Nerdy takeaways
- A foreign LLC is not a business formed outside of the United States. It refers to an LLC that registers to do business in a new U.S. state other than the one where it was first formed.
- Registering a foreign LLC allows for business growth into new geographic territories beyond your home state.
- Registering a foreign LLC is typically a straightforward process but every state has its own regulations.
If you associate entrepreneurship with expansion, you may have plans to ultimately open up shop beyond your home state. Part of scaling strategically is understanding the legal and tax implications of operating in multiple states, since each state has its own rules. That’s where foreign LLC registration comes in.
What are domestic and foreign LLCs?
Despite what the names imply, the classifications of domestic LLCs vs. foreign LLCs don’t have anything to do with businesses being formed outside the United States.
Here’s how the two differ:
- Domestic LLC: A domestic LLC is one that operates in the same state in which it was formed. If you established your LLC in Pennsylvania, and that’s where you do all your business, then your company is a domestic LLC in Pennsylvania.
- Foreign LLC: If you formed your LLC in Pennsylvania, but opened a second location in New Jersey, your business would be considered a foreign LLC in New Jersey.
If you do business in another state, registering as a foreign LLC is generally in your best interest. This is especially true when it comes to legal rights. If your LLC isn’t properly registered, you may not be able to bring or maintain a lawsuit in that state until you register and pay any required penalties.
You’ll also generally be expected to pay taxes in every state where your business operates. If you sidestep registration requirements, you could face penalties. Florida, for example, imposes a fine of $500 to $1,000 for every year a business operates in the state without the proper certificate of authority.
Benefits of a foreign LLC
Registering as a foreign LLC can help you legally expand into a new state while maintaining the protections and structure of your existing business.
Personal liability protection
An LLC can provide protection against personal liability. When you form an LLC, you’re effectively separating your personal financial life from that of your business. If someone sues your company, you generally won’t be held personally responsible. Similarly, your personal assets will generally be off the table should your business become unable to pay its debts, though these protections have limits in some cases.
Potential tax benefits
With an LLC, you can choose how you would like your business to be taxed. If you opt to have your foreign LLC taxed as a disregarded entity or a partnership, your business’s profits and losses “pass through” to the owners’ personal tax returns. This means those profits are typically taxed at the owner level, rather than at both the business and individual level. In comparison, a C corporation is generally subject to double taxation at both the business and individual level.
Pass-through taxation can also simplify filing, let owners use business losses to offset other income in some cases and make it easier for small-business owners to take money out of the business without navigating corporate dividend taxes.
How to register a foreign LLC
Registering as a foreign LLC is usually a simple process, but it varies from state to state. Here are some important steps to keep in mind when getting started.
1. Research state laws
Before moving ahead with plans to extend business operations to a new state, conduct research to understand the taxes, fees and registration requirements that may apply to foreign LLCs there. While states like Wyoming have no state income tax and Florida has no personal state income tax, other state-level taxes and fees may still apply and could disrupt your small business’s budget if you aren’t prepared for them.
The process for registering as a foreign LLC is different in every state. Most states will require you to fill out a state-specific registration form and pay a filing fee, which can vary widely. Michigan charges $25, while South Dakota’s filing fee is $750.
You’ll also need to appoint someone to act as your business’s registered agent. This is a person or company that can accept government mail and other legal documents on behalf of your business. You can act as your own registered agent, but many small businesses opt to use an online legal service for a fee.
The state you’re registering in may also ask you to provide a certificate showing that your domestic LLC is in good standing, meaning your company is current on required filings and fees.
3. Obtain licenses and permits
Depending on your business and the state where you’re expanding, you may need licenses, permits or sales tax registration before you can legally operate there.
4. Keep in good standing
You’ll remain a domestic LLC in your home state and may owe taxes and fees in each state where your business operates. You’ll also need to comply with each state’s requirements for remaining in good standing, which often means paying a yearly fee and providing important annual updates about your company.
