"I have what I thought was a simple question, but I have contacted the U.S. Immigration and Naturalization Service (INS), the U.S. Attorney General's Office in Washington, D.C. and my state attorney general's office and no one seems to have the answer. I understand that in a Subchapter S corporation the owners cannot be foreign nationals or illegal aliens. Do you know if there is any restriction on an illegal alien being a member of a limited liability company (LLC) if it has not elected to be taxed as a Subchapter S corporation? I really appreciate any help you can provide; it seems you may be the only person in the country who has any knowledge on the subject!"
I have nothing but admiration for the courage, the creativity and sometimes the sheer audacity of my entrepreneurial clients and readers. But someone who calls three government agencies, including two attorneys' general offices (i.e. the public prosecutors) and asks them for advice on how to circumvent the law — that really takes chutzpah. My hat is off to you, sir or madam. I sincerely hope you made those calls from a pay phone.
Technically, anyone in the world can be a member of an LLC in the United States. If a Guatemalan living in Guatemala can be a member of an LLC, then it stands to reason that a Guatemalan living (legally or illegally) in Chicago can be a member of an LLC as well. All he needs is a pulse and to be older than the age of majority in your state (usually 18 or 21).
The problems with making an illegal alien a member of your LLC will come later, as it will be hard for you to keep the illegal alien's identity invisible once he becomes a member. Unlike shareholders of a closely held corporation, whose identities are not made public in state corporation filings, LLC members in most states are required to disclose their names and addresses in the LLC's annual report to the secretary of state's office. This information is then published on the state government's Web site.
Even if your state doesn't require disclosure of LLC members' identities, since you are clearly a multimember LLC you will have to file IRS Form 1065 (partnership tax return) each year, as well as a similar form for your state tax authority, and send each of your members (including the illegal) Form K-1 at the end of each tax year. To do this, you will need each member's Social Security number, which presumably the illegal alien doesn't have. Putting down a false Social Security number on Form 1065 is tax fraud, and could land you in jail.
So what do you do in a situation like this? Let me make it perfectly clear: This column does not endorse, and has NEVER endorsed, hiring illegal aliens. But, as Dr. Phil would say, we have to "get real" here. Like it or not, illegal immigrants are becoming the backbone of the U.S. service sector, especially in high-rent communities where it's difficult to find U.S. citizens to do the low-wage jobs that need to be done every day. A great many small businesses in this country (shamefully, in my opinion) are faced with the Hobson's choice of either violating immigration laws or losing business to competitors who routinely hire illegals to lower their costs.
You should talk to a good immigration lawyer about your situation. There's a good chance Congress will soon pass some form of a guest-worker program for illegal immigrants. Since the illegal alien you're working with is already living in the United States, he or she probably will qualify for guest-worker status when the time comes. But there will be lots of paperwork involved, and it's best to get a start on that now, so that when a guest-worker program becomes law you can qualify your illegal-immigrant employees for any amnesty that program may offer to illegals who can prove they've lived in this country for more than X years. Make no bones about it: Once the system is changed to afford illegals a chance to become legal residents of the United States, you will have both a legal and moral obligation to help your illegal employees comply with the law.
Bottom line: I would strongly recommend not making your illegal alien employee a member of your LLC. If you must provide your (legal) employees with equity-based compensation for competitive reasons, consider a "phantom stock" plan or profit-sharing arrangement that doesn't involve sharing ownership of your business with someone who may have issues, legal or otherwise.
Cliff Ennico ([email protected]) is a syndicated columnist, author and host of the PBS television series "Money Hunt." His latest book is "Small Business Survival Guide," has just been published by Adams Press. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.