Limited Liability Companies for Foreign Investors

By Stanley Mailman

New York Law Journal (p. 3, col. 1)

February 27, 1995

AUTHORIZED UNDER New York law only since Oct. 24, the limited liability company (LLC) is fast becoming a competitor to the corporation and the partnership.*1 ``The driving force behind the rapid growth of LLCs as business vehicles,'' as one recent article observes, ``is that they offer their equity holders the same limited liability protection that corporations afford to their stockholders, but they may be categorized as partnerships for federal and, in most states, state income tax purposes.''*2 How well they work for immigration purposes is the subject of this column and one of the listed topics in ``LLCs for International Commerce and Investment,'' a program offered by the Association of the Bar of the City of New York on March 6th.

When foreign companies or individuals set up operations in the United States, unless the principals themselves plan to work here, the type of entity they choose to establish has little effect on their ability to bring other personnel from abroad. Immigration eligibility may turn, for example, on the nationality of the owners, the nature of the job, the personal qualifications of the employees, the availability of U.S. workers or the relationship if any between the U.S. entity and a recent employer.*3 Whether to choose a corporation, partnership (general or limited), or limited liability company, should depend on the usual business and tax considerations; the form of the employing entity does not matter under the immigration rules.

Is it a different story when the principals themselves need a nonimmigrant (temporary) work visa to accompany their investment, or when investment is only a means to the precious green card (lawful residence status)? The immigration considerations are then certainly touchier.

The Selection System

The issues for investors who seek residence are largely framed by the selection system established by the Immigration Act of 1990, as amended.*4 The new system is decidedly friendlier than its predecessor to those who would qualify for residence on the basis of personal achievement, needed skills, or investment. They make up what is sometimes referred to as the employment-based (EB) allocation, which permits 140,000 immigrants annually, up from 56,000.*5 The discussion that follows focuses on those EB provisions that involve investment or other business in the United States. Nothing however prevents the foreign investor from taking advantage of those provisions that reward outstanding personal achievement, or the applicant's relationship to a U.S. citizen or permanent resident alien; and of course there is the lottery.

Within the EB categories or ``preferences,'' there is one that specifically addresses the immigrant investor, sometimes called the $1 million investor provision.*6 It allows investors to immigrate if they put $1 million into a new commercial enterprise that creates a minimum of 10 jobs for at least two years; an investment made in a rural or high unemployment area may be $500,000.*7

The corresponding regulations of the Immigration and Naturalization Service preclude passive investments; the immigrant has to be ``engaged in the management of the new commercial enterprise, either through the exercise of day-to-day managerial control or through policy formulation . . . .''*8 (Unlike other countries, the U.S. makes no provision for immigration by retirement or settlement here simply on the basis of ample funds or a passive investment, however large.*9) The INS defines ``commercial enterprise'' broadly to cover ``any forprofit activity formed for the ongoing conduct of lawful business,'' including any publicly or privately owned entity.''*10

The INS view of the investor's management or policymaking role is unorthodox. In the corporate setting, its regulations seem to require that the investor be an officer or member of the board of directors.*11 For a partnership, limited or general, the INS requests evidence that the investor is engaged in management or policy-making functions. But in effect, the regulations hold the limited partner to a much lower standard: If the partnership agreement provides the ``rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, the petitioner will be considered sufficiently engaged in the management of the new commercial enterprise.''*12 Under these INS rules, an investor should also be able to qualify through a limited liability company.

Special Considerations

To use the LLC effectively, however, the investor should be aware of these special considerations. One is that the LLC may need at least two members, a statutory requirement in most states.*13 Although permitted by New York and several other states, the single-member LLC does not clearly avoid being taxed as a corporation.*14 Foreign investors must therefore be prepared to share ownership. On the other hand, they should not relinquish the management or policy-making role that these INS regulations require them to assume.

LLC statutes ordinarily permit management either by the members or by managers.*15 Although New York requires an election in the articles of organization, management devolves on the members if the articles default.*16 To meet the INS requirement, the immigrant investor should structure the LLC so as to exercise management powers and responsibilities and certainly not relinquish them to another member or a manager. In the absence of a specific ruling, we should not assume that the INS will extend to the LLC the easy definition of ``management'' that it applies to the limited partner.

Similar considerations apply to the treaty trader (E-1) and treaty investor (E-2), the nonimmigrant (temporary) forebears of the immigrant investor. Pursuant to treaty or other international agreement with the United States, the citizens of some countries may enter in E-1 status to carry on substantial trade between their country and the United States; or in E-2 to direct and develop an enterprise in which they have invested or are in the process of investing a substantial amount of capital. Their visas, although temporary, may be extended for as long as they continue to qualify.

The E classifications, which derive from 19th Century statutes, are cast in terms of an individual trader or investor.*17 But recognizing how business is done now, Department of State regulations also permit E-1 and E-2 visas to employees of a treaty-qualified individual or organization, if the employees have the same nationality, and will work in executive or supervisory jobs or have special qualifications that make their services essential.*18

The substantiality of the investment is measured in relative terms rather than by specific figures. Less than $100,000 might be enough if that is all that is needed for a given business to turn a profit.*19 Given a substantial investment, there is no other restriction on the nature or form of the enterprise, so long as it is ``a real and active commercial or entrepreneurial undertaking, producing some service or commodity.''*20 The actual investor need not be employed but must have a controlling interest in order to ``direct and develop'' the enterprise.*21

Standard of Control

This E-2 formula is a higher standard of managerial control than INS imposes under the the immigrant investor regulations, at least as applied to the limited partner. It is a standard that an investor should be able to meet as president of a corporation or as the member-manager of an LLC. With respect to a limited partner, however, a consul might ask how the necessary control could be exercised to ``direct and develop'' the operations of the enterprise.

The treaty investor (E-2) visa can be valuable both toentrepreneurs who wish to work on site with their U.S. companies only several weeks or months a year and to those who wish to settle here indefinitely. But it does not yield the status of lawful permanent resident; and, under the U.S. system, a nonimmigrant permit does not mature into a green card. As to the immigrant investor program, relatively few entrepreneurs have been willing to plunk down $1 million for the privilege of the green card, largely because of the 10-job requirement.*22

A useful provision for foreign investors who are already running a business in another country is one designed for the transfer of executives within multinational companies. Headed, ``Certain multinational executives and managers,'' it offers permanent residence to someone ``employed'' abroad for one year during the last three in an executive or managerial capacity, who is coming to continue to render such services in the United States to the same firm or a subsidiary or affiliate.*23 The transferring executive or manager need not have an interest in either entity, but ownership of both by the same person or other entity qualifies them as affiliates. No minimum investment is specified.

Under INS regulations, the prospective U.S. employer has to be doing business for one year before it may file for the transferee as a resident;*24 but as soon as the U.S. affiliate is established and signs a lease, an employee may be transferred in L-1 status, a nonimmigrant counterpart which has essentially the same requirements.*25 Although a temporary visa classification, the L-1 allows the manager or executive to stay for as long as seven years, or indefinitely if the stays are only intermittent or no more than six months a year in the aggregate.*26

Hence, the managing director of a Belgian societe anonyme could quickly qualify for an L-1 visa to run a recently organized U.S. affiliate, as its president. As early as a year later, assuming that the success of the business continues to warrant a manager or executive, the affiliate may file to qualify the president as a permanent resident.*27 That the manager is also the sole or majority owner of the two corporations establishes their relationship as affiliates;*28 it does not alter the manager's role as ``employed.'' The INS has specifically held that ``[t]he corporation is a separate legal entity from its stockholders and able to file a petition and employ them.''*29

Double Taxation

But an ordinary stock corporation may be a poor vehicle for a given investor because of its potential for double taxation; and the shares of an S corporation are only available to an individual who is a U.S. citizen or lawful resident alien. The limited partnership, attractive for its pass-through income and its shield from personal liability, would seem to be unavailable to an investor who must function in an executive or managerial capacity in order to qualify under for the green card as an immigrant transferee. Consider then the LLC. Can a member of that entity qualify as a multinational executive by managing the LLC's operations?

The INS regulations on multinational executives and managers (transferees), define ``affiliate'' broadly in terms of ``firm, corporation, or other legal entity,''*30 and no doubt any form of business can hire a manager, including a limited liability company. The question is whether a member of an LLC who functions as a manager can be deemed ``employed'' by that company within the meaning of the transferee provisions.

The question is hard to answer, largely because of the hybrid nature of the LLC and the short time it has been on the statute books as an entity.*31 Not many laws concerning the usual incidents of employment have been amended to address the LLC. The few states that have considered the issue with respect to workers' compensation and unemployment insurance, mandate coverage only for those LLC members who provide their company with at least some employee services, including services as a member-manager.*32

In the context of the temporary transferee classification, a federal district court held in 1982 that the beneficiary of an L-1 petition could be ``employed'' as a manager by his own sole proprietorship.*33 The INS has itself ruled that compensation may be discounted as a factor in deciding whether an individual is employed.*34 And, although denying a petition for lack of a labor certification in a precedent decision, the INS found no other fault with an employment-based petition filed by a general partnership for one of its two equal partners.*35 If the INS rethinks that position, it is unlikely to do so in the context of an LLC, which is the creature of an enabling act that gives it a legal existence distinct from its members*36 and permits management of the entity by a member-manager.

Most Efficient

Investors therefore have a variety of options in terms of the immigration and business vehicles available. While there are still other ways to qualify for residence on the basis of employment, transfer as an executive or manager to a related company in the United States is the most efficient, both in terms of immigration procedures and business convenience.*37 As the business entity to use, the LLC has obvious advantages and can accommodate the immigrant transferee requirements if the investor reserves clear-cut managerial powers, ideally with separate compensation. The same may be said for the corresponding nonimmigrant status of L-1. Although the LLC is also suitable for the immigrant investor route, many see the minimum investment, the payroll, and the uncertainty, as unreasonable tolls.

Notes

(1) See Limited Liability Company Law, ch. 576, 1994 N.Y. Laws, Chap. 576 (April 5, 1994), adding ch. 34 to the Consolidated Laws (effective Oct. 24, 1994).

(2) Stuart Levine, Robert M. Ercole, & Daryl J. Sidle, ``Revenue Procedure Clarifies IRS Position on Tax Classification of Limited Liability Companies,'' in Aspen Law & Business, Corporation 1 (Feb. 1,1995).

(3) See 2 Charles Gordon, Stanley Mailman & Stephen Yale-Loehr, Immigration Law and Procedure Sec.31.02 (1994).

(4) Pub. L. No. 101-649, Title I, 104 Stat. 4978 (Nov. 29, 1990) (codified as amended at Immigration and Nationality Act (INA) Sec.201, 202, 203, 8 USC Sec.Sec.1151, 1152, 1153).

(5) For current EB allocation see INA Sec.Sec.201(d), 203(b), 8 USC Sec.1151(d), 1153(b)). See also 2 Gordon, Mailman & Yale-Loehr ch. 39.

(6) See INA Sec.203(b)(5), 8 USC Sec.1153(b)(5); 8 CFR Sec.204.6. See also 2 Gordon, Mailman & YaleLoehr Sec.39.07. In the statute and regulation, such investors are referred to as ``employment-creation aliens.''

(7) For an alternative pilot program for immigrant investors, as yet not fully developed, see infra note 22 and accompanying text.

(8) 8 CFR Sec.204.6(j)(5).

(9) However, under the selection system earlier in effect, both INS and DOS regulations provided that active investors and retirees, among others, were not within the purview of the labor certification requirements of the then Sec.212(a)(14), and therefore could qualify for a nonpreference visa number without a labor certification. See, e.g., Matter of Lett, 17 I. & N. Dec. 312 (BIA 1980). For general discussion, see 1 Gordon, Mailman & Yale-Loehr Sec.17.06 n.1. The nonpreference category no longer exists, its closest analog being the diversity (lottery) allocation, see INA Sec.203(c), 8 USC Sec.1153(c).

(10) 8 CFR Sec.204.6(e).

(11) See 8 CFR Sec.204.6(j)(5) (referring to the documentation required).

(12) Id. This standard seems at odds with the usual view of a limited partner's managerial authority as extremely circumscribed. ``Limited partners risk personal liability if they are too involved in the business.'' Bishop & Kleinberger, supra note 13, at Sec.1.01[2][a] (citation omitted).

(13) See Carter G. Bishop and Daniel S. Kleinberger, Limited Liability Companies, at Current Developments 2 (1994).

(14) See, e.g., supra note 2 , at 7-8; see generally Bradley Manns, ``Taxation of One Member LLCs,'' Limited Liability Company Reporter 94-604 (Nov./Dec. 1994).

(15) See supra note 13. In New York, the managers need not be members, see Limited Liability Company Law Sec.410.

(16) Supra note 13 at 2. For New York provisions see supra note 1, at Sec.Sec.206(6), 401(a).

(17) See generally 1 Gordon, Mailman & Yale-Loehr Sec.17.02.

(18) 22 CFR Sec.41.51(c). See also 9 (DOS) Foreign Affairs Manual (FAM) Sec.41.51 n.3, reprinted in 10 Gordon, Mailman & Yale-Loehr, on the nationality requirements of the employing organization.

(19) 9 FAM Sec.41.51 nn. 9, 10.

(20) Id. at n.8

(21) See 9 FAM Sec.41.51 n.11.

(22) Although the drafters expected the program to generate 4,000 petitions annually, during its first 20 months ending July 31, 1993, only 1,036 petitions had been filed. See 70 Interpreter Releases 1129 (Aug. 30, 1993). As the investor petitions were then only trickling in, Congress in 1992 enacted a five-year pilot program, see Pub. L. No. 102- 35, Sec.610, which sets aside 300 visa numbers annually for investors, who need not hire 10 employees if they make their investment within designated regional centers established to promote domestic capital investment and create jobs. See 59 Fed. Reg. 17920 (April 15, 1994) (final rule codified mainly at 8 CFR Sec.204.6[m]). See also generally 2 Gordon, Mailman & YaleLoehr Sec.39.07[2]. Another discouragement to the use of the investor provision is the conditional nature of the residence granted: two years after the approval, INS looks at whether the investment has been maintained in good faith.

(23) INA Sec.203(b)(1). Although the statute does not explicitly require the initial year of employment to be outside the United States, the INS has so held, see Matter of Kloeti, 18 I. & N. Dec. 295 (Reg. Comm'r 1982), accord, Karmali v. INS, 707 F2d 408, 411 (9th Cir. 1983), and now so specifies in its regulations, see 8 CFR Sec.204.5(j)(3)(i)(A). International accounting partnerships may be considered affiliates for this purpose even if they do not meet the definition otherwise specified: ownership and control by the same parent or individual or same group of individuals, each owning approximately the same proportion of each entity. See 8 CFR Sec.Sec.204.5(j)(2), 214.2(l)(1)(ii)(L). For the definitions of ``executive capacity'' and ``managerial capacity,'' see 8 CFR Sec.204.5(j)(2).

(24) 8 CFR Sec.204.5(j)(3)(D). ``Doing business'' is defined at 8 CFR Sec.204.5(j)(2) as producing goods or services. Note that the one-year requirement is a creature of the regulation; it does not appear in the statute.

(25) See INA Sec.101(a)(15)(L), 8 USC Sec.1101(a)(15)(L); 8 CFR Sec.214.2(l)(3)(v) (requirements of new office including necessary physical premises).

(26) 8 CFR Sec.214.2(l)(12). The limit on aliens who qualify for L-1 on the basis of their specialized knowledge is five years.

(27) If the manager meets the one-year-inthree requirement when arriving on a temporary visa, that qualification is retained so long as the manager continues to work for the same multinational organization, not necessarily in L-1 status. 8 CFR Sec.204.5(j)(3)(B).

(28) 8 CFR Sec.204.5(j)(2) (definition of affiliate). Limited Liability Companies for Foreign Investors

(29) Matter of Tessel, 17 I. & N. Dec. 631, 633 (Acting Assoc. Comm'r, Exam. 1981) (unsalaried chairman found qualified for L-1 and hence for the earlier counterpart of the present first EB preference transferee). See also Matter of Allan Gee, 17 I. & N. Dec. 296, 297 (Acting Reg. Comm'r 1979) (in context of predecessor immigrant provision: ``It is an elementary rule that a corporation is a legal entity separate and distinct from its stockholders, and this is true even though one person may own all or nearly all of the capital stock . . . .''), Matter of M ----, 8 I. & N. Dec. 24 (BIA 1958; A.G.) (same conclusion).

(30) 8 CFR Sec.204.5(j)(2).

(31) See Bishop & Kleinberger, supra note 13, at Sec.1.01 n.1 and accompanying text. See also Matter of Hughes, 18 I. & N. Dec. 289, 290 (Comm'r 1982) (a South African ``limited liability company . . . has no exact counterpart in the United States,'' but is a legal entity recognized as an employer for L-1 purposes).

(32) See Bishop & Kleinberger, supra note 13, at Sec.1.04[2][b]. However, in Oklahoma LLC members with an interest of at least 10 percent are specifically excluded from workers' compensation coverage; Wisconsin allows owners of the LLC with a 10 percent interest to opt out of such coverage. Id. at nn. 138, 139. The active net income of a member whose activity level rises to that of a manager would also seem to be subject to the federal self-employment tax and be counted in calculating contributions to qualified plans. See id. at Sec.1.04[2][a].

(33) Johnson-Laird v. INS, 537 F.Supp. 52 (D. Or. 1981), appeal withdrawn, see 59 Interpreter Releases 290 (1982).

(34) See Matter of Pozzoli, 14 I. & N. Dec. 569 (Reg. Comm'r 1974) (held employed in the U.S. as L-1 even though salary paid by subsidiary abroad); see also Matter of Tessel, 17 I. & N. Dec. 631, 633 (Acting Assoc. Comm'r, Exam. 1981) (unsalaried chairman found qualified for L-1 and hence for the earlier counterpart of the present immigrant transferee).

(35) Matter of Zang, 13 I. & N. Dec. 290 (D.D. 1969). Compare letter of Jacquelyn A. Bednarz, Chief, Nonimmigrant Branch, Adjudications, INS Central Office, file CO 214h-C (June 14, 1993), reproduced at 70 Interpreter Releases 1318 (Oct. 4, 1993) (INS will not entertain specialty occupation petition by solo law practitioner to accord himself H-1B status.)

(36) See Bishop & Kleinberger supra note 13, at Sec.1.01[1].

(37) For example, a labor certification to be issued by the Department of Labor is needed in the EB third preference for professionals and skilled and unskilled workers; and, unless the need for a job offer is waived in the national interest, in the EB second preference for professionals with advanced degrees and persons of exceptional ability in certain fields. The labor certification process, a difficult drill at best, is particularly hard in the case of the significant investor who is seen by the Department of Labor as controlling the recruitment process and as not an ``employee,'' even of a corporation. See Deskbook of the Board of Alien Labor Certification Appeals, 2d Edition, chapters 3, 9, reprinted in 8 Gordon, Mailman & Yale-Loehr. The Labor Department's view of employment, see 20 CFR Sec.655.715, may also be problematic for the labor condition application which must be accepted by the Labor Department before a petition may be filed with INS to accord H-1B status, the classification used by aliens coming for up to six years to work in a specialty occupation (usually a profession).