Introduction
Undocumented immigrants face significant barriers when pursuing legal employment in Michigan. While immigration laws unequivocally prohibit businesses from employing undocumented immigrants, there is no rule against an individual's ability to establish a business without proper immigration documentation. This blog post focuses on forming a Limited Liability Corporation as an undocumented immigrant in Michigan. By reading this blog post, you will have a clearer understanding of (1) the legality of starting an LCC without proper immigration documentation, (2) the taxation requirements for the State of Michigan and the Internal Revenue Service (IRS), and (3) other potential challenges associated with such an undertaking.
Is it legal to start a business as an undocumented immigrant
in Michigan?
In Michigan and across the United States, no law prohibits undocumented immigrants from starting and operating their own businesses. Regardless of legal status, all immigrants can pursue entrepreneurship opportunities (business start-ups) and receive payment for goods and services.
What type of business entities can an undocumented immigrant
form?
In Michigan, undocumented immigrants can establish sole proprietorships, partnerships, C-Corporations, and limited liability companies (LLCs). However, one important business type, the S-Corporation, is not an option for non-resident aliens, making it one of the few business structures they cannot use.
What is the best business entity for an immigrant?
The choice
of business structure should depend on the person’s specific circumstances,
business goals, and advice from an experienced attorney. However, an LLC is a
popular business structure that offers several advantages for immigrants and
business owners:
- Limited Liability:
One of the primary benefits of an LLC is the limited liability it provides
to its owners (members). Limited liability means that members’ personal
assets are generally protected from business debts and liabilities. If the
business encounters financial trouble or legal issues, a member’s personal
assets, like homes and savings, are usually not at risk.
- Pass-Through Taxation:
LLCs enjoy pass-through taxation, which means that the business itself
does not pay federal income taxes. Instead, profits and losses "pass
through" to the individual members, who report this income on their
personal tax returns. This often results in a lower overall tax burden and
simplifies tax compliance.
- Flexibility in Management:
LLCs offer flexibility in how they are managed. Members can choose to
manage the company themselves (member-managed LLC). This flexibility
allows undocumented immigrants to actively participate in the day-to-day
operation of the business (more on this below).
Will I need to disclose my immigration status to federal or
state authorities when forming a business?
An immigrant does not have to disclose immigration status when forming any business entity in Michigan. An LLC is a business structure allowed by state statute, meaning an LLC must be registered with the State of Michigan to operate. Immigrants, regardless of legal status, may form and register their LLC with the State of Michigan.
To register an LLC, an individual must file the Articles of Organization (the “Articles”) with the Michigan Department of Licensing and Regulatory Affairs (LARA). These Articles outline essential information about the LLC and its operation. LARA does not require disclosure of immigration status to file the Articles and form the LLC. In addition to the Articles, Michigan requires LLCs to file Annual Statements certifying the business’s good standing and to register with the Michigan Department of Treasury. None of these forms and registrations request members’ immigration status or documents.
How will I pay taxes on my business’s earnings?
Taxation is perhaps the biggest worry for undocumented immigrants forming a business in the United States. It's crucial to note that the Internal Revenue Service (IRS) and state tax authorities generally do not inquire about immigration status when processing tax returns. The IRS's primary concern is collecting taxes owed, not evaluating immigration status.
LLCs are generally taxed as "pass-through" entities, which means that the business itself does not pay income taxes. Instead, the business owner reports the business's income and expenses on their individual tax return (Form 1040 or Form 1040NR). To file an individual tax return, the IRS allows undocumented immigrants to obtain an Individual Taxpayer Identification Number (ITIN) in place of a Social Security Number. An immigrant does not have to provide proof of legal immigration status to get an ITIN; the only requirement to obtain an ITIN is a birth certificate or an official foreign ID. Immigrants should file IRS Form W-7 to apply for an ITIN.
In addition to the ITIN, all LLCs must acquire an Employer Identification Number (EIN). An EIN is essentially an identification number for your business and is necessary for federal tax purposes. To obtain an EIN, the member applying for the EIN must have a valid ITIN. Applying for an EIN is a free service offered by the IRS. Visit the IRS website at www.irs.gov and apply using the EIN application.
Even though forming an LCC and paying taxes does not create a path to citizenship, failing to file taxes when required can lead to significant trouble, as tax evasion is a criminal offense applicable to both documented and undocumented residents. To maintain a clean business record, it's essential to file your taxes yearly. Additionally, paying your business taxes is considered to demonstrate “good moral character,” improving your chances of qualifying for legal residency in the future.
Can I participate actively in the business without being
considered an employee?
The legal default for Limited
Liability Companies is that their members are responsible for managing the
business (member-managed LLC). As a result, if LLC members actively manage and
control the LLC, they are not considered employees of the LLC. This distinction
is advantageous for undocumented member-managers.
Since no employer-employee
relationship exists between the LLC and its member-managers, the obligations
imposed by the Immigration Reform and Control Act (IRCA) banning the employment
of undocumented migrants generally do not apply to LLCs with undocumented
member-managers.
Are there
other challenges to forming a business as an undocumented individual?
Multiple operational challenges should be considered when
forming a business in Michigan as an undocumented immigrant. Some of the
challenges are:
●
Banking: Undocumented immigrants may face challenges when opening
business bank accounts, as banks often require valid identification and SSN
numbers. Because of their status as separate legal entities, members of LLCs
might be able to open a bank account under the business’s name rather than the
owner’s name by showing proof of the entity’s EIN and organizational documents.
●
Permits and Licenses: In some industries, such as construction, necessary permits
or licenses may not be available to undocumented immigrants.
Starting an
LLC as an undocumented immigrant in Michigan is legally permissible. While the
best business structure depends on individual circumstances, LLCs provide
advantages such as limited liability, pass-through taxation, management
flexibility, and the ability to participate as an entity member. Once formed,
an LLC owned by an undocumented immigrant works in the same way as one owned by
a US citizen – meaning the business will need to comply with taxation,
reporting and employment regulations. One should alway seek the advice of a
qualified attorney and/or accountant familiar with tax regulations. Overall,
forming an LLC serves as a valuable vehicle for undocumented immigrants to
pursue opportunities, achieve financial independence, and contribute to their
communities.
By: Javier Enrique Paredes Heredia