What is a Domestic Limited Liability Company?
Domestic limited liability (also called a “Limited Liability Company” or “LLC”) is a type of business structure in which the owners of the company (called “Members”) are only liable for a certain amount of money in the event that the company fails, and the LLC can shield the Members from liabilities that may occur during the normal course of business.
Domestic limited liability companies are a formal business structure registered at a state level (usually at the Secretary of State), and can be registered in other states they are doing business (such registration is called a “foreign registration”). They are different from Corporations (also registered at the state level), and different from sole proprietorships and partnerships (which are not registered).
One of the main advantages of a domestic limited liability business structure is that the Members of the company are not liable for any debts or obligations that the company may incur. This means that if the company fails, the Members will not be held personally responsible for any losses incurred. This provides the Members with some financial security and peace of mind. If the company were to be sued, it would be the company (and not the Members) who would be on the hook for any financial penalties or other liabilities.
Another advantage of a domestic limited liability business structure is that it can provide members with some tax benefits. Depending on the state, Members may be able to deduct any losses incurred by the company from their personal income tax. This can help reduce the amount of money a Member has to pay in taxes and can be a great way to lower their overall tax burden. LLC’s are the only entity type that can have one of four tax statuses: disregarded, partnership, S-Corp and C-Corp.
A third advantage of this type of business structure is that it can be relatively easy to set up. Setting up a company with limited liability is often much simpler than forming a corporation, as there are fewer government regulations and paperwork to complete. This makes it an attractive option for small business owners that may not have the resources or time to form a corporation. This also means setting up such a structure is less costly to setup and maintain in the long-term.
Finally, a domestic limited liability company is the only entity type that can provide anonymity, which is important for many people, including abuse victims, controversial businesses, landlords and more.
Differences between General LLC and Domestic LLC
You are required by law to register your company in the state (or states) it’s doing business in. From a purely legal standpoint, there really isn’t any difference between a General LLC and a Domestic LLC. Both types of LLC’s are registered at the state level. When referencing the state that the LLC was originally formed in, it is a Domestic LLC. When referencing another state the LLC is doing business in, although wasn’t originally formed in, then that LLC is considered a Foreign LLC or General LLC (it’s more standard to refer to the LLC as a Foreign LLC in such instances, over a General LLC).
Therefore, your LLC can be both a General LLC and a Domestic LLC, depending on what state we’re referencing. For example, if you originally formed your LLC in Texas, but are also doing business in New Mexico and Colorado, then your LLC is a Domestic LLC with respect to Texas, and a Foreign LLC (or General LLC) with respect to New Mexico and Colorado. In both instances, it is required that you register your Domestic LLC in New Mexico and Colorado as a Foreign LLC.
How do you form a Domestic Limited Liability Company?
There are three components to forming a domestic limited liability company: First, you must make some decisions on what your company will look like, in terms of the name, location, your partners, possible anonymity, and more. Second, you must file the paperwork as appropriate to properly register your LLC in the state (or states) it will be doing business. Third and most importantly, you must make sure you have a high-quality, customized and tailored Operating Agreement for your company.
You can file a domestic limited liability company yourself, although there are some pretty compelling advantages to hiring a lawyer or law firm to help you form your LLC. When you hire someone else to help you, they not only deal with the paperwork, but they can answer questions and make sure they steer you in the right direction as it relates to some pretty important decisions. Hiring a third-party can also provide some level of prestige when your company is associate with a law firm as the Organizer and Registered Agent. Finally, if you desire any form of anonymity, it’s impossible to do it without a third-party.
Step 1: Make some important decisions
You need to make the following decisions:
- What is the name of your company? You want to avoid a “confusingly similar name” from anyone else, especially trademark holders. Consider a 30-minute trademark attorney consult, if you’re not sure what to do — we can do name lookups and determine your risk-level with respect to other companies already out there.
- Where will you locate your business? Home offices are just fine, although that information is made publicly available. If you are concerned about privacy, you may want to look into virtual offices or virtual mailboxes.
- Do you value your privacy? Most states require disclosure of ownership information. If you don’t want such information disclosed, you may want to look into an Anonymous LLC.
- Do you want to be your own Registered Agent? You can save some money being your own RA, although you must have a real physical address in each state your company is registered in. Also, this address will be public information, and it will be the address where a sheriff goes to deliver a summons or legal complaint — so your home may not always be the best place for this. Also, you want the address to be open and accessible regularly, so you don’t miss any important correspondence.
- Who will you partner with? Think of going into business with partners, as getting married. You need to take it that seriously. Read our blog article about When Partners Declare War, to learn about the nightmares some folks face with bad partnerships.
- What are the initial capital contributions of the Members? Every company needs money to start. How much will each partner need to contribute?
- Will you have a Member Managed or Manager Managed company? A Member Managed company is managed by all the owners, and you can have different voting structures depending on what you and your partners decide. A Manager Managed company is managed by one or more Managers, who don’t necessarily have to be owners. We recommend Member Managed, unless you want one or more owners to have additional powers over the other Members, or you want to be able to hire someone to act as Manager, who will not own the LLC.
- Will you file yourself, or do you want to hire a third-party? We’re biased on this point, and believe you will be best served hiring us to help you form and setup your LLC. No where else, will you find the level of service and a high-quality Operating Agreement.
- Are you going to operate in other states, aside from the one you’re forming in? If so, then you will need to form a Foreign LLC in each state you’re conducting business. Note that this isn’t a question of where you sell, and so you can sell online everywhere and not have to register a Foreign LLC in all 50 states. The question is, where are you “purposefully availing yourself” of? This means different things in different states, but if you have an employee, base of operations, or conducting significant business in a particular state, you’re probably “doing business” in that state and need to register a Foreign LLC in that state. If you’re confused about this, and have questions, consider our 30-minute business attorney consult to help you.
- What Tax Status will you elect? Every LLC can be taxed in one of four ways: Disregarded, Partnership, S-Corp and C-Corp. It’s critical you understand what these are, and select the appropriate status. Read our knowledge base article on tax status for companies to give you an overview. If you still need help, please consult with your CPA or purchase a 30-minute tax attorney consult.
Step 2: Construct and File the Paperwork, or Hire a Third-Party to Help You
If you hire a third-party to form your LLC, you can rely on them to figure out all the paperwork, ask you the right questions, submit the filing fee and proper paperwork.
Otherwise, if you want to do it, you need to obtain a template Articles of Organization from the state you wish to register in, and fill out the paperwork and send it in. This means you’ll need to decide all the above questions on your own, and fill out the forms properly. You will also not be able to form an entity anonymously, since you will have to put your name down as the Organizer.
Once your LLC is formed, you then need to submit the right paperwork to the IRS to obtain a FEIN and select the right tax status, if not defaulted properly by the IRS.
Step 3: Obtain and Execute a High-Quality, Customized, Tailored Operating Agreement
The document that controls a domestic limited liability company is called an Operating Agreement. You can think of it as a “Partnership Agreement” between the partners, as well as the governing charter for the LLC itself.
The Operating Agreement is important because it is the document that establishes the rules and regulations for the LLC, including ownership and management rights and responsibilities, how the LLC will be managed, and how profits and losses will be distributed. It also serves as a legal contract between the members of the LLC, and is essential for protecting the interests of each Member.
Therefore, it’s absolutely critical that you obtain a high-quality Operating Agreement that is customized and tailored to the unique circumstances of you, your business, and the setup with your partners. Such a document will help avoid expensive disputes with partners, help you survive an IRS audit, prevent the “piercing of the corporate veil” in a lawsuit, and help protect your assets in a variety of circumstances.
An Operating Agreement will vary drastically, depending on the tax status, management, voting structure and more. A simple template from most companies will not suffice, although we provide such a high-quality Operating Agreement due to the expert system we wrote called the Couture Operating Agreement. This is free when we form your LLC for you. If you hire another company or form a LLC yourself, you must budget for hiring an attorney to generate a high-quality Operating Agreement, if you don’t want to purchase access to our system.
Get Help Setting Up a Domestic Limited Liability Company
While a domestic limited liability company is a relatively straightforward entity to conduct business, there are still a lot of issues to consider.
When you decide to move forward with a LLC, consider hiring one of the best out there in LLC formations.
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