New Kids on the Block: Awarding Franchises to Immigrant Franchisees

Vol. 15 No. 4

By

Cheryl Mullin is with Mullin Law, Kimberly Kinser is with Kinser Law, and Rivann Yu was a summer associate with Mullin Law.

The role of immigrants in the small business environment and the U.S. economy is definitely increasing. About 30% of new small business owners over the last 20 years have been immigrants and, currently, immigrants represent approximately 18% of small business owners in the United States. In addition, according to the Immigration Reasearch Initiative published by the Fiscal Policy Institute in June 2012, immigrants employed 4.7 million individuals and earned $776 billion in receipts in 2007 (the most-recent year for which it has figures).

Clearly, the immigrant community represents a largely untapped market for franchise system growth. Awarding a franchise to an immigrant franchisee, however, raises many legal and business questions. This article provides an overview of the U.S. immigration system and explores issues of particular importance to franchisors.

Generally speaking, immigrants have most of the same rights as natural born citizens when it comes to owning and running a small business, with two major differences. First, immigrants with temporary immigration status may be restricted in their ability to work in the United States and, therefore, may not be able to devote full-time efforts to the operation of the franchised business. Second, an immigrant may have trouble doing business in the United States as a practical matter due to unfamiliarity with U.S. marketing practices and business norms. For example, he or she may have trouble with bank financing due to lack of credit history, or trouble leasing commercial property, due to the lack of personal assets to support a personal guaranty. “Immigrant-friendly” policies – such as extensive training programs, leasing assistance, bookkeeping/tax assistance, HR assistance, and marketing assistance – can help those individuals who have money to invest in a business and are willing to work hard, but are still figuring out how to do business in the United States.

Types of Immigration Status

When qualifying an immigrant franchise applicant, a franchisor needs to determine the applicant’s immigration status. Immigration status falls into four main categories: (1) U.S. citizens, (2) lawful permanent residents (known colloquially as “green card” holders), (3) temporary visa holders, and (4) undocumented immigrants.

Citizens and Undocumented Immigrants: the Opposite Ends of the Spectrum

At one end of the spectrum are U.S. citizens, with all the rights that citizenship conveys.

At the other end of the spectrum are undocumented immigrants, whose privileges and abilities are severely limited – both legally and practically – by federal, state, and local laws, and by administrative regulations, policies and procedures. Generally speaking, undocumented immigrants have the capacity to enter into contracts and share most of the same property rights as legal immigrants. Undocumented immigrants, however, are not permitted to work in the United States and may be subject to deportation. Awarding a franchise to an undocumented immigrant also may violate certain states’ anti-illegal immigration laws. Whether or not to award a franchise to an undocumented immigrant, therefore, is a decision that should be made with the advice of immigration counsel.

Between citizens and undocumented immigrants are permanent residents (or green card holders) and persons with temporary immigration status.

Permanent Visas

Permanent residents have most of the same rights as U.S. citizens, including the right to live and work permanently anywhere in the United States and to own and lease property. They can enter into contracts, hold business licenses, sue and be sued, and file for protection under the U.S. Bankruptcy Code. If the franchise applicant is a permanent resident, he or she is authorized to work in the United States. Consequently, from a franchise qualification standpoint, there is no difference between a U.S. citizen and a permanent resident.

Permanent residency rights are obtained through various types of applications, called “preferences,” which are family-based or employment-based, or issued through the diversity visa lottery. For franchisors, the preferences of most interest include those for: certain multinational executives and managers (EB-1); professionals with advanced degrees (EB-2); skilled workers, professionals (without advanced degrees), and needed unskilled workers (EB-3); and employment creation immigrants or “investors” (EB-5).

Of these preferences, the EB-5 visa is particularly important to franchisors because it enables the foreign national to stay in the U.S. indefinitely. The EB-5 visa was created in 1990 under the Immigrant Investor Program to stimulate the U.S. economy through job creation and capital investment by foreign investors. To qualify for an EB-5 visa, an applicant must invest in a “new commercial enterprise” that creates or preserves at least 10 full-time jobs for qualifying U.S. workers within two years of the immigrant investor’s admission to the United States. Qualification generally requires investment of $1 million; however, a $500,000 investment may qualify for investments within a certain “targeted employment area.”

When issued, the EB-5 investor receives “conditional permanent residence” for a two-year period. To lift the “conditions,” he or she must prove, among other things, that the requisite number of jobs were created or preserved during the conditional period. Once the conditions are lifted, which often takes several years, the investor’s right to stay in the United States no longer depends on the viability of the investment enterprise. If the business has failed to achieve its goals before the conditions are lifted, however, the visa will be canceled and the investor must leave the United States.

Temporary Visas

The final category of immigration status is temporary status. Like permanent residents, individuals with temporary immigration status may own and lease property, enter into contracts, hold many types of business licenses, and file for protection under the U.S. Bankruptcy Code. They may or may not have the right to work in the United States; and without work authorization, they may not be able to obtain certain types of business licenses. Individuals with temporary immigration status typically do not qualify for work authorization and must leave the United States when the purpose of their visa expires. Therefore, most temporary visa holders would not be attractive franchise candidates.

Certain types of temporary visas (known as “dual intent visas”), however, enable foreign nationals to apply for permanent residency while they are living and working in the United States. These include L-1 visas (intercompany transferees), L-2 visas (L-1 spouses and unmarried children under 21), H-1B visas (specialty workers), and H-4 visas (H1-B spouses and unmarried children under 21).

Generally speaking, L-1 and H-1B visas must be sponsored by an employer or other qualifying organization and are capped at seven years for L-1s and six years for H1-Bs. While the employee is living and working in the United States, sponsoring employers and organizations may petition for the employee’s permanent residency. Once permanent visa status is pending, and the employee has an employment authorization card, the employee and his or her family members (if derivative visas are also pending) have all of the privileges of a permanent resident, including the unrestricted right to work until a final decision is made on the green card application.

When qualifying a franchise candidate who is here on an employment-based visa or who is the derivative beneficiary of an employment-based visa holder, a franchisor needs to know where the primary visa holder is in the green card process. If the green card application has not been filed, the primary visa holder must continue working for his or her sponsoring company, but his or her spouse may be able to qualify for work authorization. If a green card application is pending, the primary visa holder may be able to leave his or her employment and devote full-time efforts to a franchised business, so long as an employment authorization card has been issued (employment authorization processing times currently run about 90 days). If a green card has been issued, the primary beneficiary may leave the sponsoring employer after working for that employer for a relatively short time, and devote full-time efforts to the franchised business.

Also important to the franchise community is the E-2 Treaty Investor visa. Similar to the EB-5 visa (discussed above), the E-2 visa grants temporary immigration status to foreign nationals of treaty countries who are willing to invest a “substantial amount of capital” in a new U.S. business enterprise. While “substantial amount of capital” is not defined anywhere, practitioners recommend that an investor plan to invest at least $100,000 of his or her own funds. To qualify for an E-2 visa, the investor must show that he or she has “possession of and control over” the funds and has earned the funds legally. The investor also must show that the investment capital is “in the process of being invested” (i.e., irrevocably committed to the enterprise) at the time the application is filed (in other words, having a signed franchise agreement and funds deposited into an escrow account).

The E-2 is a temporary visa issued for an initial two-year period that can be renewed indefinitely in additional two-year increments, so long as the investment still meets eligibility requirements at the time of each renewal. If the investment enterprise fails or the business is sold, the visa expires and the individual must leave the United States. Therefore, like the EB-5 visa holder, the E-2 visa holder will be looking for a long-term investment.

Because H1-B and L-1 visas are for a limited duration, employment-based visa holders and their spouses are likely to be prime franchise candidates and view franchise ownership as an opportunity to work and stay in the United States for a longer period of time. This is often achieved by setting up the employee’s spouse as the franchise owner and primary E-2 Treaty Investor, at which point the spouses essentially switch roles: the dependent spouse becomes the primary E-2 visa holder, and the former L-1 or H1-B visa holder becomes the spouse of an E-2 visa holder who qualifies for work authorization.

What Does this Mean for Franchisors?

While permanent residents can be treated the same as U.S. citizens from an immigration law perspective, franchisors need to be sensitive to the potential termination of temporary visas and consider exit strategies beforehand. With that in mind, immigrants can offer significant growth opportunities for the right franchise system. During the franchise qualification process, a franchisor just needs to confirm the applicant’s immigration status and the applicant’s right to work in the United States. From there, the qualification process turns on business considerations. Does this individual have access to capital? Does he or she understand U.S. business practices? And, perhaps most importantly, does the franchisor’s system provide the particular type of support the applicant needs to successfully run a business?

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