Can You Form an LLC In One State and Operate In Another?

When you form a limited liability company (LLC), you must file organizational paperwork to legally create the entity. This paperwork is usually called "articles of organization" or a "certificate of organization." The state that you file your articles with becomes your LLC's state of organization or home state.

You can create your LLC in one state and do business in another state. But it's important to consider the different reasons why you'd form your LLC in one state and operate in a different state.

Where Can You Form An LLC?

You can form an LLC in any state. After you create your LLC, you can operate your business in any state, not just the one where your LLC is organized.

For example, suppose you decide to organize your LLC in California. But you want to open a few stores in Oregon and Washington. You're free to open shop in Oregon and Washington. You don't even have to open any locations in California, your original state of formation, before you start up operations in Oregon and Washington, or ever.

But if you're thinking about legally forming an LLC in one state and doing business in another, you should keep a few things in mind. You'll need to:

• choose which state to form your LLC
• decide whether you want to operate in more than one state
• familiarize yourself with the laws of each state where you'll operate, and
• determine whether you need to register to do business in a state.

Choosing Which State to Form Your LLC

After you've decided you want to start an LLC, you need to pick a state to file your formation paperwork. Most LLC owners simply form their LLC in the state where they live or where their business will operate. So if you wanted to start a restaurant in Baltimore, for example, you'd probably create your LLC in Maryland.

Should You Form Your LLC in Your Home State?

Legally creating your LLC in the same state where you'll do business is often the easiest and most beneficial option. You only need to worry about one state's laws. In addition, organizing your LLC in a state automatically authorizes you to do business in that state. In other words, you don't need to qualify to do business in the state where you're already organized.

But does it ever make sense to form your LLC in a state that's different from the one where you'll do business? Typically, the answer is no. Although if you operate your business out of multiple states, then you'll need to choose one of those states to serve as your home state.

In some cases, you might find some benefits to forming your LLC in:

• Delaware
• Nevada, or
• Wyoming.

These states have a reputation for business-friendly laws. Specifically, these states offer more privacy to LLC owners as well as lower LLC filing and maintenance fees. Moreover, it's generally easier to operate an LLC within the generous parameters of these states' LLC laws. But unless you have some unique requirements for your business, you likely won't benefit significantly from these states' extra-friendly business laws.

Should You Choose a State for Its Low Taxes?

Some business owners consider legally forming their LLC in a state with low or no income taxes, like Nevada or Wyoming. But organizing your LLC in one of these states won't help you save on taxes.

In general, you'll need to pay taxes to whichever states you do business in. Your tax obligations are unrelated to where your LLC is organized.

If you have enough business activity in a state, then you'll need to file and pay the applicable business taxes to that state. These taxes could include:

• income tax
• sales and use tax
• franchise tax
• employment tax, and
• property tax.

You should check a state's rules for what level of business activity subjects you to that state's taxes. But in general, if you have continuous sales to customers in that state, you'll be considered doing business there and have to pay taxes to that state. If you're considering this option, consider speaking with a tax professional, such as a tax attorney or accountant.

Registering to Do Business In Another State

If you organize your LLC in one state but conduct business in another, you'll almost certainly need to register in the latter state. States have variations of these foreign qualification rules. But in general, if your LLC engages in intrastate commerce in another state, then you must register in that state as a foreign business.

Intrastate vs. Interstate Commerce

"Intrastate commerce" means that your business operates within one state. In contrast, "interstate commerce" means that your business operates across multiple states. It's important to understand the distinction when determining whether you need to qualify as a foreign LLC in another state. If your LLC is just engaged in interstate commerce, then it doesn't need to register as a foreign LLC.

Let's look at a few scenarios to determine whether these situations would be considered intrastate or interstate commerce.

Physical stores in multiple states. Suppose you run an outdoor sporting store. You form your LLC in Colorado and open two stores: one in Colorado and one in Kansas. Your store in Kansas serves primarily Kansas residents, and you advertise around town. You'd likely be considered to be engaging in intrastate commerce. You're not transporting goods across state lines. You're operating a physical store in Kansas to serve customers within the state.

Online store with customers in multiple states. Now, suppose you run an online store selling dog handkerchiefs and other pet accessories. You organized your LLC in Virginia because that's where you live. But you have customers all across the United States, with a lot of them coming from California and Florida. Your business activities would likely be categorized as interstate commerce. You're simply transporting goods across state lines. You don't have a physical presence in another state.

Even if your LLC is deemed to have intrastate commerce in one state, your business activities might qualify for an exemption. States generally lay out a list of business activities that are exempt from the intrastate commerce rule. These activities typically include defending or settling a lawsuit within a state, operating a bank account in that state, and collecting debt within that state, among other exemptions. Consult your state's laws for a full list of exemptions.

Business Taxes vs. Business Registration

But you should note that there's a difference in how states view business activities for registration versus tax purposes. Just because you don't have to register to do business in a state, that doesn't mean you won't owe taxes to that state. Typically, the bar for when you owe taxes to a state is lower than the bar for foreign registration.

Again, the typical test for whether you need to register to do business in a state other than your home state is whether your LLC is engaged in intrastate commerce in that state. Making sales to customers in a particular state, no matter how many, is typically not enough to require registration if your LLC isn't physically located in that state.

But the typical test for whether you need to pay taxes to a state is whether your LLC has a "nexus" with that state. States have different definitions for nexus. So you should look at your relevant state's laws or consult a business attorney or tax professional.

However, in general, states consider a business to have a nexus with the state if the business has:

• a physical location (like an office, store, or warehouse) within the state
• a large number of sales within the state (the state usually provides a specific threshold that's adjusted periodically), or
• employees or representatives who are located in or travel often to that state.

You should consider whether your LLC will be considered to have a nexus with a particular state when deciding where to form your LLC. If you have to pay taxes to a particular state anyway, then you should consider whether that state is the best place to form your LLC. Likewise, if you have to register your LLC in a particular state anyway, then it could be better just to form your LLC there in the first place and skip the extra foreign registration step.

Registering as a Foreign LLC

If you've determined that you need to register your business as a foreign LLC in another state, you'll need to file the required paperwork with the appropriate state agency. Typically, you'll submit the filing to the state's corporations division or secretary of state's office.

States have different names for the required registration form, including:

• foreign registration statement
• certificate of authority
• application for authority to transact business
• application for registration, and
• application for foreign LLC.

You can typically find the appropriate form on that state's secretary of state website. In most cases, you'll need to pay a fee when you submit the form. The fee can range from $50 to $750.

In addition to initially registering your LLC in another state, you'll need to comply with ongoing filing requirements for that state. In most states, foreign LLCs need to submit reports and pay filing fees every one or two years, just like domestic LLCs.

Most smaller LLCs that plan to operate in only one state will also form in that state to avoid hassles like foreign registration and ongoing legal requirements.

What If You Can't Form an LLC in Your State?

All states recognize an LLC as a business entity. So, in every state, you can form an LLC. In fact, LLCs are uniquely state business entities—that is, LLCs aren't separately recognized as taxable entities. Instead, LLCs are categorized as corporations or partnerships (or as disregarded entities) for tax purposes.

However, you might not be able to form a regular LLC in your home state because of your profession or business activities. Not all states allow all businesses to be organized as LLCs.

Many states allow professionals to form either regular LLCs and professional LLCs. Professional LLCs operate similarly to regular LLCs but can only be formed by professionals. Your state might be one of the states that give professionals the freedom to choose between these business structures. But that's not the case for every state.

Some states don't allow professionals to form a regular business entity. Instead, professionals must form a professional entity like a professional LLC or professional corporation. In addition, some states don't recognize professional LLCs at all.

In California, for example, professionals can't form regular LLCs or professional LLCs. Instead, professionals in California generally form professional corporations.

If you're a professional, you'll need to not only check your state's business laws for guidance but also your profession's rules. Your profession might have specific rules about whether you can form an LLC, and if you can, the specific restrictions or requirements of your business.

A state's laws and your profession's rules might affect where you can form your LLC and where it can operate.

Guidance on Operating Your LLC Outside Your Home State

When you think about where to form your LLC, remember that you can legally create an LLC anywhere (unless restricted due to your profession). But just because you can form your LLC anywhere doesn't mean any state will do.

For most LLCs, starting a business where the LLC owners live or where the business will operate is often the best choice. But before you file the legal paperwork, you should think about the advantages and disadvantages of each state. Some states offer legal advantages like business-friendly laws. But factoring in more than one state to your business plan comes with extra costs and filings. You should speak with a business attorney about your options and what will be suitable for your LLC.