Domestic Corporation

What is a Domestic Corporation?

A domestic corporation refers to a company that is incorporated in and conducts business affairs in its own country. Domestic corporations are often compared with and contrasted to foreign corporations, which is particularly significant when considering corporate taxation rates.

What is a Corporation?

A corporation is an organization authorized by the government – through registration with the relevant government ministry – to act as a single legal entity. Basically, it means that a corporation is separate and distinct from its owners in the legal context.

When faced with lawsuits, mounting debts, or bankruptcy, business owners are only subject to limited legal liability – usually, the amount of money personally invested into the business – if their businesses are incorporated through being registered as corporations, but will be held personally liable to an unlimited amount if not incorporated.

As one can imagine, it is an extremely significant difference that can potentially result in profound, wide-reaching consequences, and as such, most of the prominent businesses we are familiar with in society are corporations.

When dealing with corporations, it is particularly important to note the jurisdiction in which a company is incorporated. The jurisdictions are typically provinces or states, and there will be implications depending on the place of incorporation. When a business wants to become incorporated, the owners will officially file its articles of incorporation with the relevant government ministry of its provincial or state jurisdiction.

Advantages of Domestic Corporations

Businesses are free to choose where to incorporate in order to become official corporations. Business owners typically examine all the possibilities and choose which jurisdiction they deem the most suitable or beneficial for them. For some, it may be a matter of convenience, and many smaller business owners will just incorporate in the province or state in which their company operates. Other owners will examine the different legislations to determine which jurisdiction offers the best business-friendly tax laws.

For example, the state of Delaware in the United States is a popular place of incorporation for many businesses due to its unique, pro-business tax laws. One example of such a law concerns the resolution of business disputes through litigation. The majority of states require that business disputes go through the legal system via a civil court and thus be subject to significant time-consuming wait times due to backlogs in other civil cases.

However, Delaware’s Court of Chancery deals specifically with business disputes and complex matters of corporate law, which will benefit corporations claiming it as its state of incorporation. Delaware is also known for its business-friendly tax laws, which allow banks and credit card corporations more freedom and flexibility to charge higher interest rates on loans.

Domestic Corporations vs. Foreign Corporations

Domestic corporations are often compared to foreign corporations, which are incorporated businesses conducting business in a country different from the one in which it was incorporated. For example, a corporation incorporated and operating in the United States would be considered a domestic corporation in the U.S. but a foreign corporation elsewhere.

Another example is a corporation that operates in the United States but was incorporated in Canada would be considered a foreign corporation in the U.S. It should also be noted that the distinction between domestic and foreign corporations applies not only between different countries but also between different states, provinces, or similar regional jurisdictions.

The implications concerning domestic and foreign corporations can be quite significant, particularly when dealing with corporate taxation. While the specific tax laws differ across different countries and jurisdictions, domestic corporations are typically taxed differently than foreign corporations.

Related Readings

CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Articles of Association
• Corporate Structure
• Limited Liability Company (LLC)
• Multinational Corporation (MNC)
• See all valuation resources