LLC stands for limited liability company. That means that, unlike some other business types, you are not personally liable for the debts of the LLC. For example, if your LLC is sued and loses, the debt does not follow you to your personal assets like a car or house.
There are two main types of LLC companies, foreign and domestic. This article will explore the differences between domestic LLCs and foreign LLCs. The taxes, liability, licensing, etc., for both are different so it is important to know which one you need before starting a business.
1. What Is An LLC?
As stated before, LLC stands for limited liability company. It is a business structure that was developed in the United States to give entrepreneurs the advantages of both corporations and partnerships, without many of the disadvantages. This type of company is very flexible because it has its own tax rules.
The taxes are different from personal income taxes or taxes for other companies. Also, the LLC does not have many of the formalities required by other forms. For example, there are no restrictions on the transfer of ownership.
The benefits of an LLC are that it is easy to form and operate, has a flexible management structure, provides liability protection, and has tax advantages.
2. Domestic LLC Vs Foreign LLC
Domestic LLCs are LLCs that are formed in your country of residence. This is the most common type of LLC because it is easy to form and operate in any state or country.
A foreign LLC means that the company is formed or organized outside of your country. For example, if you are an American living in Canada, then you would need to form a Canadian LLC for business purposes. This is one of the main differences between domestic LLCs and foreign LLCs.
Having a domestic LLC is a lot better than having a foreign LLC, as suggested at FinancePond since you can have additional taxes and fees to pay. For example, if you work and live in North Dakota, but decide to open an LLC company in South Dakota, you would have to register your LLC company as a foreign one which will result in paying taxes and fees in both states.
3. Differences Between A Domestic LLC And Foreign LLC
There are many differences between a domestic and foreign LLC. Some of the main ones are taxes, liability, licensing, etc. Different rules apply to each type of LLC, which is why it’s important to know how a domestic LLC vs foreign LLC affects all of these areas.
Domestic LLCs have an easier time on taxes compared to foreign LLCs. A domestic company only has to file a single annual report regarding the income or loss from all its business activity in the state of the LLC.
However, if a domestic LLC is based in one state but has income from another state, then that company needs to file two separate returns annually as well as pay taxes on both. Foreign LLCs have more requirements and they need to file a tax return for each state where it earns an income.
With a foreign LLC, the liability protection is not as strong. If you are a sole proprietor or partner in your LLC, then that means that all of your personal assets could be at risk if someone sues your business and wins.
The opposite applies to domestic LLCs since only the company itself (and not the owner) is liable for certain debts like court awards, taxes, and debts.
Licensing requirements are different with a foreign LLC. In most states, a domestic LLC company doesn’t need a license to operate.
However, there are some professions that must be licensed no matter where your business is located, such as accounting, architecture, and engineering. Foreign LLC companies do not need to get licenses for these professions in their state of operation.
4. The Benefits Of A Domestic LLC Vs Foreign LLC
Even though both types of LLCs provide similar services, there are some benefits for each one.
One of the benefits of a domestic LLC over a foreign LLC is the fact it offers more protection against liability. Besides that, it is easier to maintain, offers more flexibility for profit distribution, lower taxes, and the option of having a corporate tax structure.
On the other hand, one of the benefits of a foreign LLC over a domestic one is that you are not required to disclose the name or address of every member of your company. Also, foreign LLCs don’t need to hold annual meetings or keep minutes of decisions since they are not required by the law.
How do you choose between a domestic LLC vs a foreign LLC? The type of company that is best for your business depends on what the primary purpose of the company will be. Hopefully, this article has been helpful in understanding the difference between a domestic LLC and a foreign LLC as well as their benefits.