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Can an E-2 Investor Draw Funds from the Business Instead of Taking a Salary?

A business woman looking at her business account

The E-2 investor visa is often an excellent option for entrepreneurs who want to start or grow a business in the United States – whether they have a startup, are opening a franchise, or are buying an existing business. The E-2 visa can be issued for up to 5 years and, although it is not a green card, it can be renewed indefinitely. Also, the required investment amount is usually lower than for other options, such as the EB-5 green card.

One of the common questions that E-2 investor applicants ask is whether they must pay themselves a salary, or if they can instead draw funds from the business. And, relatedly, how can the E-2 investor applicant who wants to take draws from the business best represent their compensation in the application?

E-2 Investors Have the Option to Take Draws Rather Than Salary

Fortunately, E-2 investor applicants have options when it comes to how they may be paid. If the applicant prefers to pay herself a salary, that is permitted. It is also permissible for the applicant to instead take draws from the business.

There are several things that the applicant should keep in mind if they choose to take draws from the business rather than receive a defined salary.

First, draws paid to the applicant would presumably come from the company’s cash flow and/or profits. As a result, the applicant should be sure that the financial projections included with the application (such as in the business plan) show that the business generates sufficient cash flow and profit to support the applicant and their family.

Put differently, the applicant should not take draws in an attempt to hide the fact that the business’s finances will likely not support a sustained salary for her. Government officers are trained to scrutinize this information and ask how the E-2 applicant will support herself in the United States, so financial figures that suggest that the company will struggle to compensate her could very well compromise the application.

The Marginality Requirement

The other key aspect that the E-2 investor applicant should keep in mind is the marginality requirement, which states that the E-2 business must generate sufficient profits to support not only the E-2 investor and her family, but also U.S. workers. As a result, the way in which the applicant represents her compensation should, ideally, make it clear that the business will both support her and her family, and will also employ at least 3 to 4 full-time equivalent U.S. employees within 5 years of starting operations as an E-2 business.

Returning to our previous example, if the applicant were to take draws in an attempt to hide the fact that the business likely will not support a sustained salary for her, the officer would likely also question whether the business will be able to generate enough income to hire and compensate U.S. workers. Failure to satisfy the marginality requirement would result in a denial of the application.

For more information on the marginality requirement, see our earlier post here.

Making the Application Easy for the Government Officer to Understand

So how can the E-2 investor applicant draw compensation from the business and not receive a defined salary, while not raising unnecessary scrutiny by the reviewing officer?

First, using reasonable assumptions about prospective sales, the business must actually be able to generate sufficient income to both support the E-2 investor applicant and her family, and to hire at least 3 to 4 full-time equivalent U.S. workers within 5 years of starting operations. It is not necessary for the business to accomplish this immediately. In many cases, it is acceptable for the business to take time at the start to establish itself, and it is not uncommon for there to even be a slight loss in year 1. However, the business should be able to generate sufficient income to support the E-2 investor and employ 3 to 4 workers within 5 years – and the company should start the hiring process as early as possible.

Second, the financial projections included with the application (such as in the business plan) should effectively communicate that the business will generate sufficient income to support the E-2 investor applicant after compensating U.S. workers. To effectively communicate this, we would typically recommend that the personnel projections included in the business plan omit the E-2 investor and only show personnel that the E-2 investor will hire. This makes it clear how many employees will be hired when and what they will be paid, without convoluting that information with payments going to the E-2 investor.

 

Similarly, the financial projections represented in the cash flow section and elsewhere in the business plan and application should only include as “compensation” those payments made to employees listed in the personnel table – meaning that “compensation” figures should exclude compensation paid to the E-2 investor applicant. Instead, payments made to the E-2 investor will be drawn from the company’s cash flow or profits. As a result, these figures should be sufficient to support draws made by the E-2 investor.

Taking this approach, if the government officer asks how the E-2 applicant will support herself, she will be able to point to strong cash flow and profits, after payments are made to U.S. workers.

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