Primarily, there are only two types of LLCs – a domestic LLC and a foreign LLC. They are very similar in many ways, but what differentiates them is where they were formed. This guide will help you to understand a domestic LLC and how it works.
WHAT IS A DOMESTIC LLC?
A domestic LLC is the default form of an LLC. It is a business entity that provides you with limited personal liability and offers you the flexibility of a general partnership.
The word domestic only expresses the fact that LLC is being operated in the state where it was formed. Understanding this definition is also helpful to comprehend the fact that you can’t register a foreign LLC without first creating the domestic LLC.
HOW TO FORM A DOMESTIC LLC?
A domestic LLC is formed by filing the articles of organization in the secretary of the state office of the relevant state. Overall, it is a straightforward process, and here, we have listed the simple steps that you have to follow to form your domestic LLC:
- First of all, you need to choose the name of your LLC. However, you have to make sure that the name that you have planned for your LLC is not already taken, and you can confirm this from the county clerk office.
- Once you have chosen the name of your LLC and have done all the relevant personal paperwork, you have to select a registered agent. A registered agent is someone who will receive the necessary documents regarding your LLC from the government and other authorities related to your LLC. You can act as a registered agent yourself for your LLC.
- After filing your articles of organization with the secretary of state office, you should move to draft an operating agreement for your LLC with your partners. This agreement will help to deal with matters arising in future related to your LLC.
- Your LLC will also need to get registered for taxation by IRS. You will need to obtain licenses for your LLC if your LLC domain requires you to do so, and along with that, you will need to get insurances as directed by your state.
TAXATION OF DOMESTIC LLCS
How a domestic LLC will pay its taxes depends primarily on whether the LLC is a single-member LLC or has several members. It also depends on whether the domestic LLC has chosen the option to treat it as a different business form for tax-related purposes.
Technically, IRS does not recognize a domestic LLC for tax purposes. IRS recognizes a single-member LLC as a disregarded entity – LLC is not separate from its owner, and it will pay taxes as an individual.
Similarly, a multi-membered LLC is not recognized as anything different other than a partnership by IRS. So, the partnership itself (a multi-membered LLC in this case) will not pay taxes directly to the IRS, and the individual partners will pay taxes based on their stakes of ownership in the LLC.
ADVANTAGES & DISADVANTAGES OF A DOMESTIC LLC
There are numerous advantages of forming a domestic LLC, and few highlights are:
- Owners of the domestic LLC are not personally responsible for business debts and liabilities.
- Members of a domestic LCL have flexibility in structuring its management.
- A domestic LLC does not require much-complicated paperwork or have as many legal formalities as corporations.
- A domestic LLC allows pass-through taxation.
- There are no restrictions on the number of members allowed in a domestic LLC.
However, like in all the good things, there are some cons of forming a domestic LLC like:
- It is more expensive to form than general partnerships and sole proprietorships.
- In a domestic LLC, ownership is typically more challenging to transfer than with a corporation.
- Domestic LLCs come with a limited Life.
WHEN TO USE A DOMESTIC LLC?
As the name suggests, a domestic LLC is an ideal structure when you are planning to run your business in the same state where you have formed it. It will not provide you with personal liability protection and tax advantages but will also help deal with all the paperwork and other formalities that you face otherwise in standard corporations.
HOW TO MAINTAIN STATUS AS A DOMESTIC LLC?
After forming your domestic LLC, your next challenge is constantly maintaining its status. IRS requires every domestic Limited Liability Company, Limited Partnership (effective 01/12), General and Limited Cooperative Association, Business Trust (effective 01/12), and Limited Liability Partnership to file two-year reports with Corporations Division to maintain good standings.
- First reports are due April 1st of the very next year from the year of LLC registration.
- After that, subsequent reports are due April 1st every two years that.
FREQUENTLY ASKED QUESTIONS
This section covers some of the frequently asked questions related to domestic LLCs:
- What is the difference between a domestic LLC and a foreign LLC?
A domestic LLC is very similar to a foreign LLC in multiple ways, but their main difference is that, while a domestic LLC operates within the state where it was formed, a foreign LLC operates in a state where it was not registered initially and formed.
- Can I change my LLC from domestic to foreign?
Every foreign LLC was once a domestic LLC, as you cannot directly formulate a foreign LLC. So, yes, you can change your domestic LLC to a foreign LLC by following the procedure laid down by your state.
- Does a domestic LLC get 1099?
If the domestic LLC is registered as a disregarded entity or a partnership, it receives a 1099 form. However, other LLCs registered as vendors and not as corporations would need to apply for the 1099 form, as they will not receive it by default.
- Is domestic LLC a partnership?
Technically, as the IRS deals LLCs, a multi-membered LLC is, in fact, a partnership. However, it is different from a regular partnership so that it has a defined operating agreement, and its partners have limited liability protection.
- Is domestic LLC a single-member LLC?
A domestic LLC is the default LLC, and it can both be a single-member LLC and a multi-membered LLC. There is no rule to define the number of members of a domestic LLC.
