[pktm]

I've done this before, though admittedly, we were already off the ground when my situation changed and I got the opportunity to live overseas.

I'd advise setting up your business wherever it is easiest (tax-wise, work-visa wise, etc.) to do so, provided one of you plans to remain there for the duration.

I personally found this arrangement to be wonderful. I was able to have the first part of the day for language lessons and such, then come home and work on the business in the afternoons/evenings. However, my business partner found it tough to schedule calls and such. (He's also my brother, so it's not easy to tease out the various possible factors here.)

Anyway, the short version of all that is: don't let geography keep you from this project. That's what Skype, vonage, emails, etc. are for.