august2021 - 31

FEATURE
where the entrepreneur is domiciled.
For example, many business owners
register their business in a state
with no state income tax or fewer
regulations like South Dakota or
Delaware. However, if the business
opens a warehouse or has employees
in a state other than where it
is registered, it must file for foreign
qualification. Foreign qualification
is when the state determines a
company conducts enough business
to be registered in the state. As the
conditions for foreign qualification
vary by state, it's essential your client
check with the Secretary of State to
find out if filing is necessary.
If your client's business has
employees residing and/or working in
a state different from the business's
home state, the business must also
register with that state's Department
of Revenue and Department of Labor
(or similar office) to withhold payroll
and unemployment taxes.
The key legal factor for digital
domicile vs. residence. A residence
is a home the entrepreneur lives in,
so for digital nomads, the residence
will frequently change. A domicile
is the place your client considers
their permanent home, where they
return after traveling. The business's
" home state " is where the entrepreneur
started and/or registered the
company with the state, opened its
bank accounts, and where the taxes
are filed.
Even digital nomad sole proprietors
(who aren't required to register
their businesses with the state) have
a domicile. In the eyes of the law,
their domicile is a question of intent,
the place where the entrepreneur has
the most roots established (voter
registration, utility bills, etc.).
Deciding where to register the
business does not necessarily parallel
nomads, no matter where they have
roots or register their businesses,
is where they make their sales.
Whether the sales occur in the U.S.
or a foreign country, in most cases
sales taxes need to be collected (and
paid) wherever the sales are made.
In addition, the kinds of sales that
constitute taxable items also vary
by state and country. To register
for sales tax collection, your client
should visit the state's Department
of Revenue website, find the sales
and use tax section (or " new business
activity " ) and fill out the information
about the company.
Finally, digital nomads must
determine if the countries they visit
require a visa to work in and whether
the business needs to be officially
registered in that country. Many
digital nomads aren't in one location
very long, so it's easy to stay off the
radar. However, it's better to keep on
the right side of the law-especially
if some sales occur in the country
where the digital nomad is traveling.
LEGAL STRUCTURES FOR
DIGITAL NOMADS
Although many digital nomads prefer
to be sole proprietors, there are many
reasons a more formal legal structure
can be advantageous.
Sole Proprietorship. All states
consider businesses owned by a singleowner
business or a married couple
to be a sole proprietorship by default
unless the company is registered as
another legal entity. There is no legal
separation of the business in a sole
proprietorship-sole proprietors are
not considered employees and do not
file separate business taxes. Other
than required licenses or permits,
there are no formal document requirements.
One of the primary downsides
for a sole proprietorship is the risk
involved if the business is sued.
Because there is no separation from
the company, the sole proprietor is
entirely liable and his or her personal
assets are at risk.
Partnership. There are digital
nomad partnerships that function
as a sole proprietorship, although the
duties and financial responsibilities
are shared among the partners. The
partners might both be digital nomads
traveling together, separately, or there
might be a mix of partners who are
digital nomads and others who stay
put. Legally, like the sole proprietorship,
there is no legal separation
between the business and the partners.
All profits and losses are passed
on to the partners, and if there are
any legal disputes, the partners are
equally liable.
Limited Liability Company (LLC).
The best legal structure for a digital
nomad might be the limited liability
company (LLC). Without the formality
of the corporate structure, the LLC
combines the liability protection of the
C Corp with the tax benefits of the sole
proprietorship. Profits and losses flow
through to the digital nomad and are
taxed at the personal income tax rate.
In an LLC, the business is considered
separate from the owner, and therefore,
in most cases, the entrepreneur
is protected from personal liability.
Registration and compliance occur
at the state level, so it's important to
know what the business's home state
requirements are for an LLC.
C Corporation. The C Corp offers
the best protection from personal
liability but has the most compliance
requirements and is the costliest business
structure option. In a C Corp, the
business is its own entity and files its
own taxes. The owner of a C Corp is
an employee of the business. The most
significant burden is double taxation,
as the business income is taxable,
and then the owner is taxed again
on income distributed in the form of
dividends. Because of the demanding
filing requirements and required
annual reporting, most digital nomads
don't need to incorporate unless they
decide to take on investors.
NO PERMANENT
ADDRESS?
Today, not having an actual physical
office space is not detrimental
to business success. As long as the
digital nomad entrepreneur has a
place to receive mail (a P.O. box will
do) and a place to meet with clients
in-person, when necessary (rented
meeting space), a digital nomad can
run a business without a hitch.
One special consideration for
digital nomads who own an LLC or C
Corp is to appoint a registered agent
in the business's home state or in the
states where most of their business
is conducted. A registered agent is
a person or company officially recognized
by the state and designated
by the business to deal with official
correspondence, such as legal documents
or tax notifications. ■
Nellie Akalp is a passionate entrepreneur,
business expert, and mother
of four. She is the CEO of CorpNet.
com, a trusted resource and service
provider for business incorporation,
LLC filings, and corporate compliance
services in all 50 states.
AUGUST 2021 ■ www.CPAPracticeAdvisor.com
31
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