Must an LLC be formed in the same state in which it will operate?

Where to form an LLC

Can I form a limited liability company (LLC) in a different state than the one in which my business will operate?

A business is pretty much free to form a limited liability company, or LLC, in any old state. But you may still need to qualify your LLC to do business in your home state -- and this means both additional paperwork and additional fees. Most smaller LLCs that are based in one state are formed in their home state to avoid this double burden of paperwork and fees.

Be ready for some state tax complications if your LLC does business in a state that's different from the state where all of its members live. For one thing, the LLC members might have to pay personal income taxes in the other state on LLC income. (At best, you might get credit for those taxes in your home state and not have to pay twice. At worst, you might have to pay taxes you wouldn't have had to pay at home.)

Other state taxes vary wildly from state to state, and might influence your choice of location for an LLC. An LLC -- like any business -- has to pay franchise taxes; sales and use taxes; other transaction and excise taxes; and employment, property, and transfer taxes.

The bottom line is that some states will be better than others for your LLC. You can sometimes make these differences between states' laws work for you, but you absolutely have to do the tax stuff right. This is one of those times when you should see a tax professional -- or maybe one in each state where you might operate your LLC -- before you start.

Also, keep in mind that not all states will let all businesses be organized as LLCs. For example, California won't let some professionals, such as accountants, architects, and massage therapists, form LLCs. This can affect where you can form your LLC and where it can operate.