U.S. businesses can operate in one or several states or they can operate in a foreign country. Most businesses must register where they are doing business, and that might mean registering as a domestic or foreign business, or both. And what if you do business in several states or in a state and a foreign country? It gets confusing, so let's sort it out.
Corporations, LLCs, and certain kinds of partnerships can be considered foreign or domestic. Sole proprietor businesses are linked to the owner and aren't registered with a state or considered as foreign or domestic.
IRS Regulations on Foreign vs. Domestic Businesses
The IRS designates whether a business is "foreign" and "domestic" for tax purposes. States also designate businesses as "foreign" and "domestic."
A domestic business is a business organized in the U.S. under the laws of a state. A business that's organized both in the U.S. and a foreign jurisdiction (another state or country) is also considered a domestic business.
The IRS also says that a business is foreign if it's not domestic. That is, all business not organized in the U.S. are considered foreign businesses. The IRS considers whether a business is "foreign" on the facts of the case, independent from its classification as a corporation or other business type.
For example, if you register your business in the U.S. under Oregon's business laws, you are registering as a domestic LLC or corporation.
If you register an LLC or corporation under French law and you also register as an LLC or corporation in New York, your business is a domestic LLC or corporation. But if you register under French law and you don't register with a U.S. state, your business is a foreign business (either LLC or corporation), according to IRS regulations.
Foreign vs. Domestic Businesses in U.S. States
A domestic business type is a limited liability company or corporation that is operating in the state where it was organized. In many states, there is no specific designation for a domestic LLC or corporation. If you are registering your LLC or corporation in a state, and this is the only state where you are doing business, you are registering a domestic LLC or corporation.
If the business registers in another state, that second state becomes a foreign business registration.
For example, if you register your business in Iowa with an Iowa address, you're registering as a domestic LLC or corporation. If you also want to do business in Illinois, you must register as a foreign business (LLC or corporation) in that state.
What 'Doing Business' Means
In order to know if you must register an LLC in a different state, you need to know the meaning of the term "doing business." In general, you are doing business in a state if you have a tax nexus in that state. A tax nexus is a connection with a state for tax purposes.
- You have a business bank account in the state
- You sell in the state through a distributor, an agent, or a manufacturer's representative
- You have an office, manufacturing or distribution facility, or retail store in the state
- You own real property or personal property in the state
- You transact business or holding meetings in the state.
Each state wants to know who is doing business in their state, for tax purposes.
Don't confuse the concept of "doing business" with a D/B/A (doing business as), which is the same thing as a fictitious name statement filed with a locality (often a county) to register the business within that location.
The Controlled Foreign Corporation – A Special Case
A controlled foreign corporation (CFC) is a special kind of foreign corporation that has U.S. shareholders who own 50% or more of the stock, thus controlling the corporation. Like other types of foreign corporations, the company is registered and conducts business outside the U.S.
Because U.S. citizens are in control of the corporation, they can make decisions that are to their advantage for tax purposes, so shareholders, directors, and officers must report their income from the foreign corporation and pay tax on that income.
Tax Reporting of CFCs
A controlled foreign corporation must file an IRS tax report on Form 5471, along with several schedules, as part of the CFC's tax filing. The report asks for information about U.S. shareholders who owned stock in the foreign corporation.
This form is extremely complicated, so get help from your tax professional to complete this form.
Two Tips for Foreign Corporations
- Complete your business registration in your "home" state first, and get the official documents from the state. You may need copies for other states where you register as a foreign corporation or LLC.
- If you are considering registering with several states, check the requirements for include "LLC" or "Inc." in each state. Some states do require the name to include specific, and you don't want to have different names in different states.