If you are an international student in the U.S. and are wondering if you can start your own company, the good news is that you can, with only a few limitations when it comes to how the company is taxed.
U.S. citizens or permanent residents have the legal right to own any kind of business. By default, a Limited Liability Corporation (LLC) is taxed as a disregarded entity, but an LLC can also elect to be taxed as a C-Corp or S-Corp. On the other hand, a corporation is by default taxed as a C-Corp, but can elect to be taxed as an S-Corp.
International students can generally own a business taxed as a disregarded entity or a corporation taxed as a C-Corp with no problem, as long as they do not exceed the legal restriction of a 20-hour work week if they are working for their own company. Now, it gets a little trickier when it comes to an international student owning a corporation taxed as an S-corp.
How can an international student with an F1 visa own a corporation taxed as an S-Corp?
A business with the elected tax status of an S-Corp offers the benefits of having the protection of an LLC by allowing a company with less than 100 shareholders to be taxed as a partnership, basically avoiding the double corporate tax.
A student with an F1 visa can own a business taxed as an S-Corp if they either: (1) become a permanent resident with a green card or (2) meet the requirements for establishing a substantial presence in the United States.
- Permanent Resident in the U.S.
Any individual who is a permanent resident with a green card can own a corporation taxed as an S-Corp. Once a student with an F1 visa obtains a green card, they are no longer an “alien” and therefore, for taxation purposes, there are no restrictions. This status in the U.S. gives the student a legal right to own a business taxed in any way.
2. Substantial Presence in the U.S.
Establishing a substantial presence in the U.S. can be met by going through the requirements set out by 26 CFR § 301.7701(b)-1. It is stated that an alien individual satisfies the substantial presence test if they have been present in the U.S. for at least 183 days during a three (3) year period that includes the current year. The days are determined as follows: (a) Each day of presence in the current year is counted as a full day; (b) any day of presence in the first preceding year is counted as one-third of a day; and (c) any day of presence in the second preceding year is counted as one-sixth of the day.
This substantial presence needs to be established every year to maintain the benefits of an S-Corp or the international student can become a permanent resident with a green card.
Although there are a few limitations, if you are an international student with a vision or dream to start your own company, there are several ways in which you can achieve your goal.