• Immigration

Protecting Your Small Business from Immigration Problems

by Noel Bagwell
for ExecutiveLP®

January 30, 2017

America’s Shifting Immigration Policy Landscape

President Trump, on Sunday, January 29, 2017, released a statement in which he corrected the widely misreported opinion that his executive order, entitled “Protecting the Nation From Foreign Terrorist Entry Into the United States”, was a “Muslim ban”. The White House has instituted a temporary hold on immigration from high-risk areas around the world. Here is the full text of Sunday’s statement from President Trump:

“America is a proud nation of immigrants and we will continue to show compassion to those fleeing oppression, but we will do so while protecting our own citizens and border. America has always been the land of the free and home of the brave.

We will keep it free and keep it safe, as the media knows, but refuses to say. My policy is similar to what President Obama did in 2011 when he banned visas for refugees from Iraq for six months. The seven countries named in the Executive Order are the same countries previously identified by the Obama administration as sources of terror. To be clear, this is not a Muslim ban, as the media is falsely reporting.

This is not about religion – this is about terror and keeping our country safe. There are over 40 different countries worldwide that are majority Muslim that are not affected by this order. We will again be issuing visas to all countries once we are sure we have reviewed and implemented the most secure policies over the next 90 days.

I have tremendous feeling for the people involved in this horrific humanitarian crisis in Syria. My first priority will always be to protect and serve our country, but as President I will find ways to help all those who are suffering.”

According to ABC News, “[President] Trump’s plan to remove the undocumented immigrants who have committed crimes is similar to what President Obama declared in 2014.” In fact, the numbers seem to indicate that, as of the time of this writing, Obama has deported more illegal aliens than any other President.

“Between 2009 and 2015 his administration has removed more than 2.5 million people through immigration orders, which doesn’t include the number of people who ‘self-deported’ or were turned away and/or returned to their home country at the border by U.S. Customs and Border Protection (CBP).

According to governmental data, the Obama administration has deported more people than any other president’s administration in history.
In fact, they have deported more than the sum of all the presidents of the 20th century.

President George W. Bush’s administration deported just over two million during his time in office; and Obama’s numbers don’t reflect his last year in office, for which data is not yet available.” Id.

As Alex Nowrasteh, an immigration policy analyst at the Cato Institute observed:

“President Obama has a mixed immigration legacy. His executive actions have shielded hundreds of thousands from deportation and have the potential to do much more. On the other hand, he was a stringent enforcer of immigration laws and expanded their reach. President Obama did not enforce immigration perfectly – he just did so far more thoroughly than any other administration in U.S. history.

The lesson of this mixed legacy is that immigration enforcement cannot solve the illegal immigration problem and executive actions to legalize them are just a temporary and partial solution. Only Congress can put forth serious and permanent immigration reform that expands legal immigration and legalizes the current illegal immigrant population as a lasting solution to the current broken system.”

Illegal Immigration Cartoon

Credit: Adam DiOrio for CNSNews.com

President Trump’s January 27th executive order limiting refugees’ entry into the U.S. has upset a lot of people, but it’s important to understand that a pause on high-risk immigration from hotbeds of terrorist activity, while imperfect, is a reasonable temporary measure. The Trump administration needs time to formulate sound policies and procedures which, in the short term, will enable them to address the immigration and security concerns the U.S. has.

Ultimately, Congress needs to come up with a long-term immigration reform solution that will meet America’s immigration and security needs. The executive branch of government should be enforcing the laws Congress creates. That’s how our government is supposed to work. No one should reasonably expect President Trump to solve the nation’s immigration and security problems, just as no one should have reasonably expected President Obama or President Bush to have presented long-term solutions to those problems.

Until such time as Congress finds the wherewithal to do its job, immigrants and illegal aliens in the U.S. who are engaging in commerce, here, will have to deal with significant uncertainties. It is to addressing, from a legal perspective, the uncertainties in business, and especially entrepreneurship, that we now turn.

Entrepreneurs Are More Than Just Dreamers

In a 2012 article for CNN Money, Jose Pagliery relates the following story:

“Wil Prada is [an] entrepreneur.

Prada’s father left Peru in 1991 to escape the violent, leftist Shining Path guerrillas. His mother followed in 1994 when he was seven years old on a three-week trek through Central America. Prada remembers being torn from his mother’s arms by a hefty stranger who carried him across a river along the U.S.-Mexico border.

His father was deported in 2007. That forced Prada, then a political science student at the University of California in Los Angeles, to run his father’s landscaping business himself.

Prada started to feel trapped. It dawned on him that he had few other work options. He said he became depressed, and the company slumped on his watch.

‘Your whole life you’re told you have to get an education and you’ll be successful if you do,’ Prada said. ‘I finished and I couldn’t use my degree.’

But he picked himself up and taught himself how to give client estimates, repair sprinklers and better lead his sole employee, a documented Mexican immigrant.

Prada, now 25, maintains lawns for 40 homes and earns himself $25,000 a year.

‘I realized that we have to change this social notion that we’re bad for the country and we’re leeches,’ Prada said. ‘We’re human. We have families. We contribute.'”

Mr. Prada never decided to come to the U.S. illegally. As an adult illegal alien, however, he did decide to stay here. While that choice is a conscious violation of U.S. immigration law, it’s an understandable decision. Who among us, in Mr. Prada’s position, would want to return to Peru?

Peru was Mr. Prada’s parents’ home, before they came to the U.S. illegally. His father was deported, presumably back to Peru, in 2007, as Mr. Pagliery reports. Nevertheless, despite, perhaps, having a father there, one can reasonably imagine Peru would not seem like home to Mr. Prada. Certainly starting over in an unfamiliar country would be a significant challenge for him.

Let us presume that those who find themselves in circumstances similar to Mr. Prada’s–those who own and operate small businesses in the U.S. but are illegal aliens–will continue to remain in the U.S. These illegal alien entrepreneurs will need to do everything possible to avoid violating any more laws. This will reduce, as much as possible, the likelihood of deportation and to protect their small businesses, not to mention those who depend upon them for their livelihoods (like Mr. Prada’s “documented Mexican immigrant” employee).

U.S. immigration law is federal law. This means that it is enforced, albeit unevenly, in every state in the U.S.  That is an enormous scope, but a strange facet of U.S. immigration law is that nowhere in the U.S. Code is there a law barring an illegal alien from owning a business.

While being in the U.S. without permission is unlawful, and while violating this law is punished by deportation and the imposition of barriers to return to the U.S. after deportation, there have been cases where illegal aliens caught in the U.S. have used their business ownership as grounds for favoring alternatives to deportation.

The Immigration Reform and Control Act, or the IRCA (8 U.S. Code Section 1324a) makes it illegal for anyone to employ an illegal alien. So, businesses hiring illegal aliens risk being sanctioned with forfeiture of their assets, fines, and–for repeated violators–criminal arrest. Technically, zealous enforcement authorities could use this section of the IRCA to argue that a business owner is self-employed; and, therefore, is employing an illegal alien in violation of the IRCA.

Ultimately, no attorney or lawyer can responsibly assure you that there is some legal way for an illegal alien to start a business in the United States. It would be unethical and irresponsible for any attorney to suggest that you can or should start a business in the U.S., if you are an illegal alien. The only thing I want to do, here–and the only thing any attorney ought to do–is inform individuals of ways they can safeguard against further violations of the laws of the U.S., assuming that such individuals are going to consciously choose to continue to violate U.S. immigration law.

If you are an illegal alien who operates a business, the best you can do is abide by other U.S. laws that regulate business activity. These include, but are not limited to, labor laws, health codes, permits, etc.

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Nonresident Alien Ownership of LLCs

Note: Read the definitions of the terms “Resident Alien” and “Nonresident Alien” in Publication 519 from the IRS. The remainder of this article will refer only to resident aliens and nonresident aliens, and will not refer to illegal aliens, per se.

The best place to start with legal compliance in business is at formation. Generally speaking, most states’ laws do not restrict members in limited-liability companies (LLCs) to resident aliens or citizens; in other words, nonresident aliens can be members of an LLC. Even foreign companies could form and own an LLC in the U.S., as many foreign investment firms presently do.

However, nonresident aliens cannot be shareholders (owners) in an S-Corporation. IRC § 1361(b)(1)(C). Neither can an LLC with one or more members who are nonresident aliens, meet all of the same restrictions that a corporation must meet in order to qualify to elect S-Corporation treatment under the tax code.

Of course, except as described below, no requirement exists which would limit the activities of an LLC, owned in whole or in part by a nonresident alien, to activities within (or managed from within) the United States. In general, a person outside the U.S. can form and manage from virtually anywhere an LLC in which they have a membership interest.

Keep in mind, this freedom of ownership and management only applies to ownership and management, not any other activities in which the LLC might be engaged. If an illegal alien wanted to start a law firm as a PLLC (a professional LLC), for example, it would be impossible, because state law would require that all the members of the firm be licensed attorneys, which would preclude nonresident aliens from being members. These kinds of restrictions apply to a variety of other industries, not just the legal industry.

One of the biggest hurdles to starting an LLC, with one or more members who are nonresident aliens, is obtaining a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (the IRS). Typically, obtaining an FEIN is far easier if at least one member of the LLC has a social security number. In any case, at least one member of the LLC will need to obtain a taxpayer identification number–either a social security number or an individual tax identification number (ITIN). (See also the Instructions for Form W-7.)

Operating a Nonresident-Owned LLC in the U.S.

If a business is organized as an LLC, with one or more members who are illegal aliens or non-resident aliens, the trickiest parts of running the business will be (1) getting paid, (2) establishing and maintaining control of the company, and (3) acting on behalf of the company.

Getting Paid

Each Nonresident member in an LLC needs to have an ITIN. As of the time of this writing, a nonresident alien member of an LLC will be deemed to be engaged in a U.S. trade or business, and the LLC must withhold 35% of the profits to which any such member may be entitled for taxes, paid and filed on a quarterly basis with the IRS. The Internal Revenue Code (IRC) requires that nonresident aliens pay taxes on all earnings generated in the United States.

Legally having a bank account in the U.S. is also a difficult thing for certain nonresident aliens to do, but having an ITIN makes it easier. Consulting with an immigration attorney, a tax attorney, and Certified Public Accountant will make marginally easier the process of setting up an account into which distributions of profits can be legally deposited. (Notice I said “and,” not “or“. One absolutely should consult with each and all of these professionals.) A nonresident alien member of an LLC in the U.S. might also benefit from asking such professionals about the usefulness and viability of setting up a domestic trust to receive payments of distributions of profits from the LLC to be paid to such foreign beneficiaries (i.e. nonresident aliens).

Taking cash under the table is a bad idea. Doing anything that would constitute tax fraud or tax evasion is a bad idea. Whatever you do, do it legally, and don’t try to get cute. When the IRS audits a company with nonresident alien members (and assume they will, at some point), management will want the auditors to find a 100% compliant entity, and have no reason to look too closely at the immigration status of any of the LLC’s members.

Note: Now, this is where my discussion of anything tax-related will end, because I am not a tax attorney. If you are an illegal alien or a non-resident alien with a U.S. business, I strongly recommend that you hire a tax attorney in the U.S. to help you comply with any tax obligations you may have. Also, you should read Publication 519, “U.S. Tax Guide for Aliens” (For use in preparing 2016 Returns. Jan. 19, 2017) from the IRS.

Establishing and Maintaining Control of LLCs

Defining the relationship between a company and its employees is very important. Under the IRCA, as discussed above, illegal aliens cannot be legally employed in the U.S.  Nonresident alien members of U.S. LLCs should take care to ensure that all corporate documents properly classify them as owners, but not employees of the company; provided, however, they may be employees, if they become resident aliens of the U.S. or obtain work visas or other documentation enabling them to legally be employed in the U.S.

The company should also use employment agreements to establish its relationships with employees, including citizens and resident aliens; with vendors and suppliers; and with customers and clients, whenever possible. All of these agreements should include confidentiality statements which require individuals contracting with the company to maintain strict confidentiality about sensitive legal issues affecting the company.

An LLC with members who are nonresident aliens should hire a General Counsel attorney or firm to offer In-House Counsel or Outside General Counsel legal services. A General Counsel attorney will assist management in establishing and maintaining the relationships necessary to ensure the stability and operational efficiency of the LLC.

In the event of a dispute between the business (or its management) and any other person, such as an employee, a General Counsel attorney would represent the company’s interests in the dispute. It’s important to respond quickly and proactively to disputes as they arise; taking a preventive approach to dispute resolution can avoid expensive litigation and the exposure of sensitive company information, which might irreparably harm the company.

Nonresident Aliens As Authorized Representatives of LLCs 

In many cases, it will be difficult, if not impossible, for a nonresident alien to act on behalf of an LLC in the U.S., but, as a member of such an LLC, a nonresident alien may vote for a resolution of the members of the LLC authorizing another person, such as the company’s General Counsel, to act on behalf of the LLC under certain circumstances.

Acting through trusted intermediaries, including company officers, the company’s general counsel, and other fiduciaries often will be a nonresident alien’s best option when it comes to taking corporate action. The company’s Operating Agreement should spell out the requirements and processes for delegating authority, decision-making, and addressing other related concerns. Rarely, if ever should a nonresident alien be the face of a company.

Be Good. Be Smart.

When I was in college, as my buddies and I would be leaving a certain friend’s house, his dad would say to us: “Be good, and if you can’t be good, be smart.” That is sage advice. Be good; respect the immigration laws of the United States. And if you can’t do that, hire a good lawyer; that’s being smart.

Illegal Alien Entrepreneurs will need:

  1. At least one immigration lawyer to assist them with immigration law matters;
  2. At least one tax lawyer to help them strategically manage their tax compliance matters in a forward-looking manner, and to defend them in any audit, investigation, or litigation involving the IRS;
  3. At least one General Counsel attorney or firm to help them properly structure a business (either as an LLC, as discussed herein, or as a C-Corporation, which, in some circumstances, might be more beneficial but, in all cases, will be more expensive); and
  4. At least one Certified Public Accountant to assist them with bookkeeping, payroll, tax reporting, and other accounting issues.

Without a strong team of professionals supporting their business, illegal alien entrepreneurs are extremely likely to violate business laws and regulations, which could increase their risk of deportation. Moreover, all of the employees, including resident aliens and citizens, could have their lives and livelihoods disrupted by government action in connection with the deportation of a company’s owner(s) or manager(s), if those persons are illegally present in the U.S.

Be good. And if you can’t be good, be smart. Just don’t expect cleverness to be an infallible shield against the consequences of choosing to violate U.S. immigration law.

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