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 (LLC) in any old state. But you may still need to qualify your LLC to do business in your home state -- and this means you'll have to file additional paperwork and pay additional fees. Most smaller LLCs that will operate in only one state also form in that state, to avoid these hassles.

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 a better home for your LLC than others. You can sometimes make these differences between states' laws work for you, but you absolutely have to get 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 allow all businesses be organized as LLCs. For example, California won't let some professionals, such as accountants, architects, and massage therapists, form LLCs. This might affect where you can form your LLC and where it can operate.