Should Digital Nomads Form a Business Entity?

Should Digital Nomads Form a Business Entity?

Being a digital nomad is a unique experience; hence, the difficulties you confront as a digital nomad are distinct from those normally discussed in business magazines and conferences. You have to face numerous short- and long-term obstacles in this path, even though it is undoubtedly feasible.

Also, there is a myth about digital nomads starting a business. The myth is that you can not run a business while traveling worldwide. And definitely, this idea is wrong. Starting a business as a digital nomad is more beneficial, especially if it is a U.S. LLC structure.

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.

Digital Nomads and What They Do

Digital nomads are remote workers who work from anywhere in the world and aren’t available in an office or headquarters. A digital nomad uses advanced technologies such as internet connections, content management software, smartphones, etc., to get their work done.

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?

Well, there are various reasons why you should 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.

Corporation

Unlike sole proprietorships and partnerships, a corporation creates a metaphorical wall between the business and its owner. In this form of business, you aren’t personally liable for your business debts and liabilities. And a corporation can be formed with one or more shareholders.

However, a corporation also has its disadvantages. The structure of a corporation involves a lot of paperwork and maintenance. As for taxation, a C corporation is subject to double taxation. This means that the corporate profit is taxed twice – once at the corporate level and once at the personal level through the dividend.

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.

LLCs generally require less paperwork than a corporation and the cost of maintaining them is less. Owning an LLC does come with some costs, but in our opinion, the benefits outweigh the minimal costs when you embark on a journey as a Digital Nomad.

How a Digital Nomad Could Use U.S. LLCs

We believe that regardless of your citizenship, you should consider the U.S. LLC structure instead of other exotic corporate structures from Belize, United Arab Emirates, Estonia, etc. as your primary business vehicle that separates your personal finances from your business finances. Read on to find out why.

U.S. Citizen Digital Nomad

As a digital nomad who holds a U.S. passport, you should by default use an LLC to conduct your business. Filing taxes is easy if your online business is registered as an U.S. LLC: all income you earn with your LLC worldwide will be linked to your personal tax return and taxed as usual.

Since you’re a U.S. citizen, you must report your worldwide income and pay taxes to the U.S. government regardless of where you live. Suppose you incorporate your online business in another country, such as Estonia, Singapore, or other offshore countries. In that case, you’ll need to file additional tax forms with the IRS to declare your holdings in these non-U.S. companies, which can be cumbersome and costly. Not to mention, you don’t have to file taxes in the U.S. and the other country you chose to incorporate; you can do it all in one 1040 tax return.

Also, by forming an LLC, you can easily open your U.S. bank account for your business. This makes your business transactions easier and you don’t have to pay additional fees for foreign currency exchanges.

Non-U.S. Citizen Digital Nomad

On the other hand, as a digital nomad, even if you do not hold a U.S. Passport., you should consider incorporating an LLC before looking at other business structures in other countries. Because if you ignore U.S. LLC, you’ll miss out on some great opportunities, such as low-maintenance fees, potentially tax-free business structure, excellent banking options, wide range of payment processing options, and operating your online business from a first-world jurisdiction.

If you incorporate the U.S. LLC, the U.S. Internal Revenue Service considers your U.S. LLC a transparent entity (Disregarded Entity) and doesn’t tax it. So if you incorporate U.S. LLC as a non-U.S. resident, there’s a chance that you can do business without paying taxes to the U.S. government, and you’ll gain a good reputation for your business. Visit this page to learn more about how to structure you LLC correctly without triggering U.S. taxation.

Where Should I Start?

Once you’ve found the business structure that works for you, the next step is to pick a U.S. State to register your company, name your company, and complete the necessary paperwork.

As a U.S. citizen or non-U.S. citizen not residing in the U.S., it is better to just go for states with no state corporate income tax like Wyoming. The state of registration only matters when you are physically residing in that particular state since you will be triggering state economic nexus and state taxes. Going with states like Wyoming will be your best bet when operating outside of the U.S.

As for the name of your company, it depends on which state you are registering at. You will need to check with your state on the availability of your chosen name. Visit the Secretary of State or Division of Corporations website of the state to search.

The following steps to registering a U.S. company would be:

  • Filing of LLC or Corporation with the State
  • File additional requirements such as Statement of Information
  • Apply for the EIN for your U.S. company
  • Apply for Bank Accounts
  • Apply for Stripe if necessary

As a digital nomad, remember that your personal residency and business residency are separate. You may have staked a claim for your company residency in the U.S., but your personal residency is not necessarily the U.S. if you don’t live there. You will need to decide on a personal residency to claim “home”.

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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