Domestic vs Foreign LLC
All businesses operate in their “Domestic” state. The state that the business is managed from becomes the domestic state for the entity. It does not matter if the business is home-based or cloud-based. The business could have zero employees. The business may only sell to or buy from out-of-state. The domestic state is ultimately wherever the business manages itself from. All other states the business does business in may require the business to register either as a foreign or domestic entity.
Taxes and fees get levied, disputes get adjudicated and corporate veils can get pierced against any businesses operating in a state’s geographic jurisdiction. Businesses hoping to cloak ownership and/or save taxes by filing a “Domestic” LLC in states like Wyoming, Alaska, Nevada, South Dakota, Washington, Florida or Texas can have hopes shattered.
A plaintiff citizen, entity or taxing authority may ask a judge to re-decide which state the business is managed from. The judge considers whether a mailing address and bank account are the only things present in the supposed state of domesticity. The judge also considers which state the entity’s manager/officer/owner lives in.
If the business is lucky, the judge just forces the business to file as a foreign entity in the actual state of domesticity. Foreign entities are usually charged higher up-front and recurring annual filing fees than Domestic entities. Back taxes, fines and penalties owed to the domestic state may be limited to the statute of limitations for that state if the entity is forced to register as a foreign entity.
For the unlucky business, the judge makes the business re-register as domestic in the state it operates in. Dissolving a fraudulently domestic LLC in the pretend domestic state and re-filing the entity as domestic in the new state is just the tip of the iceberg. So is closing puppet bank accounts, the merchant card processing account and re-opening them in the new domestic state. The need to re-write, re-assign and re-execute leases, vendor and client contracts, refile trademarks, patents, franchises, and restructure any payroll mid-year in a new state still may not be the end. Having the IRS disassociate the old state LLC and re-associate the new LLC to retain the federal identification number may help but the most severe blow is for businesses that went many years before being outed by a judge.
Fraudulent domesticity erases protections of the statute of limitations. The state can assess back taxes, filing fees, penalties and interest for as many years as the business operated in the state. Combined interest and penalty rates in some states exceed 50% per year. The compounding effect can be a severe financial blow.
Only three of the seven no/low-tax states (Nevada, Texas and Florida) have winters that rarely hinder operations. Florida and Washington states’ four-hour gap from the opposite coasts force any national businesses on either coast to operate at night to handle business on the opposite coast. Only three of the seven no/low-tax states (Texas, Florida and Washington) have sizeable populations to source talent from and deliver goods and services to. The same three states also are the only ones with enough highways, hospitals, airports and airlines, mass-transit, universities, and deep-water ports to lure most businesses into investing a credible base of operations. Only two of those three (Texas and Florida) have enough natural energy and tourism gird their governments with extra revenue to safeguard losing their no/low-tax prestige. Washington state supports its status with a peak 9.5% sales tax rate and business occupation tax.
Save yourself and your business. Let us create your LLC in the same state it does business in. In fact, let us create a life-time supply of domestic LLCs for nearly the cost as one LLC in Texas or one of the other 16 states that allow for a series LLC filing. Reach out to us.