Fulfilling Dreams: How F-1 Students can be Entrepreneurs

Quoting President Barack Obama during his visit to Georgia Tech., “United States is a land of opportunities”. That day, I was wondering if I could explore something to make that statement valid for me too. The exploration was hampered by a simple question. How can an international student be eligible for starting a company of his own and be an entrepreneur when there are legal restrictions on even the number of hours an international full-time student can work in the United States.

To start with, it is expected that the businesses created or soon to be created by students or graduate students would mostly be based on technology. Moving overseas to study from a fine technical institute such as Georgia Tech. inculcates a spark to innovate and try to commercialize the innovation for social good. Students either are in debt or are living on a very nominal pay from the school. In that situation, it is not easy for them to think about investing in their own initiatives. Most of the students are left with a choice to start a company with minimal investments of their own, subsequently, raise funds to continue develop the idea in mind to take it further. In this process, there are a series of steps, questions and hurdles which are required to be covered, answered and jumped over to proceed quickly but in a way which is deemed “legal”.

In this paper, three key aspects are being addressed. First and foremost is the issue of citizenship. U.S. citizens and permanent residents have legal rights to choose the kind of business entity they would like to choose where as international students entering the states with F1 visa, there is a legal restriction of maximum of 20 hours paid work per week. Starting a company and earning profits is still a distant thought. As an international student, if we wish to collaborate with the people from different countries, one is left with only two feasible options. Either to go and file for an LLC or a C-Corporation. The other class which is named as the S-Corp. is restricted to U.S. Citizens and green card holders (permanent residents). There have been many articles in the course reading packet which compare LLC with an S-Corp and listing down pros and cons of each option we choose. But in case of an international student the choices are restricted to an LLC or a C-Corp.

One of the main reasons to form a business entity which is an LLC or a C-Corp is liability protection. It is important to have liability which means that the members or the owners/shareholders will not be held liable for losses which a business entity might bear. This protection can be taken off in certain cases. This phenomenon is termed as “piercing the corporate veil”. If a court pierces the corporate veil, then the members, owners or shareholders can be held personally liable for corporate debts. As mentioned in the article “Piercing the Corporate Veil: When LLCs and Corporations May be at Risk” by Diana Fitzpatrick on nolo.com, there have been cases when this incident can happen specially if an LLC or a C-Corp is single owned or owned by just a few people. So, here comes the second key aspect to be considered by an international student. As mentioned earlier, most of the international students are going through tough economic times. They are either in debts or burning up the savings of their family. In this scenario an incident like this might be devastating. So, one has to be careful in proceeding to realize their business. There are a few steps mentioned to strengthen the corporate veil as mentioned in the article on companiesinc.com. By proper organization, proper signing of contracts, keeping the business activities separate from personal activities, following state requirements regularly helps strengthening the corporate veil. There have been cases observed where people used business bank accounts for personal transactions or when there is only one member in an LLC. It is easy in those cases for the court to pierce the corporate veil and and hold the member(s) of the LLC, liable for the misdeeds of the company. If there are a few members or owners, it is not easy for the court to hold a person or all the owners or members liable for the misdeeds of the company. They can pierce corporate veil in case one provides evidence that there could be a reason to hold one or a group of members/owners liable.

Considering a different perception, let’s take another look at comparing the two entities, LLC and C-Corp. If the business owner is legally penalized, the assets such as owned real property, bank accounts, investments and corporate stock are at stake based on the judgement passed by the court. In case of a corporation like C-Corp, the shares of stock one has in a corporation are assets that can be used to satisfy a judgement. Share in an LLC, on the other hand, is not considered property that can be awarded in the event of a loss caused by a negative judgement. There is another provision to handle this complicated situation called a charging order where the awarded party can take the profits of the LLC but the awarded party receives the amount that is actually distributed. Moreover, the awarded party would be held liable to pay taxes on the amount of the profit in the LLC, whether or not any or all of the profit was distributed. This way, the awarded party is actually facing more liabilities than actually feeling that the judgement was in their favor. So, this way, when large capital flows into the company, banks, investors and lawyers would prefer dealing with a C-Corp rather than an LLC because a C-Corp is more organized, with records of board meetings at least every quarter, keep minutes of the meetings recorded and stored, make resolutions, elect officers and produce formal financial statements which are given to shareholders as well as published for a community of people or general public. Besides, it creates more separation between the owners and the corporation itself which would be favorable to the entities mentioned earlier.

Third and one of the key aspects is to execute the plan of starting a business, raise funds and establish a settled business in the United States. Looking at the current scenario about raising funds and immigration, it feels that an international graduate student who wants to start business, would need to form a business entity to properly execute filing of patents in the name of the company. During initial stages, it is hard for students to get guidance from lawyers or hire somebody to look after all these legal issues. It is important for them to file every document carefully. A student can choose himself to be the registered agent for the LLC if the age requirements of being 21 years or older is met. This can be carried out in two steps. First is to look up the business directory of the state in which the student is residing or has an official address for starting the LLC, for a suitable name. One of the articles from instigator blog written by Ben Yoskovitz, mentions 10 different questions which a venture capitalist or an angel investor will ask. I am sure if the list would have contained 11 questions, then the 11th question would be, “Why ______ as the name of your company”. So this step is important too and should not be neglected. It is important to reserve domain name and maintain a working website for that LLC going to be formed. Subsequently, the articles of the organization can be filed with the Secretary of the State, for approval/compliance of the business. For example, an LLC could be filed for 100$ as a domestic entity and for about 275$ as a foreign business but that has to be already in strong standing in its place of formation which would initially not be the case with a graduate student starting his business. The details of the foreign limited liability company are mentioned in an article by April Kohl where it is stated that there are a few exemptions from registration in certain cases where there are “one-off transactions” involved according to particular state laws in consideration. Now that the LLC has been formed, it has no income & no expenditure. Thus, we it is not making any profits and there is no need to file taxes for it. In case of single owned LLCs, the organizer or the member can file taxes for the LLC on the individual tax return. If the LLC has more than one member, there is a need to apply for EIN (Employer Identification Number). Once the LLC has an income and starts making profit, the profit is distributed to the members. The members have to consider this as income earned and pay taxes on their individual tax returns. Here comes another challenge, that being the member of the LLC, a student on F1 visa status is not permitted to work for more than 20 hours a week. And most graduate students are already employed by the university for 20 hours per week, so technically, would that mean a student is not allowed to be a part of LLC? The answer is no. A student can be a non-earning member of the LLC, that could be mentioned in the operating agreements and kept in records. Further, if other members possess valid work authorization, permanent residence or citizenship, it would be easier for the LLC to operate. In any case, when the student graduates, he/she can use the OPT ( Optional Practical Training) period for working towards the initiative and subsequently, would need to apply for a legal status which allows to work and earn through the LLC. As the business becomes better and raises capital, it would improve chances for the student in obtaining a legal status. The immigration laws are subject to change every now and then, and it is important for a student to receive consultation from an immigration lawyer in this regard before proceeding to avoid any repercussions later. Further as the LLC goes in raising capital and starts generating revenue, it would be a great choice to convert the LLC into a C-Corp which would be preferable for the reasons mentioned earlier in this paper as well as it would be an important step if the intention is to take the company for an IPO (Public Offering).

Disclaimer: The information above is just for a student’s reference. The material provided is for informational purposes only and not for the purpose of any legal advice or advice of any sort. One should contact your attorney to obtain advice and CPA (Chartered Personal Accountant) with respect to any particular issue or problem. The opinions expressed are the opinions of the individual author. They do not relate or point to any physical entity.