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?

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:

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.

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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.

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Advantages & Disadvantages Of A Domestic LLC

There are numerous advantages of forming a domestic LLC, and few highlights are:

However, like in all the good things, there are some cons of forming a domestic LLC like:

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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.

General FAQ

Frequently Asked Questions

This section covers some of the frequently asked questions related to domestic LLCs:

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.

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.

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.

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.

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.