H1B holder starting an S-Corp?

S

sakabih2003

Registered Users (C)
The IRS says you have to be a US citizen or resident to be a shareholder in an S-Corp?

Does the "resident" mean permanent resident or resident for tax purposes? An alien resident who passes the substantial presence test is considered a "resident" for tax purposes by IRS and therefore should be able to start an S-Corp?
 
My accountant advised differently. The shareholders have to be US residents, either citizens or resident aliens. A person is a resident alien if he either has a green card or meets the "substantial presence test." The substantial presence test is met if a person is in the US 31 days during this year and 183 days during the 3 year period that includes this year plus the previous two years.

I tried finding your thread but had no luck. Could you post that tax law text again?

Thanks
 
Thanks JoeF. What about starting a partnership - you don't have to work there, just invest money in it and be a partner?

Then the partnership can report annual revenue and expenses with Form 1065. Each partner would take the profits or losses as specified in the Partnership Agreement and add this information to the Schedule E, Supplemental Income and Loss, which he or she then files with his or her individual 1040 form.

That way one can avoid double taxation associated with being a passive member of an LLC. What do you think?
 
Joe - This what I have received from IRS agent himself.
*************************************************************
Good afternoon. In an S-corp, there are some requirements per IRC Sec. 1361(b) & Reg. 1.1361-1(b) which must be met. One of the requirements is only citizens or residents of the US can be shareholders. If the person you are referring to has been in the US for 5 years under an H-1 visa, that person should be considered a resident alien per the substantial presence test and, thus, could be a shareholder of an S-corp. You may want to try the IRS web site (www.irs.gov) for additional information. Enjoy the weekend.
*********************************************************

As per the agent reply. The point you have mentioned that only Greencard holder or US Citizent can be the shareholder in S-Corp might be wrong !!!
 
Hi,
Its interesting. I think I have to shake my accountant to get to the bottom of it. He advised to go with C corp as my GC was not approved when we incorporated. By the way I would take the response the IRS agent on the face value. You might still needs some research on it.
 
JoeF - still waiting for ur reply.

JoeF seems to be still researching on the message I posted here that I have received from IRS about H1 visa holder can be a shareholder in any S-Corp. Im just waiting for his reply cause he seems to very confindent about his point that H1 visa holder cannot be a shareholder (passive) in S-Corp. I look forward to hear from JoeF.
 
IRS has a different definition of resident aliens, and it looks like any one who is considered a US resident for tax purposes by IRS can form an S corp.

(b) Definition of resident alien and nonresident alien
(1) In general
For purposes of this title (other than subtitle B)—
(A) Resident alien
An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):
(i) Lawfully admitted for permanent residence Such individual is a lawful permanent resident of the United States at any time during such calendar year.
(ii) Substantial presence test Such individual meets the substantial presence test of paragraph (3).
(iii) First year election Such individual makes the election provided in paragraph (4).
(B) Nonresident alien
An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).
(3) Substantial presence test
(A) In general
Except as otherwise provided in this paragraph, an individual meets the substantial presence test of this paragraph with respect to any calendar year (hereinafter in this subsection referred to as the “current year”) if—
(i) such individual was present in the United States on at least 31 days during the calendar year, and
(ii) the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days:
The applicable In the case of days in: multiplier is: Current year 1 1st preceding year 1/3 2nd preceding year 1/6
 
JoeF - I’m really sorry if I offended you. I didn’t mean to attack anyone personally. I just wanted someone's review who I think deeply knowledgeable in this topic. Thanks for you comments. But I’m still going to be shareholder in 3 diff S-Corp for year 2004. If any query comes from INS or IRS I have supporting email from IRS agent and I will try to defend myself.
 
Thanks JoeF. You might be right why they just working as IRS agent instead if they really knowledgeable they could do their own practice which pay them buck load !! But I'm also wondering why big agency like IRS have 800 line for your tax concern on which you cannot even rely !!!
 
Joe,
you quote from the CFR § 301.7701(b) but did not read it completely.
Here is the first paragraph:
§ 301.7701(b)–1 Resident alien.
(a) Scope. Section 301.7701(b)–1(b) provides
rules for determining whether an
alien individual is a lawful permanent
resident of the United States. Section
301.7701(b)–1(c) provides rules for determining
if an alien individual satisfies
the substantial presence test.

Here is the section 1(b)
(b) Lawful permanent resident—(1)
Green card test. An alien is a resident
alien with respect to a calendar year if
the individual is a lawful permanent
resident at any time during the calendar
year. A lawful permanent resident
is an individual who has been lawfully
granted the privilege of residing
permanently in the United States as an
immigrant in accordance with the immigration
laws. Resident status is
deemed to continue unless it is rescinded
or administratively or judicially
determined to have been abandoned

Since you did not read beyond this section, let me help you with section 1c:

(c) Substantial presence test—(1) In
general. An alien individual is a resident
alien if the individual meets the
substantial presence test. An individual
satisfies this test if he or she
has been present in the United States
on at least 183 days during a three year
period that includes the current year.
For purposes of this test, each day of
presence in the current year is counted
as a full day. Each day of presence in
the first preceding year is counted as
one-third of a day and each day of presence
in the second preceding year is
counted as one-sixth of a day. For purposes
of this paragraph, any fractional
days resulting from the above calculations
will not be rounded to the nearest
whole number. (See § 301.7701(b)–9(b)(2)
for transitional rules for calendar
years 1985 and 1986.)
(2) Determination of presence—(i) Physical
presence. For purposes of the substantial
presence test, an individual
shall be treated as present in the
United States on any day that he or
she is physically present in the United
States at any time during the day.
(But see § 301.7701(b)–3 relating to days
of presence that may be excluded.)
Section 1(c)

There is only ONE definition of resident alien in tax laws, they apply BOTH to tax filing AND S corporation requirements.
 
Guys, lets take this as table of discussion. Present your points, your examples and your views. We might not come to great solution but with discussion we all will learn lot.

Anyway, while I was going through CFR Section 26 1.1361 - 1 (S Corporation defined), this is what I have read and I think It would be interesting to discuss it here.

(g) Nonresident alien shareholder—(1)
General rule. (i) A corporation having a
shareholder who is a nonresident alien
as defined in section 7701(b)(1)(B) does
not qualify as a small business corporation.
If a U.S. shareholder’s spouse is a
nonresident alien who has a current
ownership interest (as opposed, for example,
to a survivorship interest) in
the stock of the corporation by reason
of any applicable law, such as a state
community property law or a foreign
country’s law, the corporation does not
qualify as a small business corporation
from the time the nonresident alien
spouse acquires the interest in the
stock. If a corporation’s S election is
inadvertently terminated as a result of
a nonresident alien spouse being considered
a shareholder, the corporation
may request relief under section 1362(f).

Section reads “A Corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify as a S Corporation” and this is exactly what JoeF pointing out.

Now carefully read the example follow the above paragraph in CFR Section 26 1.1361 - 1 itself.

Example 1. In 1990, W, a U.S. citizen, married
H, a citizen of a foreign country. At all
times H is a nonresident alien under section
7701(b)(1)(B). Under the foreign country’s
law, all property acquired by a husband and
wife during the existence of the marriage is
community property and owned jointly by
the husband and wife. In 1996 while residing
in the foreign country, W formed X, a U.S.
corporation, and X simultaneously filed an
election to be an S corporation. X issued all
of its outstanding stock in W’s name. Under
the foreign country’s law, X’s stock became
the community property of and jointly
owned by H and W. Thus, X does not meet
the definition of a small business corporation
and therefore could not file a valid S
election because H, a nonresident alien, has
a current interest in the stock.

Example says W (I interpreted as Wife) , a U. S. citizen married to H (I interpreted as Husband) a citizen of foreign country. In example, corporation does not qualify as S Corporation just because H is nonresident alien and as per foreign country law W and H has join assets after marriage.

Now read the second example follow first…read it very..very carefully…

Example 2. Assume the same facts as Example
1, except that in 1991, W and H filed a section
6013(g) election allowing them to file a
joint U.S. tax return and causing H to be
treated as a U.S. resident for purposes of
chapters 1, 5, and 24 of the Internal Revenue
Code. The section 6013(g) election applies to
the taxable year for which made and to all
subsequent taxable years until terminated.
Because H is treated as a U.S. resident under
section 6013(g), X does meet the definition of
a small business corporation. Thus, the election
filed by X to be an S corporation is
valid.

Here corporation qualify as S Corporation cause H treated as U. S. resident for purpose of chapters 1, 5, and 24 of Internal Revenue Code in year 1991 and following years…Remember few things here…and these things are clearly established from example even though they have not mentioned about it.

1. After marriage H and W maintained there permanent house in foreign country…clearly established from example.
2. H never applied for Green Card or any immigration petition to become permanent resident.

So clearly if consider 7701(b)(1)(B) in second example (H is not U.S. citizen or permanent resident), corporation dose not qualify as S Corporation. It only qualify as S Corporation cause as per section 6013(g), H treated as U. S. resident for tax purpose.

Conclusion: You don’t have to U. S. citizen or permanent resident to qualify as S Corporation shareholder but you just don’t have to nonresident alien. So I guess I’m not nonresident alien as per Substantial presence test.

PS: JoeF..I would like to thank you cause if you have not mentioned about CFR 26 1.1361 I would never looked at it and read it carefully. Thanks.
 
According to the rules of incorportion set by the Secretary of State of the respective states, S corporation can have a maximum of 75 members and no more and none of these can be a foreign national.

The quotations provided by individuals on this board about the IRS are irrlevant since the S corporation formation is not possible. Hence the discussion is off the point.

There is a difference between owning a unit in the company and owning common stock.

JoeF, take it easy buddy !
 
Take it easy Joe. No one is trying to prove you wrong. As I told you before this is just the board where you present your views and points.
 
I'm still going to stick with my decision of being shareholder. After discussion and reviews, It only made my decision firmed and stronger. Joe's point doesn’t really convinced me. Honestly, It seems like Joe's just trying to argue.

Example wasn’t about the special case or anything It was just to illustrate that nonresident alien can be treated as U. S. resident in certain condition. In example, spouse even had no connection with U. S. at all During the entire period H was resided in foreign country. Still he was qualify as S Corp shareholder just because of some special provision. Here the special provision is substantial present test and I don’t think its hard to understand for anyone.

FYI, I had meeting with my immigration lawyer and account. They did enough research about the point have mentioned and they also gave me green signal. (Don’t worry Joe, my immigration lawyer and account are both wrong !!)
 
sakabih2003 said:
The IRS says you have to be a US citizen or resident to be a shareholder in an S-Corp?

IRS doesnt say you have to be US citizen or Permanent Resident. It says you just dont have to be nonresident alien. And if you pass 'Substantial Present Test', you are not nonresident alien and of course you are SO qualified as shareholder of any S Crop ..No doubts !!!!
Does the "resident" mean permanent resident or resident for tax purposes? An alien resident who passes the substantial presence test is considered a "resident" for tax purposes by IRS and therefore should be able to start an S-Corp?
Click to expand...
 
It does not seems to end ...(Its so right Joe..)

Lets flashback...you were keep mentioning about CFR 26 1.1361 and posted here 'Only U.S. Citizen and Permanent Resident can be shareholder in S Corp'. I saw you the true interpretation of CFR 26 1.1361. Where there was example itself in CFR displayed one nonresident alien (never been in US, still live in foreign country) was qualified for shareholder of S Corp !!! (That’s where I proved you wrong..JoeF!!!)

Link for CFR 26 1.1361 - 1 (Read it for yourself)

http://a257.g.akamaitech.net/7/257/...gpo.gov/cfr_2003/aprqtr/pdf/26cfr1.1361-1.pdf

Then JoeF came out with excuse that 'Its special provision'. Of course Its special provision. As nkm-oct23 posted here before, the main qualification to be shareholder is not to be U.S. Citizen or Permanent Resident. CFR Section 26 1.1361 reads ' You just don’t have to be nonresident alien' ...clearly if you pass Substantial Present Test, you are not nonresident alien and of course you are SO qualified as shareholder of any S Crop ..No doubts !!!!

Other thing, JoeF slammed the reply I got it from IRS agent.

Max007 posted:
Joe - This what I have received from IRS agent himself.
**************************************************
Good afternoon. In an S-corp, there are some requirements per IRC Sec. 1361(b) & Reg. 1.1361-1(b) which must be met. One of the requirements is only citizens or residents of the US can be shareholders. If the person you are referring to has been in the US for 5 years under an H-1 visa, that person should be considered a resident alien per the substantial presence test and, thus, could be a shareholder of an S-corp. You may want to try the IRS web site (www.irs.gov) for additional information. Enjoy the weekend.
**************************************************
JoeF posted:
The agent is wrong.
While 1.1361-1(b) in fact says that all shareholders of an S-Corp. have to be US citizens or residents, it qualifies the "resident" part with a reference to 7701:
"(g) Nonresident alien shareholder--(1) General rule. (i) A corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify as a small business corporation."

He only posted part of CFR section 26 1.1361 and talked lot about 7701(b)(1)(B). Instead, itself in CFR section 26 1.1361 follows the example where you can clearly see of breaking 7701(b)(1)(B) and still person qualified for shareholder.

Other point: The reason JoeF mentioned of being agent wrong is they work for $7-$10 /hours so they have rights to say anything. Which totally unacceptable !!! I don’t think you could expect something unreliable from the toll free number and email service maintained by agency like IRS.

Dilemma for Readers: Should they believe JoeF or IRS agency? (of course there is only one way to communicate with IRS which is either you could call them or email them or you could write them. In either way you are going to receive same reply)

PS: When I called IRS, they didn’t reply me straight away on phone. They e-mailed me cause they handle the case as ‘special dept case’. So the email I have received from IRS is after few considerations.
 
JoeF said:
No, the dilemma is: should you follow the law or some anonymous person at CIS who doesn't have a law education?
Click to expand...

You are saying like you are master of all law. You are not a lawyer or an accountant and you do not even know every single time you call IRS, agents give you their ID and name first.

JoeF said:
The law is very clear: you have to be a US citizen of Legal Permanent Resident to be a shareholder of an S-Corporation.
Click to expand...

That's not the Law. The Law is CFR Section 26 1.1361-1 (S Corp defined) which clearly reads...

Small business corporation defined—
(1) In general. For purposes of subchapter
S, chapter 1 of the Code and
the regulations thereunder, the term
small business corporation means a domestic
corporation that is not an ineligible
corporation (as defined in section
1361(b)(2)) and that does not have—
(i) More than 75 shareholders (35 for
taxable years beginning before January
1, 1997);
(ii) As a shareholder, a person (other
than an estate and other than certain
trusts described in section 1361(c)(2))
who is not an individual;
(iii) A nonresident alien as a shareholder;
or
(iv) More than one class of stock.

Law does not say anything about U.S. Citizen or Permanent resident. It says shareholder cannot be a nonresident alien. And thats what the whole thing about. Thats what everyone trying to point you out but you just do not want to believe what law says.

Just by posting tons of message here, do not think that eveyone is going to follow what ever you say. People are going to follow what law says and they are going to believe what their accountant and lawyer says.

JoeF said:
The one special case doesn't apply in your case.
Oh, and lying about having asked an accountant doesn't help, either...
Click to expand...

I did not even have to go and ask accountant but still I did. I have read the law by myself and eveyone can read at CFR.

http://a257.g.akamaitech.net/7/257/...gpo.gov/cfr_2003/aprqtr/pdf/26cfr1.1361-1.pdf

It has written in plain simple english. I dont know where you have read 'U.S. Citizen and Permanent Resident'. It dosent say anywhere under that section as far as qualified shareholder concerns. (unless It has hidden somewhere like 'National Treasure' and only JoeF can read ..lol )

JoeF said:
It says a lot about your lack of arguments if you even go so low as to lie about having talked to an accountant...
Click to expand...

There is nothing to argue about and there is nothing to lie about either. No one has to believe what I say or you say. They just have to read the law. (CFR Section 26 1.1361-1)

JoeF said:
If you become a shareholder of an S-Corporation, you are breaking the law. Plain and simple.
Click to expand...

Only as per your understanding of law, yes It will break the law but that wont be the case.

JoeF said:
You just don't want to hear that, because you have made your mind up to break the law.
Click to expand...

I have made up my mind to follow the law and to follow what IRS say. Instead to believe what some ordinary person who is even not a lawyer or an accountant and No one even knows what is his qualification (but from all this arguments I'm quite sure It would not be that much) who dose not even know how to read the simple law which at least I know !!!

JoeF said:
As I said, have fun in prison...
Click to expand...

we will see about this. You do not have to worry about it !!

Good bye !!!
 
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