LLC stands for Limited Liability Company and was first accepted as an authorized legal business entity in the late 1970s in Wyoming. Since then, it is recognized in every state and has become one the most popular business structures for small and mid-size businesses (SMBs) primarily because of its liability protection. It offers business owners the simplicity of a general partnership in terms of formalities and taxes, yet with the personal protection and shield against company debts and liabilities of a corporation. Otherwise, you could be held personally responsible for the mistakes your business might make.
Another huge benefit of forming an LLC is its flexibility. You get to choose whether you want to be managed as a partnership (member-managed LLC) or as a corporation (manager-managed LLC) with all its formalities, such as a board of directors and annual meetings, or just forgo those completely. You also get to elect how your LLC will be taxed by the IRS; as a sole proprietorship (single-member LLC), as a partnership (multi-member LLC) or as a corporation. Filing your LLC as an S corporation has some great tax advantages as it allows business owners to split their income between their distribution as a partner and status as an employee. This type of LLC tax structure can result in paying less self-employment tax and leaving more money in your pocket.
LLCs can also be turned into a corporation down the road if the business takes that direction. With the simplicity, liability protection, and flexibility of an LLC, it is no wonder why so many business owners select this type of business entity when forming a company.
Domestic LLC vs. Foreign LLC
A domestic LLC means you file in your state of residence and you do business mainly in that state. This is the most common and cost-effective scenario.
A foreign LLC is used when you have filed papers in one state, and you have a physical facility or storefront in another state. In order to do business in that second state, you need to file a foreign LLC. Foreign LLCs tend to cost more and require a registered agent. Conversely, if you file for an LLC in another state for some reason, and you do business in your home state, you will have to file a foreign LLC in your home state in order to do business there.
Taxes are paid where money is made. It doesn’t matter if you file your LLC in Delaware or Texas, if you are doing business in your home state then taxes and state fees will be paid in your home state. You also still need to pay fees in the state in which you filed your LLC as that is where you originally filed your documents. Filing in more than one state makes things a little tricky and in most cases will create a more complicated business structure and add unnecessary annual costs.
Does my LLC have to be registered in the state I live in?
No, but that is most often the clear choice. If you do business in one state or have a physical address or store, filing in the state you reside in has advantages. Filing out of state requires a registered agent as well as filing as a “foreign LLC” for each state you do business in. It often saves a lot of money to file in your state of residence. However, if you do not have a physical facility or storefront or are planning on conducting most of your business out of state, you can explore filing an LLC in another state.