compliance formalities – This will depend on the specific states you will form your LLCs in.
• Higher costs – Typically, forming an entirely new LLC in a state will cost more than filing for foreign qualification there.
• More administrative and record-keeping responsibilities – You’ll be running multiple companies rather than just one. With that comes more paperwork.
• Legal separation between business locations – This can be an advantage because if your LLC in one state has debt or legal issues, the assets of your LLCs in other states won’t be at risk.