So you want to setup a business? Everyone is telling you entrepreneurship is great and you absolutely love the sound of being able to set your own work hours and be your own boss. There’s some serious momentum around owning and growing your own business, and you’re excited. But as with the rest of your life, there’s a complicating factor that has you scratching your head at some of the advice being offered. Because, you, my friend, are a military spouse, and you already know you’re going to be facing some business owner challenges that not every business owner deals with during the life of their business.
We’re going to assume you haven’t started any formal paperwork, or even started your business yet (we know you might have, so bear with us), because we want to make sure we cover all our bases. Even if you are in business, this can serves as a good checklist to make sure you’re not missing anything important.
LLC, sole proprietor, partnership, S-Corp, C-Corp, what?? Can’t I just put my head in the sand and run my hobby business without all of this? Well, here’s the thing, doing nothing doesn’t mean you haven’t made a decision. The default entity type for a solo business owner is sole proprietor, and for 2 or more people, a partnership – even if there’s nothing in writing, an implied partnership may arguably have been formed. This decision matters because the entity your choose will have tax, income, and legal implications.
If you are looking for a way to do it yourself: check out our DIY Limited Liability Company.
Where do I form my business entity?
Here’s the question that vexes the hearts of military spouse business owners in a way that doesn’t faze most new business owners: where should I form my company? Let me be clear, I am talking legal formation, not a local county or state registration for business licensing or tax purposes. Legal formation creates a distinct legal entity separate from you as a business owner.
When discussing which state is best for registering a small business, you might come across blanket recommendations for Delaware or Nevada. As a military spouse, you will need to consider the best state for your specific circumstances and how to manage things knowing that you will likely be moving state to state and potentially overseas.
Here are some examples that might provide a framework to help you make a decision about formation:
You live in State X, do most your work from that State X, but provide some services outside of State X; then you will likely only need to worry about registering and paying taxes in State X. You would likely form your company in State X. This assumes you are not likely to move from State X for the foreseeable future. This is the situation most non military spouse owned businesses are in.
If you are a service provider who moves every few years, then you should consider incorporating your business in a particular state and then registering as a foreign entity in the State you move to. When you move again, you apply to “resign” or “dissolve” your registration as a foreign entity in State A, and then apply for foreign entity status when you arrive in State B. Now, which state is your State A is going to depend on which state your tax residency is, where you plan to retire, and whether you are trying to avoid or confirm establishing residency in a state through business formation. Registering as a foreign entity in each new state is much more convenient (and generally cheaper) than dissolving your company and re-incorporating each time you move to a new state.
If you move more often than every few years, you will still need to form in a specific state meeting their sales tax requirements. As you move or travel around, you will need to check the rules for each state you move through with regard to what constitutes temporary foreign entity status and if you need to register. For example, some states allow for you to apply as a temporary entity providing you will only be in the State for less than 12 months – this can be very helpful if you are living in a location for a School or course and have orders for less than a year.
This is Important
State of formation is an important decision that can affect many aspects of running a business: liability, taxes, income, and administrative burden just to name a few. Take your time making this decision: it should take time. Your specific circumstances mean there is no one-fits-all answer. Meet with an attorney to discuss which state makes sense for you.
It happens often that a military spouse business owner is living in State X while serving clients from State T, Z, and P, while the state where the business was legally formed is State M.
Apply for an EIN
This goes for all entity types, including sole proprietor, the Employer Identification Number (EIN) allows you to set up a business bank account, is how the IRS tracks your business activities and means that you don’t have to provide your own SSN to get paid!
Set up Business Banking Accounts
Choose a bank that will move with you. While a local bank may be attractive, what happens when you move? Set yourself up from success. Don’t co-mingle personal and business funds.
Build your advisory team
Try to find an attorney, insurer, and accountant who understand the added complexity of military family life as a business owner. Reach out to your networks to find them!
Register for State Taxes
You will likely need to register for state sales tax in the state you are physically located and potentially the state where your business is registered – if that is different from where you are located and the formation state requires it. An accountant can answer questions about taxes.
Crisis and Succession planning
Military family life never did run smooth. Focus early on planning for PCS, Crisis, deployment, and succession planning (are you hoping to one day sell your company, or does it have a use-by-date). Business planning is an essential for business success! Check out our BizRevamp course for a guide to business planning for success.
Personal Security for Military Spouse Businesses
Personal Security is a huge concern to many military spouse business owners. Here are some considerations as you set up your business:
- Consider hiring a registered agent to help preserve your privacy – including home address and phone.
- Consider renting a post office box – this can also help during moves too – as this allows you to keep your home address private.
- Utilize phone and calendaring technology that allows for you to decide how much information is provided to whom.
Another important consideration for business entity formation is recognizing the potential impact of business debts and activity on a service member’s security clearance. It is important to consider how creating a separate business entity can isolate a non-owner servicemember from issues that may arise as a result of business debts. So too, in community property states, a sole proprietorship may lead to a spouse having financial interests in the business.
When you speak with an attorney or accountant: what do you ask?
Here are some tips on preparing to meet with a lawyer on formation and setting up your business:
Write out your decision-making rationale for business entity type, state of formation, and types of contracts you think you may need (you can always ask if you’re not sure. Write out the business, tax, or personal relationship you have with each of the states you are considering. Consider also including: your company mailing address, the bank you have opened business bank accounts (if applicable), where your customers are located, where you are when you typically provide your product/service, the states from which you generate the most revenue, the states where you advertise, the state(s) where you are hoping to retire to, and the states where you have tax residency under the Military Spouse Residency Relief Act.
Ask about the registration requirements for each state you’re considering, and the foreign entity registration process for the states where this might be needed.
Questions you may have about the contracts you may need to have in place, along with any liability concerns in relation to your business (are you giving advice? Are you selling a product?).
When preparing to meet with an accountant:
The business rationale above, with any questions you have about state sales taxes, state sales tax registration, federal taxes (including self-employment taxes).
If you are already in business, be prepared to share your annual and monthly profit and loss, and/or balance sheets (if applicable).
Written by military spouse & legal consultant Anna. View her website here.