Domestic Limited Liability Company: Everything You Need to Know
A domestic limited liability company is a limited liability company (“LLC”) created under the laws of the state where it is operating.
For example, a company that forms an LLC in California by obtaining approval through California’s Secretary of State is considered a “domestic” LLC when it does business in California. If that same company goes to New York and starts doing business, it is considered a “foreign” LLC in New York. Usually, the only way to determine whether an LLC is domestic or foreign is to look up filings with the Secretary of State.
Regardless of where an LLC is created, there are commonalities regarding how the LLC is formed, the benefits of the LLC, how the LLC is governed and managed, and requirements of the LLC once it is formed.
Benefits of an LLC
A limited liability company is a hybrid business entity that takes the best parts of other business forms, like partnerships and corporations, and combines them. Some of the main benefits of limited liability companies are:
Limited Liability of Owners. As the name suggests, limited liability companies limit the financial liability of the owners to the amount they have invested in the company, with a few exceptions. This means that debtors and judgment holders cannot go after individual owners for money the LLC owes. For example, when an LLC files bankruptcy, its owners usually cannot be forced to use their own money to pay LLC debts.
Owners should be careful because they will sometimes be requested to personally guarantee a loan or other financial obligation for the LLC; if they take this action, they will lose the limited liability protection for that particular debt.
Flexibility. LLCs have flexibility to create a tax status that works best for them. They get to choose how they are taxed from a few different options. They may choose pass-through single taxation or may elect to be taxed at the LLC and individual level like a corporation. LLCs also have a great deal of flexibility to determine ownership, shares of assets and liabilities, and management of the LLC.
LLCs can usually have different types of owners. The LLC can have managing-members owners who also manage the LLCs daily operations, separate owners and managers, or some combination of the two. In most states, those owners who do not manage the LLC can be “limited members” of the LLC, meaning that they are more like outside investors who only risk to lose their investment.
Because of their flexibility, LLCs are a very popular choice and a great option for businesses of any size, from one owner to 100 owners or more.
Simplicity. Compared to corporations, LLCs are simple to create, manage, change, and operate. There are fewer required formalities than with a corporation. Corporations often require meetings and paperwork to take almost any action. They also typically require more extensive records than LLCs. This complexity often requires corporations to have to use attorneys and CPAs more frequently, further complicating things and increasing costs.
Forming Domestic LLCs
To begin operating as a domestic limited liability company in the state where your business is operating is not too difficult. To form a domestic limited liability company, you must register the LLC in the state where you are or will be operating and obtain approval from the department of the state’s Secretary of State.
To register your LLC, start by locating the website for the Secretary of State for your state. Be careful that you don’t go to the website for the federal Department of State or a different state’s Secretary of State website. Once you are on the website, look for a link to register your LLC. The link will usually provide you with two options: (1) print and mail in a Certificate of Organization (called Articles of Organization in some states); or (2) complete and submit the Certificate online. In most cases, submitting the Certificate online will get your LLC formed faster, but not all states offer this option.
Your LLC is not formed when you submit your Certificate. It is formed once the Secretary of State reviews and approves the Certificate. The Certificate is usually short, requiring simple information like your full company name, which must include “LLC,” “limited liability company,” or some other designation that it is an LLC; the general purpose of the business; the registered agent; the LLC’s address, and the initial owners. In some states, the LLC can opt to have a different effective date for the LLC, either earlier or later, than the day the Certificate was filed. This information, if the option is available, is put on the form.
In most cases, if the Certificate is filled out completely and accurately, this is just a matter of waiting. It is very unlikely that your Certificate will be denied. One reason a Certificate may be denied is if there is another business already registered with the same name, so research that ahead of time. You can run a Google search and most Secretary of State websites will allow you to search their records for free.
Registering as a Foreign LLC
LLCs can conduct business in any state. As noted above, when a limited liability company does business in a state other than the state it was formed in, it is called a “foreign LLC” in that state.
Whether an LLC is “doing business” in a state can be a complicated issue. LLCs are usually considered to be doing business in a state if they:
Maintain a business bank account in the state;
Have a storefront in the state;
Use a distributor, manufacturer’s representative, or similar agent to sell its products in a state;
Have a physical presence, like an office or manufacturing facility in the state;
Own real estate or other property in the state;
Hold company meetings to make decisions in the state; or
Otherwise transact business in the state.
LLCs that are doing business in a state other than where they are formed must check the laws of the state to see what requirements apply to them as a foreign business. Usually, at a minimum, the LLC will have to register to do business as a foreign LLC in the state and pay taxes for income earned in the state.
Registering as a foreign corporation is usually easy. As with forming an LLC, the starting point is the Secretary of State’s website for the state where you will be doing business. You then locate instructions for foreign LLCs and fill out the required form. In addition to the form, you must provide the Secretary of State’s office with a copy, usually certified, of the Certificate or Articles showing that you are a registered and active LLC of another state in good standing. There is often a small fee associated with registering as a foreign LLC.
Registering to do business in a state as a foreign company is more than just paperwork. Once registration requirements are completed, your LLC will receive a Certificate of Authority, or similar certificate, from the state allowing you to do business there and providing your LLC with all the legal protections of a domestic LLC. Failure to comply with the requirement can leave an LLC unable to bring suit against a person or business that wronged them in the state’s courts. Failing to comply could also result in financial penalties being assessed against the LLC.
If your LLC is doing business in multiple states, it must obtain authority to operate as a foreign LLC in each state that it is doing business. For example, an LLC formed through California’s Secretary of State that does business in Nevada, New York, and Arizona must register and obtain a certificate of authority from Nevada, New York, and Arizona.
Ongoing LLC Requirements
Forming and registering as a foreign LLC in states where it is doing business are not an LLCs only obligations. LLCs do have ongoing requirements, though less than corporations. Some common ongoing obligations include:
Filing an Annual Report. All LLCs are required to file some type of Annual Report in the state where they are formed. The report is usually quite simple and serves to update the state with the LLCs most recent information. There is usually a small fee associated with filing the report and a large late fee if it is not paid on time. Like the Articles of Organization, many states allow for online filing of LLC annual reports.
LLC annual reports are filed with the Secretary of State. The state will tell the LLC the deadline, which is usually either the anniversary of the company’s formation or a specific date set by the state for all LLCs.
Reinstatement of LLC. Companies that don’t file their annual LLC report (or don’t comply with certain other requirements) risk being administratively dissolved. This means that the state itself dissolves, or ends the LLC, without the LLC’s consent. When this happens, the LLC can no longer do business in the state.
Fortunately, most states allow LLCs that have been administratively dissolved to remedy their mistake and apply for reinstatement at any time. There is a fee associated with the reinstatement that is in addition to annual report filing fees or other fees the LLC might owe.
Changing Information in the Certificate of Organization. The Certificate of Organization, or whatever it is called in a particular state, is filed early on in an LLC’s life. This are what officially forms the LLC. As LLCs grow, they often change and it is not uncommon for the information in the Certificate of Organization to become outdated.
When the information becomes outdated, the LLC is usually required to provide the state with the updated information. Some common changes to LLC Certificates include: a change in the people who are serving as managers; a change in the registered agent for the LLC within the state; a change in the street address of the LLC. Certain changes, like changes to the registered agent, have specific forms tailored to that purpose. In other cases, a more general amendment is filed. The fees for different filings vary but are usually quite small for these changes.
Dissolving the LLC. At some point, you may want to terminate your LLCs operations. Maybe the business was not a success, or maybe it was successful enough that you are retiring. Whatever the reason, when you want to end your LLC, should not simply stop operations. Doing so can leave them or their owners exposed to continued liability, particularly if there are multiple owners.
Terminating an LLC is a process that is set forth in every state’s laws and requires wrapping up business and LLC affairs and then completing and filing required paperwork with the state. The required paperwork is usually a Certificate of Dissolution.
Merging or Consolidating the LLC
Just like corporations, LLCs sometimes consolidate or merge their operations into a single LLC or other business entity. This could be for ease of operations or because the LLC was sold. When this happens, the LLC must file paperwork, usually called a Certificate of Consolidation or Merger, with the Secretary of State to provide notice of and formally effect the change.
If the LLC is merging into the other entity, or otherwise not surviving the merger or consolidation, the Certificate should include the fact that the LLC is being cancelled in the title and texts of the document. The appropriate Certificate must be signed by someone with authority to act for the LLC, usually a member-manager. As with virtually every filing, there is a fee associated with filing this paperwork that varies in amount from state to state.
If your domestic limited liability company or foreign limited liability company needs legal representation to help with compliance issues, drafting contracts, changing ownership, or anything else, post your legal need on UpCounsel’s attorney connection platform. Top, experienced, licensed attorneys check these postings every day and provide you with offers to help.