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Hi and welcome to our site!Your understanding is correct - there are two separate issues to be addressed - (immigration related to your visa status and (2) tax issues - related to IRS regulations. 1) Under H-1B, can I register for a S-Corp in USA under my SSNThere is no prohibition for owning shares of S-corporation - as long as you are a resident alien for tax purposes. Please be aware that the S-corporation will be a separate entity and will have its own tax ID - not your SSN. Generally - you need to register the LLC or a corporation under your state law - and after that specifically select it to be treated as S-contortion for tax purposes.
2) Can I redistribute all the profits (minus the banking fees, taxes) to my brokers in India I am not clear what do you mean under "redistribute..." If you are the only shareholder of that S-corporation - you may use the money in the business account as you want. But that will not allow to transfer the tax liability to another person or entity.
The business I am doing will generate a net profit of 10%. Can these profits be redistributed to others ( outside US) ?
3) I will be the only employee of this company - do I need to hire US Citizens ?From the IRS prospective - as an officer of the S-corporation - you are generally considered as an employee - and any distribution to you as an employee will be treated as wages. From that prospective - there is no specific requirements to have another employee. However - for immigration purposes - S-corporation will need to obtain a special authorization.
The business I am doing will generate a net profit of 10%. Can these profits be redistributed to others ( outside US) ?You may use the profit as you want - as long as your are current with your tax obligations.
I am still not clear what do you mean under "redistribute..." Is that a gift? payment for services? other?
payment for services
4) Can I work for this S-Corp but not receive Paychecks ? My work (If I can legally do) would just involve banking ( opening a letter of credit) and I will not take any penny from it since all the profits (minus the expenses & taxes) will be redistributed to my brokers in India.That is possible if S-corporation will not have any taxable income. If however there will be any taxable income passed to you as a shareholder - and there will not be any wages - the IRS will treat all that income as subject of employment or self-employment taxes.
payment for servicesS-corporation is allowed to pay for services - and such payments in general are deductible on the income tax return of that S-corporation. That include payments to service provides abroad.
5) Can I myself file taxes of this S-Corp given the structure above ?Yes - you may prepare and sign the tax return for the S-corporation - that is not an issue. S-corporation should use form 1120S - and issue schedule K1 to you as a shareholder and W2 as an employee.On your individual tax return - you should use that information accordingly with other reporting documents.
Another issue - the type of activity your S-corporation would run.For instance - if that is a rental activity or investment activity - which are not business - there will not be any requirements to have wages.However - if S-corporation will be running business - the situation is different - the IRS will require wages as long as S-corporation is profitable.
So - the structure itself is absolutely legal. If S-corporation activities will be not business related - but fro instance - rental or investment - wages are not required by the IRS.If there are are business activities - but because S-corporation will pay for services - there will not be any taxable profit - wages are not required.If however - these will be business activities and there will be taxable profit (after all qualified deductions) - wages are generally required.
The S- Corporation will be doing chemical trading
it will take a product from South America and send it to india.
but the transaction will be processed in USA
meaning indian customer will pay me in USA ( Via Letter of Credit) and I will pay to South American company from here and they will dispatch the product
I am not familiar with this specific activity - but it sound as business activity...If you prefer to have an US business entity - not the entity if India or other country - and if there will be net profit after all qualified deduction - wages are required.The alternative would be to have C-corporation as having wages might create an issue with USCIS...
You mentioned above " That is possible if S-corporation will not have any taxable income. If however there will be any taxable income passed to you as a shareholder - and there will not be any wages - the IRS will treat all that income as subject of employment or self-employment taxes" Can I quantify this via my real situation and may be you could bless it or suggest. I buy a product from South America for $100 and sell it to indian customer for $110. I now have $10 in gross profit. My question is " Can I pay these $10 profits to my brokers (payment of services) in India
There wont be any net profit as you can see from above.
Above example I gave is exactly what I will be doing
Yes - you may pay for services in India - that use that as a deduction - so - there will not be any taxable income.What you need to be aware - all deductions must be supported by documents. Supporting documents should proof the fact of payments and business related of these payments.Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
I will essentially have no profits. 1) Would wages be still required given what I will be doing 2) Under these circumstances (Zero profits and zero compensation) - if I file for taxes on S-Corp, IRS/USCIS wont tell me I am breaking visa laws, correct ? 3) Given zero profits, I can work for this S-corp, correct ?
I will have an agreement with the company that is bringing in the sales ( Indian Brokers) for me. So when I pay them their fees, it will be against a signed agreement -
As long as S-corporation will have NO taxable income (after all qualified deduction) - there is no wage requirements as per the IRS.In this case - there is no any violation for neither the USCIS nor for the IRS.If you are manage S-corporation - but there is no profit and there is no wages - there is nothing illegal.
The "work" means - receiving a compensation for your activity. As there is no compensation of any king - that activity would not be classified as "work"
Is there any IRS statuettes you can point me to in this regard for enhancing my understanding on this ?
People say under H-1b you should only register for C Corp and not S-corp ? Is there any reasoning or rationale behind this ?
As I mentioned - to be deductible, a business expense must be both ordinary and necessary - you may review IRS publication 535 for detailed information about possible business expenses - www.irs.gov/pub/irs-pdf/p535.pdf
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."See here - http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-IssuesThe amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.
Great! Is there a link from IRS/USCIS regarding the rules for H-1B visa employee starting business ?
See here - http://www.uscis.gov/ilink/docView/SLB/HTML/SLB/0-0-0-1/0-0-0-11261/0-0-0-28757/0-0-0-28770.html(f) The term employee means an individual who provides services or labor for an employer for wages or other remuneration but does not mean independent contractors as defined in paragraph (j) of this section or those engaged in casual domestic employment as stated in paragraph (h) of this section;So - if nothing is received for services or labor - that is not employment withing the meaning of USCIS.From the IRS prospective - I referenced above - The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.So - if you personally - received nothing - the reasonable compensation in the form of wages is not not required.
What's the primary rationale people think of with C-Corp for H-1b visa
The reasoning for that - if persons receive a compensation in the form of wages. If there is no compensation - you may have S-corporation or the LLC - which will be disregarded entity - and will report as your business. As long as there is no gain subject of self-employment tax - there is NO issues for immigration authorities.However - if there is business profit - in case of C-corporation - wages are not required - but the business is taxed twice - on corporate level and for the shareholder's as dividends (if distributed) - but there is no employment issues.
So in C-Corp- Say my company made $100 annually in EBITDA and I paid 25% tax. So i received $75 and now this $75 would be taxed again on an individual basis ?
That is correct - dividends are paid by corporations with after tax funds - and such dividends are included into taxable income of shareholders.
in my case - since profits are zero, what is better option C- Corp or S-corp ? what is cheaper to maintain and comply with ?
If there is no profit - it doesn't matter. The overhead would be about the same. If you want to accumulate funds and use them for business expansion - C-corporation is generally preferable. Also if you plan to attract investors - it would be easy with C-corporation as you may simply sell shares to prospective investors.
Interesting - this makes sense and is a good point. Is it difficult to sell shares with S - Corp
It is no difficult - but there are some restrictions - for instance nonresident aliens may not own shares of S-corporation. If for instance you have a shareholder who is a resident alien - but that person will move back to his home country and will become nonresident alien - the corporation automatically converted to C-corporation.In additional only individuals may be shareholders of the S-corporation.
Excellent. Lev, you are genuine and very experienced. People like you make a good difference to our society
You answered all my questions and I truly appreciate your kindness, patience and support in educating a beginner like me
Do you have a website or contact information to reach you at ?
Reason I ask is I live here in Silicon Valley, California and there are people around me who may be in need of your services- will be happy to spread a word about you
As you know silicon valley has many immigrants and many start up companies
Appreciate your warm words. Please be sure to rate my work accordingly - so I would be credited.Experts are not allowed to provide personal information.You may come back to this site and specifically ask for me if you wish.Here is my profile - http://www.justanswer.com/finance/expert-lev-tax/
I am going to rate you excellent service - without a doubt
Thank you again and god bless you. Cheers- Gaurav