Should Digital Nomads Form a Business Entity?

Should Digital Nomads Form a Business Entity?

SpringerLink 2019 study on digital nomads explains that the growth of this sector is due in part to people’s desire for self-fulfilment and freedom of choice. Factors such as ease of movement and the advancement of technology have also made it easier to become a digital nomad. In fact, in the U.S. alone, approximately 4.1 million independent workers identify as digital nomads, while 16.1 million hope to become one someday.

Being a digital nomad is an exciting opportunity that many want to experience, but don’t jump into this lifestyle head first. Take some measures to protect yourself as a professional by forming a business entity.

Why Form a Business Entity?

If you plan on being a freelancer or digital nomad full time, becoming a business entity can help cover your liabilities even in a solo operation. This helps separate the personal you from the professional you and, in case of liabilities, your personal assets wouldn’t be put at risk.

Additionally, there are certain tax advantages for registered freelancers that operate under certain business entities. If you decide to grow from being a solo digital nomad to form a collective it’s also easier to partner with others and raise investment. Finally, setting up your own business makes you look more professional to potential clients, partners, and investors.

What Business Entity is Right for Me?

Sole proprietorship

A sole proprietorship involves only a single person to operate, which gives you complete control of the business. There are also lower associated costs and minimal paperwork.

However, Business News Daily points out major disadvantages to this structure, including assuming total liability for your business. If financial problems arise, be it debt or taxes, your personal assets will still be affected.

Partnership

A partnership is similar to a sole proprietorship, but handled by multiple owners who share responsibilities and liabilities. It’s easy to start as it needs minimal paperwork and low startup costs. Any business losses are also shared among owners, which can be deducted on their personal tax returns.

The cons of a partnership are similar to a sole proprietorship as well, like having no legal separation between the business and its owners. Partners will also be personally liable for their other partners’ actions and behavior, so a client having a bad experience with one business owner will also reflect badly on the others.

Limited Liability Corporation (LLC)

AskMoney’s post on LLCs explains that an LLC separates the business from an owner, so having a legal dispute won’t endanger your personal assets. Unlike other kinds of business entities, LLCs can be filed anywhere, even if you’re not working in that location. In terms of ownership, an LLC can have one or multiple owners.

A con for LLCs is that it requires a lot of paperwork and fees to be established. For those operating an LLC alone, these fees may be an unnecessary expense. If you don’t manage to make enough money to make a liability, annual costs might further decrease your profits.

Where Should I Start?

Once you’ve found the business entity that works for you, the next step is to pick a name and complete the necessary paperwork. Check with your state on the availability of your chosen name, as well as the documentation required to formally establish yourself as a business. You’ll also need to claim permanent residency for your business. While this may seem confusing as a digital nomad, your permanent residency can be the place you return to after traveling, or where you have the most roots established (such as voter registration).

Since you’ll be doing a lot of traveling, you should also find out if the countries you visit require a visa to work in and if you should register your business in the country as well — especially if you plan to stay in one place for some time.

Forming a business entity may be an extra step to becoming a digital nomad, but doing so will open more opportunities by making you look more professional, as well as covering your liabilities. If you want to see in action what a business entity can do to a digital nomad’s business, check our interview with Tasha Prados.

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