Domestic Entity

A domestic entity is a company that does business in the same state or country in which it is established. These entities must adhere to the laws and regulations of their domestic location. For example, a domestic entity would refer to a company incorporated or legally organized within Massachusetts that does business primarily within that state, pays taxes, and follows local laws.

A domestic entity is a business that is legally recognized and operates in the state or country where it was formed. It benefits from local legal protections and must comply with all relevant laws and regulations.

• Home Base: A domestic entity is a business formed and operates within the country of origin.
• United States Example: In the U.S., a domestic entity is a company incorporated in a particular state and doing business within that state.
• Legal Recognition: A domestic entity enjoys the legal protections and obligations of the state or country where it was established.
• Different from Foreign Entities: It differs from a foreign entity, which is a business registered in one state or country but operating in another. While being a domestic entity simplifies operations, expanding into new states or countries as foreign entities requires additional steps to maintain compliance.

Understanding Domestic Entities

When a business is created, it chooses where it will legally be formed. In the U.S., this means picking a state. Once the company is registered and legally recognized in that state, it is considered a "domestic entity" there. This means the business operates and complies with the laws of that state, and it is treated as a local business in the eyes of the state government.

For example, if Jordan starts a bakery in California and registers their business there, the bakery is a domestic entity in that state. California law governs the operations, taxes, and legal requirements.

Types of Domestic Entities

Domestic entities are not one brand or category. Domestic entities can be any company that affects the local economy. Different types of domestic entities include:

• Sole Proprietorship: A single-person business that operates domestically within the state of registration.
• Partnership: A business owned by two or more people, recognized by the state where it's formed.
• Corporation: A legal entity created by filing Articles of Incorporation in a specific state.
• Limited Liability Company (LLC): A legal entity created by filing Articles of Organization, registered with the state.

Each type of domestic entity has its own legal requirements and tax implications, but they all fall under the umbrella of "domestic."

Legal and Regulatory Obligations

Once a business is recognized as a domestic entity in a state, it must adhere to all local laws and regulations, including:

• State Taxes: Domestic entities must pay state taxes, including corporate taxes, income taxes, self-employment taxes, or sales taxes, depending on the type of business.
• Annual Reports: States require businesses to file annual reports that provide updates on the company's information, such as the names of directors or operational structure.
• Permits and Licenses: Depending on the nature of the business, the state or local government may require certain licenses to operate legally.
• Employment Regulations: Domestic entities must comply with state labor laws, including minimum wage, overtime pay, and workplace safety regulations.

Domestic vs. Foreign Entities

The key difference between a domestic entity and a foreign entity lies in where the business is registered and where it operates. According to the U.S. Small Business Administration, over 99% of businesses in the U.S. are small businesses, many of which are domestic entities operating in their home states.

• Domestic Entity: Formed, registered, and operates within the same state or country.
• Foreign Entity: Formed and registered in one state or country but does business in another. For example, if the bakery Jordan opened in California decides to open a new location in Oregon, it would need to register as a foreign entity in Oregon (while still being a domestic entity in California).

The concept of "foreign entity" might sound confusing because it doesn't always refer to businesses from different countries. In the U.S., even crossing state lines can require a company to register as a foreign entity in a new state.

Benefits of Being a Domestic Entity

• Legal Protection: Domestic entities are protected by the state's laws in which they are registered, providing security for owners and shareholders.
• Local Recognition: Being a domestic entity can enhance your business’s reputation within the state, as customers may prefer local businesses that are part of the community. Many websites and products explicitly advertise being a part of the local community.
• Streamlined Operations: Operating as a domestic entity simplifies legal and regulatory compliance since the business only needs to adhere to the rules of one state.