Sm-like (Lsm) proteins are ubiquitous, multifunctional proteins that are involved in the processing and/or turnover of many RNAs. In eukaryotes, a hetero-heptameric complex of seven Lsm proteins (Lsm2-8) affects the processing of small stable RNAs and pre-mRNAs in the nucleus, whereas a different hetero-heptameric complex of Lsm proteins (Lsm1-7) promotes mRNA decapping and decay in the cytoplasm. These two complexes have six constituent proteins in common, yet localize to separate cellular compartments and perform apparently disparate functions. Little is known about the biogenesis of the Lsm complexes, or how they are recruited to different cellular compartments. We show that, in yeast, the nuclear accumulation of Lsm proteins depends on complex formation and that the Lsm8p subunit plays a crucial role. The nuclear localization of Lsm8p is itself most strongly influenced by Lsm2p and Lsm4p, its presumed neighbours in the Lsm2-8p complex. Furthermore, overexpression and depletion experiments imply that Lsm1p and Lsm8p act competitively with respect to the localization of the two complexes, suggesting a potential mechanism for co-regulation of nuclear and cytoplasmic RNA processing. A shift of Lsm proteins from the nucleus to the cytoplasm under stress conditions indicates that this competition is biologically significant.