The United States is known as the land of the opportunities and the greatest country in the world. Many individuals from around the world seek to live and work here permanently. Each year, thousands of nonresident aliens are gainfully employed in the United States. Thousands more own rental property or earn interest and/or dividends from a U.S. business they own or partially own. This blog is intended to explore legal, tax, and immigration consequences for non-citizens who start a business in the U.S.
How non-citizens can start a business in the US?
There is no prohibition in the U.S. Law for a physical person or entity, regardless of their nationality or legal status, to own shares or interests in a U.S. entity (LLC, C-Corporation, Partnership). However, owning a business does not automatically qualify a foreign national to work in the U.S. or earn a salary. Additionally, this ownership and the amount of time the foreign person is physically present in the U.S., has tax consequences. These are two different concepts with important legal effects.
How to open a company in USA?
1. Business Structures.
One of the most important decisions to make is if the foreign person (or foreign company doing business in the U.S.) will conduct business as a sole-proprietor (only for individuals) or will form an entity: LLC, C Corp, S-Corporation, or Partnership. The selection will have legal, financial, and tax implications.
a. Sole Proprietor: A sole proprietor is someone who owns an unincorporated business by himself or herself. In this situation, the Sole Proprietor is liable for income tax, self-employment tax, social security and Medicare income withholding, FUTA, Excise Taxes.
b. C- Corporations: This is a legal entity separated from its owners. Corporations can make a profit, be taxed, and can be held legally liable. This entity type offers the strongest protection to its owners from personal liability, but also requires more extensive record-keeping, legal formalities, operational processes, and reporting.
C- Corporation are subject to double taxation. Companies pay income taxes if they generate a profit for the year and pays dividends to the shareholders. It is called double taxation because the profits are first taxed at the corporate level and again at the shareholder level.
c. S-Corporation: is a special type of corporation that’s designed to avoid the double taxation of regular C corps. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
Qualifications for S corporation status:
- Be a domestic corporation;
- Have only allowable shareholders;
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders;
- Have only one class of stock;
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
d. Limited Liability Company: LLCs protect owners (and their assets) from personal liability. It is considered a pass-through entity, meaning profits and losses can get passed through to owners’ personal income without facing corporate taxes.
Depending on tax elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).
e. Partnership is the simplest structure for two or more people to own a business together for a profit. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP). Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won’t be responsible for the actions of other partners.
Case Study: Miguel is a citizen of Argentina where he resides and owns a prominent business with two other partners. They have patented a very innovative product used in construction. Miguel wants to import to and distribute these products in the U.S., so he visits the U.S. using his B1/B2 visa. After a few conversations with local acquaintances, he decided to register his own company. Someone told Miguel he can start his own LLC and apply for a tax ID number and open a bank account, so he did. He rented a house, an office and warehouse and visited constructions companies promoting the product. He was visiting clients, doing demonstrations, taking, and delivering orders, and working on site with contractors. Meanwhile he was constantly updating his social media with each business progress. He and his partners agreed that Miguel will be paid a salary and expenses by the U.S. company. He spent 6 months at the time in the U.S. (the maximum time allowed by the B1/B2 visa). After a few trips back and forth to Argentina, his B1/B2 visa was cancelled when he arrived at the LAX Port of Entry. CBP went through his personal items (cell phone, laptop, email, social media) and realized he was living and working in the U.S. His visa was revoked and he was sent back to Argentina in the next flight.
ISSUES: Miguel never consulted with an immigration and business attorney about the visa options and business entity formalities. Also a CPA would have given Miguel proper tax planning advise to avoid high tax liability.
2. Tax implications for Foreign Nationals.
There are three important tax situations foreign nationals should consider:
a. Determining Alien Tax Status.
A foreign person (not a U.S. citizen) is considered a nonresident alien unless he/she meets one of two tests: the green card test or the substantial presence test for the calendar year (January 1 – December 31). If the person meets either test, s/he is considered a U.S. resident alien and is generally taxed in the same way as U.S. citizens. This means that the foreign national’s worldwide income is subject to U.S. tax and must be reported on foreign national’s U.S. tax return.
Nonresident aliens are normally taxed only on income derived from U.S. sources. U.S.-source income that is considered “effectively connected” with a U.S. trade or business, such as salary and other forms of compensation, is taxed at graduated rates.
b. Filing Requirements for Nonresident Aliens.
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one is for income earned in the U.S. from the operation of a business in the U.S. (business income), as well as personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.
If the income of the non-resident alien is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.
c. Tax Treaties.
The United States has income tax treaties with several foreign countries. For nonresident aliens, these treaties can often reduce or eliminate U.S. tax on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains.
Case Study Part 2: Miguel remained physically present in the U.S. for a considerable amount of time. The LLC had profits and Miguel did not seek tax advice before starting the business. This could represent for Miguel a high tax liability.
3. If a foreign national owns a business in the U.S., can s/he work and earn a salary in the U.S.?
Starting a U.S. company, owing shares in a U.S. company, buying rental property in the U.S. does not allow a person to work and/or earn a salary. Any foreign person must have a work visa or be otherwise authorized to work in the U.S.
A foreign national who started his/her own LLC or Corporation to do business in the U.S., can be a passive investor, or be a member of the Board of Directors, but cannot be employed by the company and earn a salary without a proper visa. U.S. employees should be hired to run the company and the business.
Sometimes the U.S. business founded and funded by a foreign national can be later used to sponsor him/her to obtain a proper work visa.
Case study: Martin is a citizen of Spain. He came to work to the U.S. in H1B visa category many years ago for a large company. He invested his H1B salary to start a U.S. based communication company. He registered a C-Corp in Florida, hired 2 part-time employees, and rented a small place. Later he hired a business manager and gave him a small percentage ownership in the company. Martin never received dividends or had an active participation in the business. Eventually he returned to Spain and continued supervising the U.S. company from abroad and during occasional trips to the U.S. Martin has now applied for E2 visa using the initial investment and U.S. based company and he is now living and working in the U.S.
In summary, there are different work and business visas a person can qualify for with proper advise and planning: H-1B visa, also known as Specialty Occupation Worker, L-1A Intra-Company transferee, L-1B Specialized Knowledge, E-1 Visa. Treaty Trader, E-2 Visa. Treaty Investor, EB-5. Immigrant Investor, Permanent residence for First Preference Priority Worker (EB-1a, EB-1b, EB-1c), Permanent residence for Second Preference Priority Worker (EB-2), Permanent Residence for Third Preference Worker (EB-3), TN Visa. Canadian (TN-1) or Mexican (TN-2) professionals and managers.
Navigating the complex world of business and immigration requires the attention to detail and experience of legal counsel who take the time to develop the right strategy focused on one thing – your success. Through our network of highly experienced and dedicated legal partners and contacts throughout the world, we assess your requirements and assemble an exceptional team of advisors to ensure your matter is dealt with in a professional, thoughtful, and expeditious manner.
