What is the difference between domestic and foreign LLC?

A domestic LLC is formed under the laws of the state where it was created. A foreign LLC is the same company registered to operate in another state outside its formation state.

Do I need to register as a foreign LLC if I sell online?

Generally no if you have no physical presence. However, economic nexus rules may create tax obligations even without foreign registration.

Can I operate in another state without foreign qualification?

If the activity meets that state’s definition of transacting business, registration is required. Failure to register may result in penalties.

Is forming in Delaware required for startups?

It is not required. Delaware is common for venture backed companies and public corporations, but small businesses often form in their home state.

Do I pay taxes in both states if I foreign register?

Possibly. Tax liability depends on where income is earned and nexus rules. Registration alone does not automatically mean full taxation in both states.

Home State vs Foreign State Filing Explained

When forming a limited liability company or corporation in the United States, business owners must determine where the entity is legally formed and where it is legally authorized to operate. This distinction is referred to as home state formation and foreign state filing.

In practice, this issue arises when a business operates across state lines or is formed in one state but conducts activities in another.

Under US law, business entities are formed under state statutes. Each state regulates companies created under its own laws and requires registration from companies formed elsewhere that transact business within its borders.

What Is a Home State Filing

A home state filing occurs when a business entity is formed in a particular state under that state’s governing statutes.

For example:

An LLC formed in Texas is created under the Texas Business Organizations Code
A corporation formed in California is created under the California Corporations Code

This formation process typically requires:

Filing formation documents such as Articles of Organization for an LLC
Filing Articles of Incorporation for a corporation
Paying state filing fees
Appointing a registered agent in that state
Complying with initial publication requirements where applicable such as in New York and Arizona

The home state is often called the domestic state.

Once approved, the business becomes a domestic entity in that jurisdiction.

What Is a Foreign State Filing

A foreign state filing occurs when a company formed in one state registers to do business in another state.

The term foreign does not mean international. It simply means outside the original formation state.

For example:

An LLC formed in Florida that begins operating in Georgia must register in Georgia as a foreign LLC
A Delaware corporation operating in Illinois must register as a foreign corporation in Illinois

Foreign qualification usually requires:

Filing an Application for Certificate of Authority or similar document
Providing a Certificate of Good Standing from the home state
Appointing a registered agent in the foreign state
Paying a filing fee
Complying with annual reporting obligations in that state

Failure to register when required can result in penalties and restrictions on legal enforcement rights.

What Counts as Doing Business in Another State

The requirement to file as a foreign entity depends on whether the business is considered to be transacting business in that state.

While definitions vary slightly by jurisdiction, common triggers include:

Maintaining a physical office or storefront
Employing workers in the state
Owning or leasing commercial property
Regularly providing services within the state
Holding inventory in warehouses located in the state

Activities that typically do not require foreign registration include:

Conducting isolated transactions
Maintaining a bank account
Selling products online without physical presence
Defending or settling lawsuits

For example, California defines doing business under California Revenue and Taxation Code Section 23101. Other states have similar statutory definitions.

Because definitions vary, business owners should review the specific statutes of the state in question.

Practical Scenarios and How Filing Works

Different business models create different jurisdictional outcomes.

If you live and operate only in one state:

Form the business in that state
No foreign filing is required

If you form in Delaware but operate physically in your home state:

Delaware is the domestic state
You must register as a foreign entity in your home state
You will have compliance obligations in both states

If you expand operations into a second state:

Keep your original home state formation
File for foreign qualification in the new state
Maintain registered agents in both states
File annual reports in both states

If you only sell online without physical presence:

Foreign registration is often not required
Tax obligations may still apply depending on economic nexus rules

Each situation should be evaluated based on physical presence and operational activity.

Common Misunderstandings About Delaware Formation

Many businesses form in Delaware because of its established corporate law system under the Delaware General Corporation Law.

However, forming in Delaware does not eliminate the need to register elsewhere if business operations occur in another state.

If a company:

Has employees in Texas
Has an office in Texas
Generates revenue from services performed in Texas

Then it must register in Texas as a foreign entity, even if incorporated in Delaware.

This results in:

Two sets of filing fees
Two annual report obligations
Two registered agents

Delaware formation is most advantageous when:

The company seeks venture capital
The company plans public offering
The company has multi state operations
Investors require Delaware jurisdiction

For small local businesses operating in one state, forming in the home state is usually more practical.

Consequences of Failing to Foreign Register

Operating without required foreign qualification can create legal and financial consequences.

Possible outcomes include:

Monetary penalties
Inability to bring lawsuits in that state until registered
Back taxes and fees
Administrative fines
Exposure to personal liability arguments in litigation

Most states allow late registration, but penalties may apply.

How to Decide Where to Form and Register

To determine the correct structure, evaluate the following:

Where are you physically located
Where are your employees located
Where do you store inventory
Where do you maintain offices
Where are services performed

If all activities occur in one state:

Form in that state only

If operations span multiple states:

Form in one state
Register as foreign in each additional state where business activity meets statutory thresholds

Avoid forming in multiple states separately unless there is a strategic reason such as creating separate subsidiaries.

Tax Considerations Across States

Foreign qualification does not automatically create double income taxation. However, it does create compliance in multiple jurisdictions.

Businesses may face:

State income tax filing requirements
Franchise taxes such as those imposed by California and Delaware
Annual reporting fees
Registered agent costs in each state

State tax obligations are governed by nexus rules. Economic nexus standards expanded significantly after the Supreme Court decision in South Dakota v. Wayfair, Inc., 585 U.S. 278 in 2018.

Even without physical presence, sales thresholds may create tax obligations.

Consulting a qualified tax professional is recommended when operating across state lines.