Many creative entrepreneurs are building businesses to gain financial and lifestyle freedom. Even more since the pandemic. The internet makes the possibility of creating a global business achievable. You can reach prospective clients and customers almost anywhere. A year into the pandemic, we’re seeing more interest in Digital Nomad entrepreneurship than ever. Wikipedia defines Digital Nomads as “individuals who leverage telecommunications technologies to perform their work duties, and more generally conduct their lifestyle in a nomadic manner. Such workers typically work remotely—from home, coffee shops, public libraries and even from recreational vehicles to accomplish tasks and goals that used to traditionally take place in a single stationary workplace.”
We’re not talking about doing business while on vacation. Nah. We mean doing business while globe trotting. You are in a different state or country every few months. You lack real permanency in your residence because your goal is to see as much of the world as possible. And because of this, you have clients from everywhere.
From a legal perspective, though, Digital Nomad entrepreneurship presents a few challenges.
Likewise, we’re dedicating our next #legalcoffeechat to answering your questions surrounding Digital Nomad entrepreneurship. You deserve to live the life you want without constantly worrying about whether you are working by the rules. You deserve clear answers. And we intend to give them to you. Leading up to the legal coffee chat, we’ll be introducing you to some legal concepts you really need to know before putting your apartment on Craigslist, selling your belongings, and packing your bag to become a full-time jetsetter. Because CGL is a U.S. based firm, this post is written from the perspective of a U.S. business owner, traveling or living abroad while working with a global customer base.
Let’s start with the concept of domicile. And some frequently asked questions regarding it.
What is my home state? And why does it matter?
If you are considering Digital Nomad entrepreneurship, there is one legal term that you must know–and that is Domicile. Generally, domicile is a legal term that refers to the one state where you permanently reside, or where you intend to return and establish residency. Here, your intent is key. Let’s understand why.
Meet Nina. Nina is a globe trotting, travel blogger. She is typically in no less than two countries per month and her regular schedule looks a little something like this:
- Monday >> leave for Dubai from Chicago
- 20 days later >> travel from Dubai to Muscat
- 5 days later >> travel from Muscat to Johannesburg
- 30 days later >> travel from Johannesburg to Cape Town
- 30 days later >> travel from Cape Town to Morocco
- 25 days later >> travel from Morocco to New York
- 15 days later >> travel from New York to Philadelphia
- 10 days later >> return to Chicago and stay for 3 days until it all starts again
Nina has spent nearly half a year traveling the globe. She subleased her apartment because she didn’t know how long she would be gone. But her car was registered; she remained registered to vote and held a driver’s license in Illinois. If she intended to change her domicile, then Nina would have transferred these important things over to another state. Her domicile remains in Illinois.
One of the key factors in determining domicile is the person’s intent. Here are a few questions to consider:
- Where is the person registered to vote?
- Where does the person pay income tax?
- In what state does the person have a driver’s license?
- Where is their vehicle registered?
- In what state were their bank accounts set up?
- Where are their professional relationships maintained (i.e. primary physician, dentist, accountant, attorney)?
- If required, have they filed a statement of domicile in any particular state?
- Are they active in professional or civic organizations in a particular state?
- Where are their family ties?
These questions are intended to help you understand the concept of domicile. However, you should know that what specifically constitutes intent (and therefore whether someone has established domicile) is determined by each state’s law.
Understandably so, someone who desires to be a full-time Digital Nomad entrepreneur might not have a clear idea of where they want to live permanently. They want to do a bit of open-ended travel and sort the details later. In this scenario, the person may have taken additional steps to cancel their license, voter registration and any other indications of permanency, in an effort to show they no longer intend for their original home state to be their place of domicile. Even an extended stay in another state or country is not indicative of the intent to establish domicile there.
The IRS specifically says, “The amount of time spent in one place does not always explain the difference between home and domicile. A temporary home or residence may continue for months or years while a domicile may be established the first moment you occupy the property. Your intent is the determining factor in proving where you have your domicile.”
Genius Note: Intent is a two way street. Intent that you no longer claim your former residence as your domicile state. And, intent that you intend to claim a new place as your domicile are equally as important.
So, where is our full-time Digital Nomad entrepreneur domiciled? Is it legally possible to not have a domicile at all?
Nope. That is not possible. Everyone has a place of domicile. It’s either the place where you previously established domicile or where you intend to establish domicile. The fact that you run your business primarily online does not matter. Also, your current place of residence does not automatically translate to your place of domicile. This leaves, you, the Digital Nomad Entrepreneur in a sticky situation. Unless you start the process of domicile planning. Speaking of domicile planning.
How do you plan your domicile?
It starts with some good old fashion research, which we’ve taken the liberty of doing for you. So, let’s start with discussing the best U.S. states for domicile as a Digital Nomad Entrepreneur. In a perfect world, you should set up your business in the state where you’re domiciled. Why? Because you can be sued in the place where you’re domiciled as well as where your business is registered. As you can imagine, in this instance, one is far better than two.
Unfortunately, the states that are great for domicile are not necessarily the best states for business formation – so it requires a balancing act. The weighing of pros and cons based on your situation. After weighing the odds, you may decide that setting up domicile and a business in two separate states is inevitable. At that point, it will simply be important for you to be well-informed on the relevant laws of each state so you understand what setting up shop there means for you.
Let’s review the states that are best for setting up your business.
South Dakota is a great choice because there is no tax of any kind. This includes corporate, personal, personal property, business or inheritance taxes. Additionally, from a legal perspective, it is a small business-friendly state. In every state, personal creditors can seek a charging order from the court to collect monies owed by the business owner. Under South Dakota’s Uniform Liability Act, a charging order is the only way that a personal creditor can try to collect the debt through the business. A charging order means the court can order the LLC to pay any of the owner’s distributions directly to the creditor.
For example, let’s say you personally owe Bank of America $7,500 on a credit card. Bank of America can get an order from the court that requires any distributions paid from your company to go directly to them (instead of you) until the debt is satisfied. However, what’s missing (to the business owner’s benefit), is that the court cannot order your company to actually make the distribution. So, if there are no distributions, there are no payments made to the personal creditor.
Delaware is a strong contender because it has a special business court dedicated to corporate law disputes, often hailed as one of the best in the country. Also, its laws are considered business friendly. Their corporate income tax is one of the lowest in the country. They don’t assess a sales tax, inventory or personal property tax. Also, businesses don’t have to pay the corporate income tax at all if they don’t actually conduct business in the state. Lastly, Delaware corporations only have to have a one person board, whereas other states may require a three member board. Delaware does impose an annual franchise tax on corporations, which starts at $175 and is one of the highest in the country. It is also important to note that Delaware has stringent domicile requirements. You must have lived there for two consecutive years in order to establish domicile.
Nevada also has laws that are business friendly. They don’t impose corporate or personal income taxes, or franchise taxes. Also, businesses registered in Nevada enjoy privacy protections because they don’t share information with the IRS and allows LLC owners to register without listing their name in public records
Wyoming also doesn’t impose corporate or personal income taxes, or franchise taxes and also allows LLC owners to register without listing their names in the public records.
Three states, very popular for establishing domicile are South Dakota, Florida and Texas. Technomadia provides a great comparison of the non-legal reasons for establishing domicile in these three states. The legal advantages?
- These states do not have a minimum amount of time required to establish domicile
- They do not have a state income tax
- You can use a mail service to qualify as your physical address in order to get a driver’s license, vehicle registrations and voter registrations.
- However, you may also have to prove a temporary stay in the state in order to get a driver’s license. South Dakota requires an affidavit showing proof of temporary residence at a local hotel.
The end result?
South Dakota is great both for domicile and setting up a business.
As for the rest, the states great for forming your business don’t align with the best domicile states. However, you now can begin to compare the pros and cons of each to see what makes sense for you. If you choose one of the domicile friendly states, then you need to familiarize yourself with additional information on forming a business there.
#GeniusNote: Digital Nomad entrepreneurs can have more than one residence, but only one domicile.
You can exhale now. We know that was a lot of information. But like we mentioned earlier in the post, we want to introduce you, the aspiring Digital Nomad entrepreneur, to some must know concepts before you embark on your new journey. There is so much more you need to know, though. We hope that you’ll join us for our upcoming virtual legal coffee chat, Legal Lessons for the Aspiring Digital Nomad, on Friday, March 26th at 6:00PM CDT. The event is free, but registration is required. Register at the link below + meet us back here next week, for an introduction on selecting the proper business entity for your business.