Treaty Trader & Investor Visa: E1 and E2
Generally, a citizen of a foreign country who wishes to enter the United States must first obtain a visa, either a non-immigrant visa for temporary stay, or an immigrant visa for permanent residence. Treaty Trader (E-1) and Treaty Investor (E-2) visas are for citizens of countries with which the United States maintains treaties of commerce and navigation. For a list of participating countries, select Treaty Countries.
You must be coming to the United States to: engage in substantial trade, including trade in services or technology, in qualifying activities, principally between the United States and the treaty country; or develop and direct the operations of an enterprise in which you have invested a substantial amount of capital.
For more information on business investment in the United States, see the U.S. Department of Commerce website Select USA.
Trade for Treaty Trader and Treaty Investor purposes – Examples:
These are some examples of types of enterprises that constitute trade under E visa provisions.
- international banking
To qualify for a Treaty Trader (E-1) Visa:
- You must be a citizen of a treaty country.
- The trading firm for which you plan to come to the United States must have the nationality of the treaty country, meaning persons with the treaty country’s nationality must own at least 50 percent of the enterprise.
- The international trade must be substantial, meaning that there is a sizable and continuing volume of trade.
- More than 50 percent of the international trade involved must be between the United States and the treaty country.
- Trade means the international exchange of goods, services, and technology. Title of the trade items must pass from one party to the other.
- You must be an essential employee, employed in a supervisory or executive capacity, or possess highly specialized skills essential to the efficient operation of the firm. Ordinary skilled or unskilled workers do not qualify.
To qualify for a Treaty Investor (E-2) Visa:
- The investor, either a person or partnership or corporate entity, must have the citizenship of a treaty country.
- If a business, at least 50 percent of the business must be owned by persons with the treaty country’s nationality.
- The investment must be substantial, with investment funds or assets committed and irrevocable. It must be sufficient to ensure the successful operation of the enterprise.
- The investment must be a real operating enterprise, an active commercial or entrepreneurial undertaking. A paper organization, speculative or idle investment does not qualify. Uncommitted funds in a bank account or similar security are not considered an investment.
- It must generate significantly more income than just to provide a living to you and family, or it must have a significant economic impact in the United States.
- You must have control of the funds, and the investment must be at risk in the commercial sense. Loans secured with the assets of the investment enterprise are not allowed.
- You must be coming to the United States to develop and direct the enterprise. If you are not the principal investor, you must be considered an essential employee, employed in a supervisory, executive, or highly specialized skill capacity. Ordinary skilled and unskilled workers do not qualify.
How to Apply
There are several steps to apply for a visa. The order of these steps and how you complete them may vary at the U.S. Embassy or Consulate where you apply. Please consult the instructions available on the embassy or consulate website where you will apply.
Complete the Online Visa Application
Online Non-immigrant Visa Application, Form DS-160 – Learn more about completing the DS-160. You must: 1) complete the online visa application and 2) print the application form confirmation page to bring to your interview.
Photo – You will upload your photo while completing the online Form DS-160. Your photo must be in the format explained in the Photograph Requirements.
Schedule an Interview
While interviews are generally not required for applicants of certain ages outlined below, consular officers have the discretion to require an interview of any applicant, regardless of age.
You must schedule an appointment for your visa interview, generally, at the U.S. Embassy or Consulate in the country where you live. You may schedule your interview at any U.S. Embassy or Consulate, but be aware that it may be difficult to qualify for a visa outside of your place of permanent residence.
Application Fee $205
The investor, either an individual or business, must possess the nationality of the treaty country. The nationality of a business is determined by the nationality of the individual owners of that business.
If the investor is a foreign corporation, at least 50 percent of the corporate owners must be nationals of the treaty country. If the corporation is owned by another business, then the ownership must be traced to the point of reaching the 50 percent rule with respect to the parent organization.
The country of incorporation is irrelevant to the nationality requirement for E2 visa purposes. In cases where a corporation is sold exclusively on a stock exchange in the country of incorporation, however, one can presume that the nationality of the corporation is that of the location of the exchange. In the case of a multinational corporation whose stock is exchanged in more than one country, then the applicant must present the best evidence available to show that the business meets the nationality requirement.
Except in the case in which an enterprise is owned and controlled equally (50/50) by nationals of two treaty countries, a business for which E2 visa status is sought may have only one qualifying nationality. In the case of dual national owner(s), a choice must be made by the owners as to which nationality shall be used. The owners and all E2 visa employees of the company must possess the nationality of the single E2 visa qualifying country, and hold themselves as nationals of that country for all E2 visa purposes involving that company, regardless of whether they also possess the nationality of another E2 visa country. When a company is equally owned and controlled by nationals of two different treaty countries, employees of either nationality may obtain E2 visas to work for that company.
Albania, Finland, Netherlands, Argentina, France, Norway, Armenia, Georgia, Oman, Australia, Germany, Pakistan, Austria, Grenada, Panama, Azerbaijan, Honduras, Paraguay, Bahrain, Iran, Philippines, Bangladesh, Ireland, Poland, Belgium, Israel, Romania, Bolivia, Italy, Senegal, Bosnia and Herzegovina, Jamaica, Serbia, Bulgaria, Japan, Singapore, Cameroon, Jordan, Slovak Republic, Canada, Kazakhstan, Slovenia, Chile, Korea (South),Spain, China (Taiwan) , Kosovo, Sri Lanka, Colombia, Kyrgyzstan, Suriname, Congo, (Brazzaville), Latvia, Sweden, Congo (Kinshasa), Liberia, Switzerland, Costa Rica, Lithuania, Thailand, Croatia, Luxembourg, Togo, Czech Republic , Macedonia , Trinidad &Tobago, Denmark, Mexico, Tunisia, Ecuador, Moldova, Turkey, Egypt, Mongolia, Ukraine, Estonia, Montenegro, United Kingdom, Ethiopia, Morocco, Yugoslavia.
The investor, either an individual or business, must possess the nationality of the treaty country. The nationality of a business is determined by the nationality of the individual owners of that business. Below is a list of countries with E2 investor treaty with the United States.
- CHINA (TAIWAN) – Pursuant to Section 6 of the Taiwan Relations Act, (TRA) Public Law 96-8, 93 Stat, 14, and Executive Order 12143, 44 F.R. 37191, this agreement which was concluded with the Taiwan authorities prior to January 01, 1979, is administered on a nongovernmental basis by the American Institute in Taiwan, a non-profit District of Columbia corporation, and constitutes neither recognition of the Taiwan authorities nor the continuation of any official relationship with Taiwan.
- CZECH REPUBLIC AND SLOVAK REPUBLIC – The Treaty with the Czech and Slovak Federal Republic entered into force on December 19, 1992; entered into force for the Czech Republic and Slovak Republic as separate states on January 01, 1993.
- FRANCE – The Treaty which entered into force on December 21, 1960, applies to the departments of Martinique, Guadeloupe, French Guiana and Reunion.
- JAPAN – The Treaty which entered into force on October 30, 1953, was made applicable to the Bonin Islands on June 26, 1968, and to the Ryukyu Islands on May 15, 1972.
- NETHERLANDS – The Treaty which entered into force on December 05, 1957, is applicable to Aruba and Netherlands Antilles.
- NORWAY – The Treaty which entered into force on September 13, 1932, does not apply to Svalbard (Spitzbergen and certain lesser islands).
- SPAIN – The Treaty which entered into force on April 14, 1903, is applicable to all territories.
- SURINAME – The Treaty with the Netherlands which entered into force December 05, 1957, was made applicable to Suriname on February 10, 1963.
- UNITED KINGDOM – The Convention which entered into force on July 03, 1815, applies only to British territory in Europe (the British Isles (except the Republic of Ireland), the Channel Islands and Gibraltar) and to “inhabitants” of such territory. This term, as used in the Convention, means “one who resides actually and permanently in a given place, and has his domicile there.” Also, in order to qualify for treaty trader or treaty investor status under this treaty, the alien must be a national of the United Kingdom. Individuals having the nationality of members of the Commonwealth other than the United Kingdom do not qualify for treaty trader or treaty investor status under this treaty.
- YUGOSLAVIA – The U.S. view is that the Socialist Federal Republic of Yugoslavia (SFRY) has dissolved and that the successors that formerly made up the SFRY – Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia, and the Federal Republic of Yugoslavia continue to be bound by the treaty in force with the SFRY and the time of dissolution.
- ISRAEL – Signed into law on June 11, 2012. Waiting for implementation at this time.
Investor’s Control of the E2 Enterprise
The investor must have control of the US business by owning at least 50 percent of the enterprise. An equal share of the investment in a joint venture or an equal partnership of two parties, generally does give controlling interest, if the joint venture and partner each retain full management rights and responsibilities.
This arrangement is often called “Negative Control”. With each of the two parties possessing equal responsibilities, they each have the capacity of making decisions that are binding on the other party. The US Department of State has determined that an equal partnership with more than two partners would not give any of the parties control based on ownership, as the element of control would be too remote even under the negative control theory.
Investment Visa – Making a Substantial Investment
The applicant must make a substantial investment to qualify for the E2 investment visa. However, the law does not state a minimum dollar amount. Generally, the applicant should be prepared to invest at least $50,000 US dollars in the E2 enterprise. The actual amount required will depend on the type of business the investor chooses.
A substantial investment is defined as an amount sufficient to ensure the investor’s financial commitment to the successful operation of the enterprise as measured by the proportionality test. This proportionality test compares the total amount invested in the enterprise with the cost of establishing a viable enterprise of the nature contemplated or the amount of capital needed to purchase an existing enterprise.
Such comparison constitutes the percentage of the treaty applicant’s investment in the enterprise. That percentage must compare favorably in the fashion of an inverted sliding scale starting with a high percentage of investment for a lower cost enterprise. The percentage of investment decreases at a gradual rate as the cost of the business increases. An amount of capital invested in an enterprise is merely presumed to be substantial when it meets or exceeds the percentage figures given in the following examples (given in US dollars):
- Seventy-five (75) percent investment in an enterprise costing $500,000 or less. If the cost of the enterprise is substantially lower than $500,000, eighty-five (85) percent to one hundred (100) percent investment may be required.
- Fifty (50) percent investment in an enterprise costing more than $500,000 but no more than $3,000,000.
- Thirty (30) percent in any enterprise costing more than $3,000,000.
A multi-million US dollar investment by a large foreign corporation is normally considered substantial, regardless of the examples given above.
The amount invested in the enterprise should be compared to the cost (value) of the business by assessing the percentage of the investment in relation to the cost of the business. If the two figures are the same, then the investor has invested 100 percent of the needed funds in the business. Such an investment is substantial.
The vast majority of cases involve lesser percentages. The proportionality test can best be understood as a sort of inverted sliding scale. The lower the cost of the business the higher a percentage of investment is required, whereas, a highly expensive business would require a lower percentage of qualifying investment.
There are no bright line percentages that exist in order for an investment to be considered substantial. Yet, as stated above, the lower the cost of the business the higher the percentage of qualifying investment is anticipated. Thus, investments of 100 percent would normally automatically qualify for a small business of $100,000 or less. Yet, a business of this size involving two equal partners or joint ventures may prove qualification for E2 investment visa status. At the other extreme, an investment of $10 million for a $100 million business would likely qualify for E2 visa based on the sheer magnitude of the business itself.
Source of E2 Investment Funds
The E2 investor must have possession and control of the capital and funds invested. Moreover, the investor must have acquired the funds from lawful sources such as personal savings, investment earnings, gifts, inheritance, etc. The source of funds does not have to come from outside the United States. Money obtained inside the US may be used for E2 investment. However, inheriting a business does not qualify for E2 visa.
Certain types of loans may qualify as E2 investment fund. Generally, loans secured by the investor’s personal assets, such as a second mortgage on a home, or unsecured loans, such as a loan on the investor’s personal signature, may be included in the investment.
However, loans such as mortgage debt or commercial loans secured by assets of the E2 enterprise cannot count towards the investment. For example, if the business in which the applicant is investing is used as collateral, funds from the resulting loan or mortgage do not qualify for E2 investment, even if some personal funds are used.
In sum, eligible investment funds may only include money in which the investor’s personal assets are involved, such as personal funds, other unencumbered assets, a mortgage with the investor’s personal real estate used as collateral, or some similar personal liability. A reasonable amount of cash, held in a business bank account to be used for routine business expenses, may be counted as investment funds. Thus, the investor is not required to spend all of the funds for the entire amount to count towards the total investment.
The funds and assets to be invested must be committed to the investment, and the commitment must be real and irrevocable. For example, the purchase of a business which qualifies for E2 status in every respect may be conditioned upon the issuance of the visa. Despite the condition, this would constitute a solid commitment if the assets to be used for the purchase are held in escrow for release or transfer only on the condition being met.
In addition, the business must have started operating or be close to the start of actual business operations, not simply in the stage of signing contracts or scouting for suitable locations and property. Mere intent to invest, or possession of uncommitted funds in a bank account, or even prospective investment arrangements entailing no present commitment, does not satisfy the E2 visa requirements.
Real and Active Commercial Enterprise
The E2 business must be a real and active commercial or entrepreneurial undertaking, producing some service or commodity. The business must have all the necessary licenses and permits as required by the government for the particular type of business.
The enterprise cannot be a paper organization or an idle speculative investment held for potential appreciation in value, such as undeveloped land or stocks held by an investor without the intent to direct the enterprise. The investment must be a commercial enterprise. Thus, it must be for profit, eliminating non-profit organizations from consideration.
Minimum Business Size: Enterprise Must Not be Marginal
The law does not specify a minimum business size to qualify for the E2 investor visa. The law requires that the investor must not be investing in a marginal enterprise solely for the purpose of earning a living. An applicant is not entitled to E2 visa, if the investment, even if substantial, will return only enough income to provide a living for the applicant and family. There are various ways to help determine whether an investment is marginal, in the sense of only providing a livelihood for the investor.
To determine whether a business is considered marginal, first, look to the income from the investment. If the income derived from the business exceeds what is necessary to support the investor and his or her family, then the business is sufficiently large.
If the above test is not satisfied, then it becomes necessary to consider other factors. One can look to the economic impact of the business. The business must have the capacity, present or future, to make a significant economic contribution such as employing US workers. The projected future capacity should generally be realizable within five years from the date the investor commences normal business operations. Applicants need to submit a reliable business plan to verify the capacity to realize a profit within a maximum five years.
Spouse and Children of the E2 Investor
The spouse and children of the E2 investor may obtain E2 visas for dependent family members to reside in the US. These family members may apply at the same time as the E2 investor or after the investor has been issued the E2 visa. Children must be under 21 years old to qualify for the dependent E2 visa.
The spouse may apply for a work permit with the USCIS after arriving in the US. This work permit, called “Employment Authorization Card “is an open market work authorization and offers the spouse great employment flexibility and convenience. Generally speaking, the spouse may work for any employer and in any job in the US, except certain government related jobs that require US citizenship. The spouse may work for the E2 investor’s business or find a job with another employer. The spouse may also start his or her own business using the work permit. The employment may be full-time or part-time. The USCIS usually takes approximately two to three months to issue the work permit.
In addition, the spouse and children may attend school under the E2 visa for family members. The children are allowed to enroll in either public or private schools. Keep in mind that upon reaching 21 years old, the child is no longer eligible for the dependant E2 visa status and must have his or her own visa in order to continue residing or studying in the US. Frequently, children who age-out apply for the F1 student visa in order to finish their college or university education in the US.
E2 Visa for Foreign Employees
Generally, if the applicant is not the principal investor, he or she must be employed in an executive or supervisory capacity, or possess skills that are highly specialized and essential to the operations of the commercial enterprise. Ordinary skilled or unskilled workers do not qualify.
INVESTOR MUST PERSONALLY OPERATE BUSINESS IN ORDER TO BRING FOREIGN EMPLOYEES TO US ON E2 VISA
If the majority owner of the E2 enterprise wishes to enter the United States as an investor, or send an employee to the United States, the owner must demonstrate that he or she personally develops and directs the enterprise. Likewise, if a foreign corporation owns at least 50 percent of a US enterprise, and wishes its employee to enter the US as an employee of the parent corporation, or as an employee of the US subsidiary company, the foreign corporation must demonstrate it develops and directs the US company.
In instances in which treaty country ownership may be too diffuse to permit one individual or company to demonstrate the ability to direct and develop the US enterprise, the owners of treaty country nationality must:
- Show that together they own 50 percent of the US enterprise; and
- Must demonstrate, that at least collectively, they have the ability to develop and direct the US enterprise.
In these cases an owner may not receive an E2 visa as the “investor”. Rather, all E2 visa recipients must be shown to be an employee of the US enterprise coming to the US to fulfill the duties of an executive, supervisor, or essentially skilled employee.
GENERAL EMPLOYEE REQUIREMENTS
In order to qualify to bring an employee into the United States, the prospective US employer must be maintaining E2 status. In order to qualify to bring an employee into the United States, several criteria must be met:
- The prospective employer must meet the nationality requirement, i.e., if an individual, the nationality of the treaty country or, if a corporation or other business organization, at least 50 percent of the ownership must have the nationality of the treaty country. Note that a permanent resident alien does not qualify to bring in employees under the E2 visa program. Moreover, shares of a corporation or other business organization owned by permanent resident aliens cannot be considered in determining majority ownership by nationals of the treaty country to qualify the company for bringing in alien employees under the E2 visa;
- The employer and the employee must have the same nationality; and
- The employer, if not resident abroad, must be maintaining E2 visa status in the United States.
EXECUTIVE AND SUPERVISORY EMPLOYEES
In evaluating whether the employee qualifies as an executive or supervisory personnel, the following factors are considered:
- The title of the position to which the applicant is destined, its place in the firm’s organizational structure, the duties of the position, the degree to which the applicant will have ultimate control and responsibility for the firm’s overall operations or a major component thereof, the number and skill levels of the employees the applicant will supervise, the level of pay, and whether the applicant possesses qualifying executive or supervisory experience;
- Whether the executive or supervisory element of the position is a principal and primary function and not an incidental or collateral function. For example, if the position principally requires management skills or entails key supervisory responsibility for a large portion of a firm’s operations and only incidentally involves routine substantive staff work, an E classification would generally be appropriate. Conversely, if the position chiefly involves routine work and secondarily entails supervision of low-level employees, the position could not be termed executive or supervisory; and
- The weight to be accorded a given factor, which may vary from case to case. For example, the position title of “vice president” or “manager” might be of use in assessing the supervisory nature of a position if the applicant were coming to a major operation having numerous employees. However, if the applicant were coming to a small two-person office, such a title in and of itself would be of little significance.
ESSENTIAL OR SPECIAL SKILLED EMPLOYEES
In addition, the law provides E2 visa classification for employees who have special qualifications that make the service to be rendered essential to the efficient operation of the enterprise. The employee must, therefore, possess specialized skills and, similarly, such skills must be needed by the enterprise. The burden of proof to establish that the applicant has special qualifications essential to the effectiveness of the firm’s United States operations is on the company and the applicant.
The applicant bears the burden of establishing at the time of application not only the need for the skills that he or she offers but, also, the length of time that such skills will be needed. In general, the E2 classification is intended for specialists and not for ordinary skilled workers. There are, however, exceptions to this generalization. Some skills may be essential for as long as the business is operating. Others, however, may be necessary for a shorter time, such as in start-up cases.
Although there is a broad spectrum between the extremes set forth below, consular officers may draw some perspective on this issue from these examples:
- Long-term need – The employer may show a need for the skills on an on-going basis when the employee(s) will be engaged in functions such as continuous development of product improvement, quality control, or provision of a service otherwise unavailable.
- Short-term need – The employer may need the skills for only a relatively short (e.g., one or two years) period of time when the purpose of the employee(s) relate to start-up operations (of either the business or a new activity by the business) or to training and supervision of technicians employed in manufacturing, maintenance and repair functions.
Once the business has established the need for the specialized skills, the experience and training necessary to achieve such skills must be analyzed to recognize the special qualities of the skills in question. The question of duration of need will cause variances among the kinds of skills involved. Not least, the visa applicant must prove that he or she possesses these skills, by demonstrating the requisite training and/or experience.
In assessing the specialized skills and their essentiality, the following factors are considered:
- Degree of proven expertise of the alien in the area of specialization;
- The uniqueness of the specific skills;
- The function of the job to which the alien is destined; and
- The salary such special expertise can command.
The claimed duration of essentiality depends largely on the period of training needed to perform the contemplated duties and, in some cases, the length of experience and training with the firm.
The availability of US workers provides another factor in assessing the degree of specialization the applicant possesses and the essentiality of this skilled worker to the successful operation of the business. This consideration is not a labor certification test, but a measure of the degree of specialization of the skills in question and the need for such. For example, a TV technician coming to train US workers in new TV technology not generally available in the U.S. market probably would qualify for a visa.
If the essential skills question cannot be resolved on the basis of initial documentation, the consular officer might ask the firm to provide statements from such sources as chambers of commerce, labor organizations, industry trade sources, or state employment services as to the unavailability of US workers in the skill areas concerned.
The criteria above are used to assess whether the employee is essential for the efficient operation of enterprise for an indefinite period or for a shorter period. It might be determined that some skills are essential for as long as the business is operating. There may be little problem in assessing the need for the employee in the United States in the short term, such as start-up cases. Long-term employment presents a different issue, in that what is highly specialized and unique today might not be in a few years. It is anticipated that such changes would more likely occur in industries of rapid development, such as any computer-related industry. Although this may not be fully determinable at the time of initial application, the consular officer should monitor this at the time of any application for re-issuance. The alien at that time will bear the burden of establishing that his or her specialized skills are still needed and that the applicant still possesses such skills.
Essential employees possess skills which differentiate them from ordinarily skilled laborers. If an alien establishes that he or she has special qualifications and is essential for the efficient operation of the E2 enterprise for the long term, the training of United States workers for as replacement workers is not required.
In some cases, ordinarily skilled workers can qualify as essential employees, and almost always this involves workers needed for start-up or training purposes. A new business or an established business expanding into a new field in the United States might need employees who are ordinarily skilled workers for a short period of time. Such employees derive their essentiality from their familiarity with the overseas operations rather than the nature of their skills. The specialization of skills lies in the knowledge of the peculiarities of the operation of the employer’s enterprise rather than in the rote skill held by the applicant. To avoid problems with subsequent applications, consular officers might find, at the time of the original application, that it is best to set a time frame within which the business must replace such foreign workers with locally hired employees.
There is no requirement that an essential employee have any previous employment with the enterprise in question. The only time when such previous employment is a factor is when the needed skills can only be obtained by that employment. The focus of essentiality is on the business needs for the essential skills and of the alien’s possession of such. Firms may need skills to operate their business, even though they do not have employees with such skills currently on their employment rolls.
E2 Application Procedures
If the investor or employee is inside the US, he or she may apply directly to the US Citizenship and Immigration Services (USCIS, formerly INS) for a change of status, extension of stay, or change of employment without leaving the country.
The E2 category does not require a petition for employment, if the investor is outside of the US. This means the investor or employee may apply for the E2 visa on his or her own behalf directly to a US Embassy or Consulate abroad. The E2 visa may be issued for up to 5-year validity period and may be renewed indefinitely, as long as the applicant continues to satisfy the visa requirements. The actual length of the visa depends on the treaty between the US and the applicant’s country and the consular officer’s discretion.
You should understand that a change of status is not a visa. Once the person leaves the United States, he or she must apply for an E2 visa at a US consular office before returning to the United States. Only a consular office may issue a visa. The USCIS cannot issue a visa.
Buying a Business
Many find the idea of starting a business appealing, but lose their motivation after dealing with business plans, investors, and legal issues associated with new start-ups. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.
The main reason to buy an existing business is the drastic reduction in startup costs of time, money, and energy. In addition, cash flow may start immediately thanks to existing inventory and receivables. Other benefits include pre-existing customer goodwill and easier financing opportunities, if the business has a positive track record.
The biggest block to buying a business outright is the initial purchasing cost. As the business concept, customer base, brands, and other fundamental work have already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be non-collectable. Good research is the key to avoiding these problems.
Buying a Franchise
Directory of Franchise Opportunities from Entrepreneurs Magazine. Please note that our firm does not endorse any franchises in this directory. You should exercise due diligence before buying a franchise and consult an experienced E2 visa lawyer to evaluate whether the franchise business you are interested in qualifies for the investor visa.
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser’s quality standards.
Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.
There are primarily two forms of franchising:
- Product or trade name franchising and
- Business format franchising.
In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
Registering a Company: Choosing a Business Structure
Forms of Business Ownership
One of the first decisions that you will have to make as a business owner is how the company should be structured. Below are the most common forms of business structure:
- Sole Proprietorships
- Limited Liability Company (LLC)
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship:
- Easiest and least expensive form of ownership to organize.
- Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
- Sole proprietors receive all income generated by the business to keep or reinvest.
- Profits from the business flow directly to the owner’s personal tax return.
- The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
- Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
- May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
- May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
- Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Yes, it’s hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc.
Advantages of a Partnership:
- Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
- With more than one owner, the ability to raise funds may be increased.
- The profits from the business flow directly through to the partners’ personal tax returns.
- Prospective employees may be attracted to the business if given the incentive to become a partner.
- The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership:
- Partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- Some employee benefits are not deductible from business income on tax returns.
- The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships that should be considered:
- General Partnership. Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
- Limited Partnership and Partnership with limited liability. Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
- Joint Venture. Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation:
- Shareholders have limited liability for the corporation’s debts or judgments against the corporations.
- Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
- Corporations can raise additional funds through the sale of stock.
- A corporation may deduct the cost of benefits it provides to officers and employees.
- Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation:
- The process of incorporation requires more time and money than other forms of organization.
- Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
- Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.
Subchapter S Corporations
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.
Taxed as partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.
In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. This decision will have long-term implications, so consult with an accountant and a business law attorney to help you select the form of ownership that is right for you.
The purchase agreement is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all the terms of the purchase. It would be a good idea to have a business law attorney reviews this document. It is in this agreement that you should define everything that you intend to purchase of the business, assets, customer lists, intellectual property, and goodwill.
The following is a checklist of items that should be addressed in the agreement:
- Names of Seller, Buyer, and Business
- Background information
- Assets being sold
- Purchase price and Allocation of Assets
- Covenant Not to Compete
- Any adjustments to be made
- The Terms of the Agreement and payment terms
- List of inventory included in the sale
- Compliance with the Bulk Sales laws of the state
- Any representation and warranties of the seller
- Any representation and warranties of the buyer
- Determination as to the access to any business information
- Determination as to the running of the business prior to closing
- Possibilities of having the seller continue as a consultant
- Fees, including brokers fees
- Date of closing
Getting Business Licenses and Permits
- STATE REQUIREMENTS
While business licensing requirements vary from state to state, some of the more common types are listed below.
A state business license is the main document required for tax purposes and conducting other basic business functions. Many states have established small business assistance agencies to help small businesses comply with state requirements.
Occupations and Professions
State licenses are frequently required for occupations as varied as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists. Since you can’t always guess which occupations and professions are licensed by your state, you should always check with your state licensing authorities.
Licenses Based on Products Sold
Some state licensing requirements are based on the product sold. For example, most states require special licenses to sell liquor, lottery tickets, gasoline, or firearms. Contact your state licensing authorities to determine the licensing requirements of your business.
If the state in which you operate has a state income tax, you’ll have to register and obtain an employer identification number from your state Department of Revenue or Treasury Department. If you’re engaging in retail sales, you will need to obtain a sales tax license.
Trade Name Registration
If your business will only be operated in your local community, registering your company name with the state may be sufficient.
If you have any employees, you’ll probably be required to make unemployment insurance contributions. For more information, contact your state Department of Revenue or Department of Labor.
- FEDERAL REQUIREMENTS
Employer Identification Number (EIN). With the exception of sole proprietors, most business types must apply for an EIN regardless of whether they have employees.
Licenses and Permits
Most businesses do not require a federal license or permit. However, if you are engaged in one of the following activities, you should contact the responsible federal agency to determine the requirements for doing business:
- Investment Advising
- Drug Manufacturing
- Preparation of Meat Products
- Ground Transportation
- Selling Alcohol, Tobacco, or Firearms
Federal registration of intellectual property, including patents, trademarks, trade names, and copyrights, provide business owners with exclusive use of intellectual property in the US as well as in a large number of foreign countries.
12 BOLIVIA – The Government of Bolivia has given notice of termination, effective June 10, 2012, for the bilateral investment treaty between the United States and Bolivia. As of June 10, 2012, the treaty ceased to have effect except that it continues to apply for another 10 years after that date to covered investments existing as of June 10, 2012. Posts must request an advisory opinion from CA/VO/L/A if the applicant: (1) previously has not received an E-2 visa or acquired E-2 status in the United States, or (2) is applying on the basis of an investment in a different commercial enterprise than the enterprise identified at the time the applicant qualified for the last E-2 visa or (if no previous E-2 visa) the change of non-immigrant status to E-2.