One of the reasons that I wanted to own a business was so that I could design my lifestyle. I wanted the freedom and flexibility to live life according to my terms. I wanted the liberty to travel at whim, to visit a far off land for months at a time. Today, I imagine a work life where I can serve my clients well – whether it’s from a beachfront, a luxurious treehouse or a villa in Costa Rica. I desire location independence.
I’m not alone. Many creative entrepreneurs are building businesses to gain financial and lifestyle freedom. (Raise your hand if this is you). The internet makes the possibility of creating a global business possible and easy. You can reach prospective clients and customers almost anywhere. Technology makes it easy to run a business while you pick up and go…anywhere. We live in a pretty amazing world.
From a legal perspective, being able to pick up and take your business anywhere presents a few challenges. I’m not talking about doing business while on vacation. I’m talking about doing business while globe trotting. In other words, 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. You have clients from everywhere.
You are a Digital Nomad.
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.”
There are real legal concerns around Digital Nomad entrepreneurship.
I began exploring last year to see what solid, legal resources were out there around the new wave of Digital Nomad entrepreneurship and came up empty handed. I saw a lot of questions, few answers. That was my inspiration behind this post. You deserve to live the life you want without constantly worrying about whether you are working by the rules. You deserve clear answers. In this post I provide answers to the commonly asked questions around Digital Nomad entrepreneurship.
Because I am an attorney in the U.S., this post is written from the angle of a U.S. business owner traveling and/or residing abroad while taking clients or customers from everywhere.
Let’s dig into some commonly asked questions around Digital Nomad entrepreneurship.
What is my home state and why does it matter?
If you are a Digital Nomad entrepreneur, there is one legal term that you need to become very cozy with. 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. Your intent is key. I’ll give an example…
Michelle is a globe trotting, travel blogger. She is typically in no less than two countries per month and her regular schedule looks 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 Capetown
- 30 days later >> travel from Capetown 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.
Michelle 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 Michelle would have transferred these important things over to another state. Her domicile remains in Illinois.
One of the key factors to determining domicile is to look at the person’s intent. Here are a few questions to consider:
- Where is the person registered to vote?
- 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)?
- Have they filed a statement of domicile in any particular state? Note: A formal registration is not required in all states.
- Where does the person pay income tax?
- 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.
Now, someone who desires a full-time Digital Nomad, Entrepreneur lifestyle might not have a clear idea of where they want to live permanently. They want to do a bit of open-ended travel, and then sort it out. In this scenario, the person probably might have taken the additional steps to cancel their license, voter registration and any other indications of permanency. So, their original home state is no longer their intended home. 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.” I want to add a hint here – 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?
Not possible. Everyone has a place of domicile. It’s either the place where you previously established domicile or it’s where you intend to establish domicile. The fact that you run your business primarily online doesn’t 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.
By now, you’re probably yelling at the screen and pissed at me for giving you all of this ish to worry about. To that I say, ignorance is not bliss my friend. You want to know all of this information because your domicile will affect where you pay taxes and where you can be sued if business gets ugly (along with other, personal matters).
How do you plan your domicile?
It starts with some good old research. But, I’m going to give you a jumpstart so you don’t have to do the heavy lifting alone. 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, or where your business is registered. Throw two states in the mix and those are two states where you can be sued.
Unfortunately, the states that are great for domicile are not necessarily the best states for business formation – so it requires a balancing act. Good old 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 get clear 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.
In other words, let’s say I 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 my company to go directly to them (instead of me) until the debt is satisfied. However, what’s missing (to the business owner’s benefit), is that the court cannot order my 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. I also want 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 are:
- 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. Note: 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. If you choose one of the domicile friendly states, then you need to familiarize yourself with additional information on forming a business there.
Before we move on, I want to dispel another myth…
Digital Nomad Entrepreneurs, you can have more than one residence. But, you can only have one domicile. #geniuscode.
Why do I need to bother with a formal business entity anyways. Can I run my business as a sole proprietor?
You could. But, that also means that you are opening yourself up to a can of worms. From the very moment that you sold your first product or took on your first client you became a business owner and exposed yourself to liability. Your house, car, cash and any other assets are at stake. As a sole proprietor you are the business. You face unlimited personality liability for all work done in the name of your fancy blog. Setting up the business entity means that you are now separate from the biz. You are no longer the biz. How often have you second guessed decisions in your globe trotting business? Exactly.
The truth? There are many unknowns in entrepreneurship. The number one reason why you should form a business entity is to provide liability protection for your personal assets. Your house, car, cash or other assets (intellectual property) can’t be jacked from you because of business liabilities or debts. It’s also worth reminding you that the reason why you are building this business is to provide financial and lifestyle freedom for you and your family. That freedom and security goes away the second a business transaction or deal goes awry. Stop walking on the wild side (save that for your global adventures, not your business). Set up a formal business entity.
However, it is very important to understand that owning a business doesn’t give you “blanket liability protection.” Think about how crazy this world would be if peeps could act irresponsibly, do whatever they wanted and then say, “Charge that to my business.” It doesn’t work that way. You still can be held personally liable if do any of these acts in the name of the business:
- you injure someone;
- you intentionally do something illegal, reckless or fraudulent;
- you personally guarantee a business loan; (which is common and unavoidable if you need the loan);
- you treat the business as an extension of your personal affairs (i.e. commingling personal and business funds) .
I tell you this just so you are aware that limitations do exist. But, if you are on the up and up, dot your i’s and cross those t’s…everything will be fine.
My business is 100% online…what does this mean from a legal perspective?
Your business can never, ever be 100% online. That’s a myth. #geniuscode
So, stop saying it. Unless you are a robot, a droid of some sort, dwelling inside the casings of your Macbook… then your business is not all online. You, dear human, are selling or entering contracts with other live humans. Both of you occupy space in the physical world. Therefore, your business occupies space in the physical world.
Saying that your business is 100% online lends to a common misconception that your risks are limited. That you don’t have as much liability as the physical plant, or brick and mortar shop. The truth? You have the same amount of liability, if not more. At the very least, you can be sued (or will have to sue) in the state where your business is registered or where the transaction took place. In some circumstances, you can be dragged into court in the state where the person at the opposite end of the transaction is located.
So let’s define what it means to have an online business.
My definition is that you are selling a product or service online. If a customer enters your website, clicks to purchase or receive something from you or a third party marketplace that you’ve authorized to sell on your behalf, then you have an online business. There is a business transaction that happens online with your customer. Payment doesn’t always have to be cash. A business transaction exists if I give you my email address in order to receive your free ebook or audio training. A business transaction exists if I download your free font or app. By entering a transaction with your website visitors; you automatically become bound by certain U.S. laws and legal requirements. Again, this post assumes that your business is legally set up in the U.S. and you are temporarily residing overseas.
Even if your business is based outside of the U.S. and you’re doing business with U.S. customers, you may be bound by these laws.
Your website should include the following policies:
Privacy Policy: You’ve seen this policy on plenty of websites. It is required if you collect any personal information from visitors of your website. At the very least, the policy should state the following:
- What information you are collecting from them
- Who you will share that information with (if anyone)
- How you will use the information
You will usually see the privacy policy either in the footer of a website, or embedded as a link in the newsletter sign up box.
Terms of Use: The terms of use policy helps to limit, you, the website owner’s risk, by providing your visitors rules associated with your website. Minimally, the policy will address the following:
- Describe the content that will be shared on your website
- Provide rules for how visitors shall conduct themselves on your website
- Provide a disclaimer for links to third party sites
- Provide intellectual property information
Copyright Notice: You should provide a simple copyright notice in the footer of your website to let visitors know that you are the owner of the published content. The notice should follow this format: Copyright © 2015 Creative Genius Law, LLC. All Rights Reserved. This tells visitors when you published the content, and who owns it (the owner could be you or your business).
You may also need the following policies for your website depending on the nature of it and your business:
Affiliate Disclosure Policy
If you are an affiliate for a particular company, and sell their products on your site then you must disclose that relationship on your website.
DMCA
The Digital Millennium Copyright Act (DMCA) notice provides a procedure to follow if someone believes that content on your website infringes on their copyright.
Earnings Disclaimer
Some business owners via a website, sell a product or service that provides an opportunity for the buyer to make additional money, either from enhanced skills or from a specific business opportunity. This disclaimer provides that there is no guarantee of outcome, and limits the liability of the website owner.
Health/Medical Disclaimer
If you provide health or medical information, you will want to have a disclaimer on your site to limit liability if people don’t receive expected results, or are injured because of information received on your site.
Lastly, I will cover the question of what happens if I sign a contract with someone during my global adventures?
This is a very short section because the answer is simple. The first bit of intel that I’ll give should be common sense…but it’s not so common.
Don’t enter business agreements without contracts (this includes customers and business partners). As a Digital Nomad Entrepreneur, you could be exposed to even more liability because your contracts are initiated from anywhere around the globe, at any given moment. Without contracts, there is no clear and defined statement about:
- What state’s law controls your contracts (the “choice of law” clause”) and,
- In the event of a legal dispute, the state (and county) where a lawsuit must be filed (the “jurisdiction” clause).
Without a doubt, your home state will be one of the options, but when that is not written into your contract you leave those important issues unresolved. In other words, you leave it up to chance that you can land in court or be bound by the law where your customers live, or where their business is located. If you include those clauses the territory where you will have to face legal issues will be confined. Your next challenge is being conscientious enough to recognize every scenario in which there should be a written contract. And, not moving forward until you have one. Let’s be honest. Deals happen fast. Some are written; often they are not…especially in this world.
Lucky you, I’m giving a cheat sheet that will help you recognize the situations when you should enter a written contract. Print it, and hang it by your workspace as a constant reminder.
That’s it peeps. There is so much more to cover on this topic, and yes I’m working up some magic for this year. I hope this dispelled some of the myths around Digital Nomad entrepreneurship and gave you legal intel so that you can build your business while enjoying the freedom-centered lifestyle you designed.