Incorporating a business in the U.S and why is it relevant for O-1?

Most founders who are about to apply for a visa in the States wonder what kind of company to form. There are many structures to choose from, forms to file with regulators, and distinctions that are difficult for a non-lawyer to understand.However, it’s not as complicated as it might seem, especially as online services such as Firstbase.io are increasingly emerging that can help streamline the entire process.

Where to start?

The first step is to choose the right legal structure that is best for your business. Among the most popular legal forms are:

1. C-Corp
2. S-Corp
3. LLC

What is incorporation?

Inc. – incorporated – means that the company’s business structure is a legal corporation. An Inc. corporation is a completely separate entity from its owners and shareholders. This is an important legal distinction because a registered company essentially becomes a separate “person” under the law. Incorporation is the process by which a company becomes a corporation, thereby gaining the right to put the suffix “Inc.” or “Incorporated” after its name. The rules for incorporation vary depending on the state and the specific type of corporation you want your company to be.

In general, to get “Inc.” you must first choose whether you want to register your business as an S-Corp or a C-corp.

You have to remember that after you choose the type of corporation, you have to choose the state in which you want to register. Every corporation must have directors and a registered agent who agrees to receive important legal and tax documents on behalf of the company. The registered agent must be available to receive these documents during normal business hours.

The next step in establishing a company is to prepare and file incorporation documents with the secretary of state of your choice. Each state also has a filing fee that must be paid when the documents are filed.

C-Corp

A C-Corp is a C Corporation, which is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation.

C-Corporation is almost always the right choice for technology startups. It is the form chosen by, for example, Apple, Google, and quite a few large companies within the United States. As a C-Corp is a fully separate legal entity that is responsible for paying corporate taxes and issuing annual reports. In addition, under this structure, the company must also appoint a board of directors.

Why do investors prefer C corporations?

There is one important reason why almost every Venture Capital-backed company registers as a C-corp: very often, investors require this form. The reason is the pass-through tax status, which is defined by the dictionary of Merriam-Webster, as: „US law: pass-through entity They structured the business as a pass-through to enjoy more beneficial tax treatment.” In addition, the C-Corp structure also opens up more fundraising opportunities. For example, LLCs and S-Corps cannot have more than 100 shareholders or any foreign shareholders, nor can they accept equity investments from other companies.

S-corp

S-corps are less flexible than C corporations. A limited number of shareholders is allowed – no more than 10. As with C corporations, shareholders own the corporation by virtue of the shares they hold in it. However, unlike a C-corp, there can be only one class of shares in an S-corp. S-corp is dedicated to active businesses with little debt, no high-risk assets such as real estate, and a low chance for substantial appreciation since all corporate earnings are typically distributed to the shareholders. If the business will make a profit in excess of what amounts to a fair salary to owners, an S corporation is an ideal tax structure. The S corporation is ideal for most small businesses.

LLC

An LLC –  limited liability company is essentially an organized partnership offering the same protections as corporations, but with much more flexibility.

Firstly, managing an LLC from outside the US is allowed, but maybe not be permitted within the US without a valid work visa. Being a director, as well as a shareholder, of a US corporation is allowed without any kind of visa, but being an employee and performing your duties within the US is generally not allowed.

The LLC provides significant flexibility in terms of the allocation of profits and losses to its owners. Specifically, an LLC can allocate profits and losses among its members in order to minimize the overall tax burden of its members. Another significant benefit is the ability of the members to limit a transfer of a membership interest to a transfer of an economic interest only. This means future members can be restricted to receiving distributions (and paying taxes on those distributions) but with no accompanying voting or management rights. When a shareholder of a corporation transfers his or her stock, all attributes of ownership including voting rights accompany the transfer, unless the stock is non-voting stock. Furthermore, without the consent of the members of an LLC, no transferee of a membership interest becomes a substituted member, only an assignee. This is significant since, by law, the assignee has no rights as a member under the operating agreement. Unfortunately, in many states, a shareholder cannot contribute future services or intangible property in exchange for shares in the corporation. Members of an LLC can generally contribute cash, property, or services upon formation or in the future, as they see fit, or no contribution at all in some cases.

Owners of the LLC must pay self-employment tax – “payroll taxes” – to the extent they are receiving compensation for services provided to the LLC and are considered general partners. Remember, in an S corporation, only the wages, and not the distributions to shareholder-employees, are subject to self-employment taxes. Thus, electing to be taxed as an S corporation can provide significant tax savings to its shareholders in contrast to the LLC in some instances.

We recommend choosing LLC, when your company works in real estate investments, holding companies owning equipment and investment assets, and businesses owning other assets involving a risk of liability are generally appropriate for LLCs. Of course, if you have one or more partners and want to be flexible with how the business distributes profits and losses or other allocations to the owners, then the LLC is almost certainly the best choice.

How does incorporation affect the O-1 visa?

The O-1 visa is a non-immigrant visa intended for individuals deemed to have exceptional ability in various fields, including science, education, business or athletics (O-1A), art and film, and television ( O-1B). O-1 visas must be filed by an employer or designated agent, as petitioning is prohibited under the regulations. However, the U.S. Department of State’s Foreign Affairs Manual (FAM) was amended in 2016 to allow a legal entity owned by a foreign national to file an O-1 petition on his or her behalf. Specifically, it states in 402.13-2b that „USCIS regulations provide that the petitioner may be either an employer or agent. While O-1 beneficiaries may not self-petition, a separate legal entity owned by the O-1 beneficiary may be eligible to file a petition on behalf of the O-1 beneficiary.”

The amendment to the FAM, eased the procedure for O-1 visa applicants, who can use a legal entity they own in whole or in part as their proxy, provided they meet the basic requirements of O- 1, i.e., winning a major award or meeting a minimum of 3 criteria set forth in the Policy Manual. Most importantly, the O-1 petition must be approved by USCIS, which is independent of DOS.

When does a company’s incorporation affect the O-1 visa?

There are two cases when this is recommended. First, when an O-1 applicant seeks to obtain O-1 status specifically through a company it owns, i.e., citing the guidelines outlined above. Although O-1 beneficiaries cannot file petitions on their own, the second exception is when a separate legal entity owned by an O-1 beneficiary files a petition. It may qualify to file a petition on behalf of an O-1 beneficiary under the FAM guidelines 402.13-2(b). Importantly, in both cases, there must be an “employer-employee” relationship.

According to the 2010 Neufeld Memo, an employer-employee relationship means that the beneficiary, who is“the sole operator, manager, and employee” the beneficiary can’t be fired because he can’t fire himself and has no other entity to do so. In such a case, there is no employee-employer relationship. This requirement can be overcome by creating a separation between the applicant-entrepreneur and the company through a board of directors or an agent. 

For beneficiaries with a valid O-1 visa, the establishment of a business (which includes the limited activities of forming a corporation or LLC, opening a bank account for the business, etc.) is permitted without the need for any other form of work authorization. However, the actual running and operation of a business require a proper work permit. Of course, it exists alternative options for O-1 visas, such as an E-2 or EB-5 visa also.

Conclusions

In summary, an “employer-employee” relationship must exist in the context of an O-1 visa. Accordingly, an O-1 beneficiary can still be the sole shareholder of a corporation and be employed by a corporation in which he or she has a majority interest, as long as there are entities, such as a board of directors, that can fire, hire, pay or otherwise control the beneficiary. To see if such a relationship exists, several factors must be considered, including the presence of other investors, the existence of bylaws with board members and their ability to fire, supervisory investors, etc. USCIS will look at such cases and look at the list of factors to determine whether such a requesting company has the right to control the beneficiary.

Of course, if you have doubts or questions, please contact us.