What’s a Domestic Profit Corporation?
A domestic profit corporation is simply a business that is conducting its activities within the country in which it was first set up. If a domestic business deals with any imports, then it can be expected to pay duties and fees on them, as well as being taxed differently to a foreign corporation. As a general rule, a domestic profit corporation has the ability, should it wish to expand, to file Articles of Organization in other states to conduct business outside of its home state.
Understanding Domestic Profit Corporations
Foreign corporations are those which were originally set up and established in another country. Note though: the term ‘foreign’ is also applicable to a business if it is operational within a state, which is not that within which the company was first formed. So, were you to set up a corporation in Pennsylvania and then expand by setting up a branch in New Jersey, that business would be considered a foreign corporation there. The original business in PA – the HQ if you like – would be classified as a domestic profit corporation.
As with other businesses – such as LLCs – a corporation will become registered (usually after filing with the Secretary of State office) and then be legally authorized to conduct its business affairs after submitting Articles of Organization. Once these are processed and the business is on record, the corporation will be required to operate within the boundaries of state stipulations. These regulatory compliances need to be maintained throughout the lifetime of the corporation.
Perhaps surprisingly, it is possible for a corporation to alter the specific state government under which it operates. For illustration, suppose a corporation had been founded in Illinois. If the corporation is dissolved there, the state from which the business originated, then once the dissolution is finalized, Articles of Organization can be filed in an alternative state, such as North Dakota, and then be run according to ND’s state laws.
Entrepreneurs are able to choose where in the country their corporation be domesticated. Business laws and startup regulations can differ quite considerably between the states. For this reason, many business people will examine the regulatory differences around the country before deciding which state will be best suited, in which to headquarter their company. Here are just a couple of examples of factors that can determine the domestication state of a corporation:
- Nevada has state-specific privacy laws, keeping the names of invested corporation members away from public eyes;
- Delaware has some of the best laws for corporations, making it a hotspot for domestic corporation start-ups.
Classification of Domestic Corporations
A domestic corporation will most likely face fees and tariffs for any products it imports. They are also taxed differently compared to foreign corporations. Generally speaking, once a corporation files its Articles of Incorporation, it should then be able to conduct business in other states across the country.
The following list is the rulings by the IRS which assign the mentioned entities as corporations:
- A company created under either a state, or federal law, or a law of an Indian tribe that is known federally if the law mentions the company as a corporation, incorporated, body politic, or body corporate;
- A company listed under section 301.7701-3 of the IRS Regulations;
- A company created under a state or federal law that declares the company to be a joint-stock association;
- A company that is chartered by the state, operating as a bank with FDIC insured deposits;
- A company entirely owned by a state, political section, or a foreign government;
- A company that is recognized under section 1.892.2-T.3 of the IRS Regulations;
- A company that is treated as a corporation for tax purposes as long as it is not under section 7701(a)(3) of the IRS;
- A company that operates as an insurance company;
- A company that operates as a specific type of foreign business.
When the time comes to file taxes, a limited liability company has the option to request to file as an S-Corp. Until that request is made, LLCs are not generally considered to be corporations.
One of the main reasons so many people opt to have their businesses domesticated in Delaware is its Court of Chancery which is highly regarded for specializing in all manner of corporate legal issues.
Typically, a corporation is deemed domestic according to the state in which it is formed. However, sometimes, a business that was created in Delaware may be classified as foreign if its business is not actually operational there. So, by way of example, a business started up under Pennsylvania’s laws would be considered a domestic corporation within PA, but would be deemed as foreign in any of the other states.