Domestic vs. Foreign Corporations: Key Differences Explained

What Is a Domestic Corporation?

A domestic corporation is a company that conducts its affairs in its home country. A domestic business is often taxed differently than a non-domestic business and may be required to pay duties or fees on the products it imports. Typically, a domestic corporation can easily conduct business in other states or parts of the country where it has filed its articles of incorporation.

Businesses that are located in a country different from the one where they originated are referred to as foreign corporations. Companies also may be referred to as foreign businesses when they are outside of the state in which they were formed. For example, a corporation that is incorporated in Delaware will be considered a domestic business there and a foreign business in all other states.

How Domestic Corporations Operate in Their Home State

Usually, a corporation is established after a business files its articles of incorporation with a state agency. From that point forward, all of the corporation’s conduct is subject to the law of the state in which it was formed, even if it is not doing business there. This also means that if the company was incorporated under Nevada law, it will be considered a domestic corporation in that state and a foreign one everywhere else.

Corporations are allowed to change which state laws govern them. To become a domestic business in another state, the corporation must first be dissolved in the place where it was originally formed. After that process is complete, the company may file the appropriate articles of incorporation in another state.

Domestic business owners are free to choose where to domesticate their corporations and, as a result, will seek to analyze corporate laws in different states to determine which state represents the most suitable home. Historically, Delaware has often been the preferred option.

Delaware is perceived as a business-friendly state and is particularly known for its Court of Chancery. This unique court system is adept at resolving complex corporate legal matters, including disputes among shareholders. Delaware also has business-friendly usury laws, giving banks and credit card companies more freedom to charge steep interest rates on loans.

Key Factors for Incorporating and Taxation

For a domestic business that is deciding where to be incorporated, weighing which states have lower corporate tax rates is not a big consideration. Corporations are subject to the tax rates in states where they do business, not just where they were formed. Under federal tax laws, corporations are subject to 21% tax rate on all income, regardless of where they were formed.

Corporations doing business in another state generally must register as foreign businesses in that state, with any business conducted there being taxed by that state at their rates. A business located where corporate tax is high would not be able to lower its tax bill by choosing to incorporate in a state where taxation is lower.