LLC conversion to S-Corp with foreign owner

[jasdlm]

Taxpayers have a 4 person LLC (which I set up). Chose an LLC for several reasons, but 2 important reasons were 1) one of the owners is a foreigner on an H1B visa and 2) All owners are employed full-time and above the FICA limit in other jobs.

The foreign owner is now wanting to change jobs and become a full-time employee of the company (which has done well -- grossing 4 plus million in its second year). All other owners are in favor of him becoming an employee. He can not be an employee of the LLC since he is an owner (or I can't think of any way that he can). He has to have employee status to keep the H1B visa and stay in the country. If I file a 2553 and elect for the LLC to be taxed as an S-Corp, do you think that violates the 'no foreign ownership' of an S-Corp rule, or do you think it's okay since the entity itself is still an LLC (and just an S-Corp for tax purposes)?

Also, the two owners who have the largest membership shares do not want to be employees. They tell me they are not going to 'work' in the company; only serve as advisors. Both are now admittedly working in the company about 20 hours/week, but since the income is being taxed as self employment income and they are paying the medicare tax, it doesn't matter. Do you think it is reasonable to have officers of an S-Corp who receive no 'salaried' compensation?

Thanks for your thoughts.

[RoyDaleOne]

Why can he not by an employee? Ownership status in the form of a LLC interest or partner in a partnership is not as far as Iknow block in anyway of becoming an employee. Naturally, the onwer must function in a capacity of an employee.

[jainen]

>>that violates the 'no foreign ownership'<<

Of course it does. How can you even consider such an impossible option?

>>He has to have employee status to keep the H1B visa<<

It doesn't matter what his status is under the tax code. He has to meet INS requirements. If he doesn't want to talk frankly with them, he should ask his own embassy for help.

[OldJack]

As an "employee" of the LLC he simply receives his employee earnings as "guaranteed payments for personal services" in box 4 of the 1065k-1 subject to SE tax.

edit: Although it is not technically correct, I have had partnerships that treated certain working partners as payroll employees and issued W2's for such work. It appears that the IRS gets the same taxes and on audit does not make an issue of the fact. Of course it cost the partnership extra for certain taxes such as unemployment tax.