Dateline: Yerevan, Armenia
At Nomad Capitalist, most of the people I work with are six- and seven-figure entrepreneurs.
Like all successful entrepreneurs, my business tends to focus on catering to the needs of a specific market – people who are already successful but want to diversify themselves internationally.
However, not everyone who reads this blog is quite there yet.
I often receive questions from young entrepreneurs, solopreneurs, and freelancers about how they can get to that level of success – how they can get to a point where they can live the Nomad Capitalist lifestyle.
One of the most common questions that come up is: “what kind of business should I start if I want to become a Nomad Capitalist?”
The truth is, there’s no perfect answer to this question.
But if you need ideas, tax-friendly businesses are a good place to start.
What Makes a Business Tax-Friendly?
Over the course of my career, I’ve run a number of successful businesses in the United States – and I’ve learned what you need for a tax-friendly business the hard way.
One of my most successful businesses was a pool cleaning business that I ran in Arizona. It started as a small side hustle, and by the time I sold it, it was one of the largest pool companies in the state.
The company was hugely successful and profitable – and I hadn’t even optimized it.
But it wasn’t a very tax-friendly business.
Even knowing what I do now, I wouldn’t have been able to save much in the way of taxes with my pool cleaning business.
I could have tried to stay outside of the US as much as possible and taken advantage of Foreign Earned Income Exclusion, which allows me to exclude around $104,000 of my income.
Unfortunately, however, going remote is easier said than done with a pool cleaning business.
In that kind of service business, you have to manage a lot of people, so you need to be more hands-on. Even when I took a step back to travel more, my phone still blew up constantly.
Even if I had managed to go remote and claim exemption, I wouldn’t even have been able to maximize those tax savings.
By working for a US company, I would have needed to pay Medicare and Social Security, and as the company’s owner, my tax rate is around 15.3%.
You can take some other steps, such as moving out of a high-tax state or living overseas, to reduce your tax burden, but at best, you’ll only save about $20,000.
At the end of the day, because I was selling a physical service to people in Arizona, the majority of my business infrastructure needed to be in Arizona.
While I could have outsourced a few tasks like social media management to somewhere like Romania, I still needed a team of people in the US to actually clean pools.
Businesses like my pool cleaning company – which are location-dependent and require a lot of personnel – simply aren’t very tax-friendly.
That’s ultimately why I ended up selling the company when I decided to leave the US for good. It was difficult to manage remotely, and it wasn’t a tax-friendly business.
On the other hand, I’ve also owned a handful of more tax-friendly businesses.
I also ran a business that helped radio stations fill advertising slots by connecting buyers and sellers.
This was back in 2005, so we were mostly connecting people over the phone at that point. We even had to use a fax machine on occasion.
Technology has certainly changed a lot since then, but this business made me realize that I could work from anywhere.
While my market was radio stations and media buyers in the US, my staff and I didn’t need to be there for the business to run smoothly. I could have moved offshore with relatively little hassle.
That’s a much more tax-friendly business.
Location independence is a key part of starting a tax-friendly business. If you or your staff can physically do the work in a country with lower taxes, then that’s where you get into more serious tax savings.
Location-independent businesses, however, don’t need to be location-unstable. Many freelancers and digital nomads bounce from Starbucks to Starbucks, but you don’t need to do that to have a location-independent business.
You can still have an office – it just needs to be outside of the United States.
What makes a tax-friendly business, then, is its ability to be location-independent, which allows you to go where you’re treated best.
What to Consider When You Start a Tax-Friendly Business
While there’s no set formula for the perfect tax-friendly business, you should take these issues into consideration as you start your business planning.
Are You Selling Products or Services?
Although you should ask yourself this question when you start any business, it’s especially important if you want to start tax-friendly businesses.
If you’re selling a product, then you need to consider the entire chain of production when doing your tax planning.
Where your product is made, where it’s shipped to, and where it’s stored all factor into your business’s tax structure.
If you store your product in a warehouse that you own, for example, then you may have a more complicated tax structure than if you store it in a third-party warehouse.
Although challenges will inevitably arise, there’s a way to make selling a product tax-friendly if you’re willing to be flexible.
Services, on the other hand, can be a bit easier.
Unless you’re providing an in-person service like pool cleaning, you can base your business in a tax-friendly country – which makes your business quite tax-friendly as well.
Are You Going to be Online or Offline?
Whether or not your business is web-based also affects its tax-friendliness.
If your business is completely online, then you can base your website in a low-tax country and find serious tax savings.
Not all tax-friendly businesses, however, are completely online.
Offline business generally impacts your business’s tax-friendliness if it’s location-dependent – like my pool cleaning business.
You can handle phone calls or give seminars and still be location-independent – though some restrictions do apply
Is Your Business Manual or Automated?
Finally, you should consider how your business will run once you set it up.
In my line of work, which is primarily consulting, I have to do a good amount of work manually. I make phone calls, hire people, and conduct meetings in person.
Whether your business is manual or automated will depend on the line of work you’re in. You can automate e-commerce businesses rather easily, but businesses like consulting require more hands-on work.
Regardless of how automated your business is, you will have to consider how any manual processes will impact your business’s tax structure.
What Kinds of Tax-Friendly Businesses Can I Start?
Now that you know what makes a business tax-friendly, you might be wondering what kinds of location-independent businesses that you can actually start.
The exact type of business you start will depend on a number of factors – such as your skills and your resources – but here are a few good suggestions for tax-friendly businesses.
Selling a product online through retailers like Amazon is one of the easiest tax-friendly businesses to start.
After you design a product, you can have it produced in a country like China and then use a third-party shipper to send it to Amazon’s warehouses.
Then, once your infrastructure is set up, Amazon does most of the legwork for you.
Even though your product may be sold in the US, your infrastructure isn’t based there, giving you substantial tax savings.
If you’d rather stay out of manufacturing, you can also start other tax-friendly e-commerce businesses like drop shipping platforms.
Because e-commerce businesses can easily be offshore and remote, they’re great tax-friendly businesses to start.
Selling software-as-a-service is another area where it’s easy to start a tax-friendly business.
Software-as-a-service is an online service where users pay subscription fees for a third-party provider to host and manage apps and data remotely. Microsoft 365 is a popular example of this type of model.
Because software-as-a-service is cloud-based by nature, it’s highly location-independent. You can manage everything remotely, and you can hire contractors and subcontractors outside of the US.
However, starting a software-as-a-service business will require you to be fairly tech-savvy.
While you can leave the bulk of the app development to contractors, you’ll need at least a basic understanding to formulate a product that works – and will sell.
Other Tax-Friendly Business Ideas
Tax-friendly businesses aren’t just limited to e-commerce and software-as-a-service.
Selling e-books is another great idea for a location-independent business. However, if you’re not a talented writer, it might not be so successful.
The same goes for businesses like consulting.
You can do it remotely, but your success will depend on your skills.
Basically, any business that’s location-independent – whether it’s writing, app development, or consulting – can be a tax-friendly business.
While there are some restrictions – particularly for US citizens – working from low- or no-tax countries is the key to starting tax-friendly businesses.
In order to have a tax-friendly business, you should avoid being physically present and working in a place where you don’t want to be taxed.
You can set up a website that sells stock photos in Singapore, for example, and even if you sell your product in the US, you won’t necessarily be taxed there.
Overall, the secret to starting a tax-friendly business is making it as international and location-independent as possible.
You base your business somewhere where you’re treated best, and you make it work from there.