Navigating the legal landscape when starting a business can be tricky, and this is especially true when doing so in a country foreign to your own. In this post and others to follow, we will discuss some of the issues faced by foreign entrepreneurs when founding start-ups in the United States.
The best advice one could give to a foreign entrepreneur, first and foremost, is to assemble a solid team. Aside from founders, investors, key employees and business consultants, experienced corporate, international tax and immigration advisers are essential. After your team is assembled, an analysis of immigration options should be the next step. Too often, entrepreneurs, enthusiastic about a new endeavor and the opportunities available in new territory, enter into joint ventures or similar arrangements without first determining what (if any) immigration avenues are available. The U.S. immigration system is complex, and, arguably, one of the main challenges it presents is that the categories under which foreign entrepreneurs can enter and work here are limited (and the hoops through which they must jump are numerous). There is nothing more disappointing and costly than making moves toward an exciting new business venture only to realize too late that there are no options available for the founders and key people to come to the U.S. Furthermore, even if there are options available, as discussed below, the immigration regulations have very specific requirements that drive how a deal or start-up enterprise is structured.
The following discusses some of the most common categories under which entrepreneurs typically come to the U.S. temporarily to start businesses. Before we dive in, however, there is a distinction to be made: Generally speaking, there are two types of visas classifications—nonimmigrant and immigrant. To put it simply, nonimmigrant visas are temporary (i.e. after temporary work in the U.S., you will return home or apply for an immigrant visa for which you are eligible), and immigrant visas are permanent (i.e. the end result is a green card). Immigrant visas will be discussed in a future post. Now, for the nonimmigrant visas:
E-1 Treaty Traders:
The E visa is only available to nationals of countries that have commercial treaties with the United States. There are two types: the E-1, Treaty Trader, and the E-2, Treaty Investor. Currently, there are 54 E-1 treaty countries and 80 E-2 treaty countries. A full list can be found on the Department of State Website.
E-1 Example: Donatella is a citizen of Italy. She is the majority stockholder of a company in Italy that designs high end clothing and accessories. Donatella wants to form a subsidiary of the Italian company in the U.S. to manufacture the high quality materials and fabrics Donatella needs for her designs. The U.S. company will manufacture the materials, export and sell them to the Italian company, which will then use them in its clothing and accessories sold in Italy and all over the world. Donatella needs to come to the U.S. temporarily to set up the U.S. operation. She will also need her senior design executive, Carlo, to come with her as he is the only one that knows how to manufacture the materials so that they work well with the company’s designs and produce the highest quality goods.
The E-1 is a viable option for principals and certain employees of start-ups engaged in trade between the U.S. and a treaty country. Trade, as defined (i.e. the international exchange of goods, services and technology), can touch on many different industries, including merchandise, equipment, international banking, tourism, transportation, insurance, advertising, accounting, communications and others. Generally, to qualify for E-1 status, the treaty trader must:
- Be a national of treaty country;
- Carry on “substantial” trade (There is a whole body of law on what constitutes “substantial” trade, with no hard and fast rules. However, generally speaking, a continuous flow of sizable international trade items, involving numerous transactions over time is substantial. Monetary value of transactions is an important factor in considering substantiality, but it is not the only factor.); and
- Carry on “principal” trade between the United States and the treaty country (This requirement is met when over 50% of the total volume of international trade conducted by the trader is between the U.S. and the treaty country of which the trader is a national.).
Employees of a treaty trader may also be eligible for E-1 status if they meet the following requirements:
- Are of the same nationality as the principal employer (i.e. the same treaty country);
- Meet the definition of “employee” under the relevant law; and
- Are either engaged in duties of an executive or supervisory character, or, if employed in a lesser capacity, have specialized skills which are essential to the efficient operation of the business.
More often than not, E-1 eligible employees work for an entity, as opposed to an individual. In this case, the immigration service will look to the “nationality” of the entity. However, because of the ease of forum shopping, the jurisdiction in which an entity is incorporated has nothing to do with its nationality for E visa purposes. Rather, the entity must be at least 50% owned by persons in the United States who have the nationality of the treaty country and are themselves maintaining E-1 status. If the owners are not in the U.S., they must be able to be classified as E-1 treaty traders if they were to apply for admission to the U.S. In the case where there is a more complex ownership structure (e.g. multiple subsidiaries leading up to a foreign parent), the immigration service will look to the individual ownership of the ultimate parent entity to satisfy the ownership requirement.
In our example above, Donatella, being a citizen of Italy and seeking to enter the U.S. to engage in the trade of materials produced in the U.S. to be sold to the Italian company, would be eligible for E-1 Treaty Trader status. Additionally, if she can show her employee Carlo has the requisite essential skills, he would be eligible for E-1 status as well. Additionally, the ownership requirements of the employer operation are met because the U.S. company will be a subsidiary of the Italian company, the majority of which is owned by an Italian citizen eligible for E-1 status (Donatella).
E-2 Treaty Investors:
E-2 Example: Javier is a citizen of Colombia. He wants to open up a soccer facility in Miami with his cousin Juan who is a U.S. citizen. The facility requires a $500,000 cash investment initially, $400,000 of which has come from Javier. Javier and Juan have formed an LLC to run the business, which is owned 80% by Javier. Javier is also the manager of the LLC. The company will employ Javier’s friend James, a former professional soccer player from Colombia, who will be the president and supervise the coaching staff. The soccer facility is expected to generate enough income within the first 5 years to support Javier, Juan, James and another 5 U.S. employees.
As with the E-1, the E-2 is available to both individual treaty investors and certain employees of treaty investors. To be eligible, the following requirements must be met:
- The investor must be a national of a treaty country;
- The investor must have invested, or be actively in the process of investing, a substantial amount of capital in a bona fide enterprise in the U.S. (For the investment to qualify, it must be funds or assets placed at risk—e.g. secured debt is typically insufficient, but some unsecured loans are acceptable— with the objective of generating a profit. The rule for what is substantial is, again, not hard and fast, but the $400,000 cash investment from Javier in our example above is likely substantial.);
- The investor must be seeking to enter the United States solely to develop and direct the business in which he has invested (This is established by showing at least 50% ownership of the enterprise or possession of operational control through a managerial position or other corporate device.); and
- The U.S. business cannot be marginal (i.e. it is expected to generate more than a minimal living for the investor and his family within 5 years).
Employees of a Treaty Investor must meet the following requirements to obtain E-2 status:
- Be from the same treaty country as the principal E-2 employer;
- Meet the definition of “employee” under relevant law;
- Be either engaged in duties of an executive or supervisory character, or, if employed in a lesser capacity, have specialized skills which are essential to the efficient operation of the business.
Additionally, as with the E-1, if E-2 employees are employed by an entity as opposed to an individual, the entity must be at least 50% owned (directly or indirectly) by persons in the United States who are nationals of the treaty country and are themselves maintaining E-2 status or are able to be classified as such.
In the example above, Javier has put in capital that is likely sufficient to classify him as a treaty investor. Furthermore, because he will manage the operation, and the business is expected generate enough income to support several employees after 5 years, Javier meets the E-2 requirements. Additionally, James likely meets the requirements of an executive or supervisor employee to be eligible for E-2 status.
L-1 – Intracompany Transferees
L-1 Example: Andrew, a UK national, has spent the past 10 years working for a company in London that provides technology services to companies all over the world. The UK company is opening a subsidiary in the U.S. to provide a particular line of IT services to U.S. clients. Andrew is the president of the U.S. operation and thus needs to enter the U.S. to set up and run the new office. The U.S. subsidiary has entered into a lease agreement for office space in New York City. The income generated by the U.S. subsidiary is expected to support Andrew’s position within a year and several additional employees thereafter.
The L-1 visa is another visa commonly used in the start-up context. The L-1 is for employees of multinational companies coming to the U.S. to work for a U.S. parent, branch, affiliate or subsidiary entity. In order to obtain an L-1 visa, you must either be coming to the U.S. in a managerial or executive capacity or have specialized knowledge about the company. Additionally, you must have worked abroad for the employer corporation continuously for one year out of the three years prior to coming to the U.S. There are specific definitions in the law as to what constitutes a “managerial or executive capacity,” as well as “specialized knowledge.” Generally speaking, managers or executives are people who create the goals and policies of the company, have discretion to make decisions, receive minimal supervision or direction from higher-ups, and have oversight over the organization and employees. Specialized knowledge involves advanced knowledge of the company’s products, markets, processes, and procedures.
There are some particular hurdles for L-1s in the start-up context. When a foreign company is establishing a “new office” (and thus has no operating history), special evidence must be submitted with the visa petition to show that the start-up (1) has secured sufficient physical space in the U.S., and (2) will support an executive or managerial position within one year. Satisfying this latter requirement means providing information regarding the scope of the operation, its organizational structure and financial goals, as well as the size of the U.S. investment and the financial capacity of the foreign company.
The example above is a typical L-1 scenario. Unlike the E-1, no international trade is required, and so it is not a problem that the U.S. subsidiary will not be selling or trading products or services with the UK company. Additionally, because Andrew will run the U.S. operation and has worked with the UK company continuously for more than 1 year in the prior 3, and the U.S. business has secured a lease and will support at least Andrew’s job within a year, the other L-1 requirements are met.
Other Nonimmigrant Visas:
The following are other visa classifications that, although less commonly utilized by foreign entrepreneurs, could also be useful in the start-up context:
- O-1 (Extraordinary Ability) – For individuals with documented extraordinary ability to work in a particular field
- H-1B (Specialty Occupation) – For work in an occupation that normally requires a bachelor’s degree or higher in a related field of study (e.g., engineers, scientists or mathematicians)
- E-3 (Specialty Occupation for Australian Nationals) – Almost the same as the H-1B, except that it is a separate category of visas available only to nationals of Australia.
- B-1 (Business Visitor) – For visits to the U.S. as opposed to work for a U.S. employer (such as to secure funding or office space, negotiate a contract, or attend certain business meetings)
Each of the nonimmigrant visas discussed above, because they are temporary, will only be issued for a specified period of time. If additional time in the U.S. is desired, an extension would need to be filed. A start-up’s key people are rarely, if ever, done in the U.S. at the end of the first validity period (e.g. only 1 year for an L-1 new office petition), and so it is important to plan for the extension at the outset. The extension application will typically require evidence that the company (and/or the particular individual) has been successful or, at the very least, is still likely to be successful in the near future. Because success, in the eyes of immigration, amounts to profit and, most importantly, job creation, these goals, as well as possible contingencies, delays and hurdles should be considered from the very beginning.
Finally, one more point worth making: Documenting eligibility for any of the above visas is a topic worthy of its own discussion, however, it would be a mistake not to at least mention the importance of a solid business plan. Much of the information that must be demonstrated to the immigration service is speculative because, after all, a start-up has no track record. The business plan is the document that drives projections as to success of the business and thus visa eligibility. (For more on business plans, see our previous post.)
Be sure to check out part 2 of this post, discussing some of the immigrant visas available to foreign entrepreneurs.