Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
A limited liability company (LLC) is a domestic entity registered in one state and permitted to operate within its borders. Owners of this business structure are known legally as members. These may include private individuals, other LLCs, foreign organizations, and corporations.
American Corporate Law defines a foreign LLC as an entity registered in one state but conducts business in another state. Every state has stipulated guidelines for who qualifies to open a foreign LLC and instructions they must adhere to or risk running into legal jeopardy.
If you are considering opening a foreign LLC, this article is for you. We will cover everything you need to know to move ahead with confidence.
Pros of Opening a Foreign LLC
If your limited company needs to expand and conduct business in other states, you may need to register as a foreign LLC as per the regulations of your target state. There are many benefits of opening a foreign LLC for your business. Here are the major ones.
Expanding the Business
You could be seeking business opportunities in other markets where your business will flourish. The Bureau of Economic Analysis shares the latest gross domestic product trends, consumer spending, and other vital statistics. If your company is doing well in your home state, expanding to another jurisdiction can boost your profits to shareholders.
Registering a foreign LLC serves your company well as it has legal standing in that state’s justice system. If you run into legal woes, you can sue to reinforce contractual agreements or recoup damages when business deals are awry. You can enjoy pass-through taxation and safeguarding of personal assets too.
Opening a branch in another jurisdiction does not affect the membership structure. You can keep the same owners at the headquarters and hire local managers to run operations in the new market. Additionally, your company is still a single entity with the same Employer Identification Number (EIN) regarding filing a single tax return.
Many banks require an entity to have local registration papers to open a local bank account. A foreign LLC takes care of this, so you have access to the financial services of local banks, such as loans. Taking these measures builds trust among your target customer base and makes it easier to transact with them.
Cons of Opening a Foreign LLC
The above benefits notwithstanding, consider the downside of opening a foreign LLC.
Foreign Qualification Process
Almost every jurisdiction has its unique requirements for registering a foreign LLC. Obeying the “foreign qualification process” prerequisites means you will fill out and submit separate foreign LLC registration forms.
You will also need to pay statutory fees in your home state if you maintain operations there. The varying rules of doing business from state to state are tricky, so you will need to enlist a qualified attorney to advise you accordingly.
If you are expanding your business outside your home state, you may have to pay taxes twice, impacting your bottom line. The law may dictate paying business income tax and franchise taxes in your home state and other states where you have operations.
Paying more taxes is just one aspect of opening a foreign LLC. You will encounter a host of hidden costs before your new venture is fully operational. For example, annual fees on top of the initial costs of opening the business and some states will require you to procure a business license and pay the related fees.
Furthermore, you may find that business is not as lucrative as you had imagined, which means the extra charges don’t make business sense.
The law will require you to select and maintain a registered agent for the LLC in all states where you conduct business and pay initial plus ongoing fees.
Registered agents accept service of process and other legal paperwork on behalf of the LLC in the event a collection action, lawsuit, or other claim is brought against the LLC. There are lots of services that can be your registered agent for you; check out our roundup of the best registered agent services for recommendations.
Venturing out to another state or multiple states means you have to study the laws and regulations of running an LLC. These requirements have legal implications, and failure to uphold them could launch legal woes that will affect your business.
For instance, grounds for revocation of an LLC include refusal to pay fees, penalties, or taxes, delay in submitting annual reports, and not retaining a registration agent.
The implications for such mishaps vary from state to state, and the state may amend laws without your knowledge. Therefore, having an attorney is crucial, even if it comes with additional expenses.
Since the laws and regulations of running a foreign LLC are so disparate, don’t be surprised to learn that some states don’t allow professional groups like physicians to operate an LLC. Furthermore, some states do not honor asset protection for single-member LLCs.
Differences From a Domestic LLC
A Domestic LLC is a business structure that is registered and operates in your home state. Its managers and members have limited liability, and they observe flow-through taxation to avoid double taxation. That is, members pay personal tax after receiving their share of profits.
Opening an LLC is the best approach for holding appreciating assets like intellectual property and real estate. It offers excellent flexibility in disbursing profits and losses among members, including individuals, corporates, and other LLCs.
Foreign LLC must have a unique name in the chosen state, and this starts by checking if the name is available. Once you confirm availability, the next step is to reserve your name before filing registration documents to block other entities from taking your preferred company name.
Suppose the familiar business name is not available in the new state. In that case, you will have to use a fictitious moniker which must also be available.
Suppose you stop conducting business in a foreign jurisdiction. In this case, it is prudent to cancel your authorization so you are not subject to franchise tax, annual report, or other prerequisites of the said state.
How to Register a Foreign LLC
The process of registering a foreign LLC varies from one jurisdiction to another. Below are the general requirements and procedures:
- Register an LLC in the primary state where your company operates and use these documents to open a foreign LLC in your chosen state. You will also need copies of the official document identifying your LLC in your home state and the Articles of Organization.
- Indicate whether you intend to do business in that state. For instance, keeping an office, distribution warehouse, opening a bank account, holding meetings, owning property, etc.
- Visit the website of the Secretary of State for that state to research what information is required to open a foreign LLC. Therein you will find other details like registration fees and the address for mailing this information.
- Complete the Certificate of Authority document or whatever name they use in that state. Indicate your chosen name and include the term “LLC” or limited company.
- Mail the original documents for registration in your primary state if necessary.
- Double-check all documents for accuracy, then mail the complete application to the Secretary of State. Include a check from your business account to pay the registration fees.
Tips for Filing Foreign LLC Taxes
As discussed previously, foreign qualifying or foreign registration is a prerequisite for opening a foreign LLC in other jurisdictions. This process ascertains that the public knows basic information about a business entity, such as its legal name, address, and name of its registered agent for service of process.
It also ensures foreign LLCs don’t get an unfair advantage over domestic LLCs regarding taxation and other requirements. After successfully opening a foreign LLC, you will need to file taxes to fulfill your host state’s obligations. Here are some things to consider:
- Have a certified public accountant prepare an accurate franchise tax report and file it with the local Comptroller of Public Accounts every year
- Pay your franchise taxes on time to avoid falling out of good standing with the new state, as this will attract fines and penalties that will impact your company
- If your company is not subject to annual taxation, you will need to file a periodic report with the Comptroller of Public Accounts every four years
- Should the registration of your LLC be forfeited, pay all fees and penalties, then apply for reinstatement and attach a tax clearance letter from the Comptroller of Public Accounts
- Observe double taxation laws where the corporation pays taxes and then members pay taxes after receiving their share of profits
The Last Word
Opening a foreign LLC is not complicated, but one must adhere to the laws of the state they are targeting. Hiring an experienced lawyer to handle these murky issues is always a good idea so you can avoid making costly mistakes as you expand into a new market. If things are too complicated in one jurisdiction, you may consider opening a new office where laws are more favorable.
Filed under: Advice Columns