What Is a Domestic Profit Corporation: Everything You Need to Know
What is a domestic profit corporation? A domestic profit corporation is a corporation that operates in its country of origin. 3 min read
2. Classification of Domestic Corporations
Updated October 26, 2020:
What is a domestic profit corporation? A domestic profit corporation is a corporation that operates in its country of origin.
Definition of Domestic Profit Corporations
A domestic profit corporation operates in the country in which it began, whereas a foreign corporation operates in a country outside of its home country.
For tax reasons, the IRS acknowledges any company that originated in the U.S. and is bound by the laws of the state in which it resides as a domestic profit corporation. For instance, any corporation created in and doing business in Pennsylvania, Nevada, or Puerto Rico is known as a domestic profit corporation.
While companies originating outside of the U.S., such as Japan's Toyota Motor or Germany's Volkswagen, are known as foreign companies, divisions or branches of these companies that originate in the United States could be considered domestic profit corporations. For example, while Honda Motors is a foreign Japanese corporation, Honda of America Mfg, Inc. is a domestic corporation because it was founded in Ohio.
An additional definition of a domestic profit corporation takes into consideration the state in which a company is based. A company that is founded in one state but has permission to operate in another state is considered a foreign corporation to that specific state; therefore, a corporation founded in Idaho that does business in Wisconsin would be considered a foreign corporation.
Following are some facts about certain states concerning corporate laws, foreign corporations, and domestic corporations:
- It is common for companies to choose to be based in Delaware so that they can utilize the state's preferable corporate state laws.
- Some owners opt to found companies in Nevada because of the state's laws concerning privacy that guard stockholders' names from the public.
- In order to operate a business in Georgia that was founded in Nevada or Delaware, a company must enlist as a foreign corporation.
- If a Nevada or Delaware corporation wishes to be considered a domestic corporation in Georgia, it must create a separately owned branch of the company in Georgia.
Classification of Domestic Corporations
Domestic corporations may face charges for importing products and are not taxed the same as foreign corporations.
Usually, if a domestic corporation files its articles of incorporation, it should be able to operate its business in other states.
The following rules provided by the IRS designate the listed entities as corporations:
- A company created under either a state or federal law or a law of an Indian tribe that is known federally, if the law mentions the company as a corporation, incorporated, body politic, or body corporate.
- A company listed under section 301.7701-3 of the IRS Regulations.
- A company created under a state or federal law that declares the company to be a joint stock association.
- A company that is chartered by the state and operates as a bank with FDIC insured deposits.
- A company that is either fully owned by a state, political section, or foreign government.
- A company that is recognized under section 1.892.2-T.3 of the IRS Regulations.
- A company that is treated as a corporation for tax purposes as long as it not under section 7701(a)(3) of the IRS.
- A company that operates as an insurance company.
- A company that operates as a specific type of foreign entity.
Unless a limited liability company (LLC) files Form 8832 requesting to be treated as a corporation regarding taxes, it is not usually deemed a corporation. The IRS provides guidelines for corporations under its 542 publication.
As mentioned previously, a lot of US companies choose to be founded in Delaware which means they are obligated to Delaware's state laws. Delaware is a common choice for incorporation for the following reasons:
- It is considered a pleasant state to do business in.
- The Court of Chancery in the state is known for its expertise in settling corporate legal issues.
Occasionally, a corporation incorporated in Delaware may be recognized as a foreign corporation if the company is not doing business in the state; however, most corporations are recognized as domestic corporations in the state the company is created.
For instance, a company created under Virginia's state law would be recognized as a domestic corporation in Virginia and would be known as a foreign corporation to any other state.
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