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Illegal Entrepreneurs
By Julia Boorstin/Los Angeles

(FORTUNE Small Business) – José" and "Maria" seem to be living the American dream. A wiry, mustachioed man in perpetual motion, José, 36, runs a profitable seven-year-old garment business in Southern California that brought in $650,000 in sales and paid a six-figure tax bill last year, employing 25 people. Maria, 23, manages the firm's tidy, efficient office. They married in 2001, a year after José hired her, and last year purchased a two-bedroom ranch with a spacious backyard, where they live with their cherubic 3-year-old, George, and two dogs. But the life and the business they are creating could end abruptly. They're not citizens: Both arrived in the U.S. illegally, and they live with the threat of deportation.

José came to San Diego from Honduras in 1987 to escape poverty, living on the streets when he first arrived. He obtained a legitimate work permit, Social Security number, and driver's license in 1999 when the U.S. government granted "temporary protected status" (TPS) to undocumented Hondurans because of hurricane damage to their country. He pays $500 a year to renew that status, which was extended to Hondurans through July 2006. Unless he gets a green card immediately after that, he could be deported. With immigrants filing six million applications for legal status annually and only about one million receiving approval, success is unlikely. The wait often takes 15 years or more. Maria, who entered the country as a child in 1988, has no legal documentation, not even a driver's license.

Introduced to FSB by an employee who liked the way they ran the company, the couple spoke to us on condition that we disguise their names and that we not report details that might reveal their identity. They wanted to tell their story to counter the argument that illegal immigrants represent a drain on the U.S. economy and to show that their contributions include founding companies and creating jobs.

Because José and Maria don't have an employer to sponsor them for green cards, their attorney has advised them to apply for the right to stay in the U.S. under a provision of immigration law that grants permanent legal residency to applicants who have invested $1 million or more in the U.S. economy. Although José applied for permanent residency in 2000, a judge denied it, ruling that his business was not large enough to justify his moving here permanently, according to the couple's attorney. The attorney says that the hundreds of thousands of dollars in equipment they own doesn't count toward the minimum assets that are required for citizenship under current law, and based on precedents in which others have won citizenship, he has advised them to increase their annual profits to $1 million as rapidly as they can. They hope to reach that goal by 2007 or 2008.

But there are no guarantees. And as José logs long hours at the factory, he dreams of visiting his ailing father in Honduras before it is too late. José hasn't been back since 1987; he can't leave the U.S. without a green card because he might never be able to return. "I think people like me who have been here for more than 15 years deserve green cards," he says above the din of the machines in his factory. "I spent $68,000 on this machine, and I paid $8,000 in sales tax. I've borrowed a total of $200,000, and now I only owe $10,000. If Bush sends me home because TPS expires or whatever, I can't take this factory with me. Who knows if they'll give me a chance to sell it before they make me leave?"

José and Maria's options may change if the immigration reform that President Bush proposed last year passes in Congress. Bush's plan would let undocumented immigrants who have jobs apply to become legal temporary workers for three years; it would link other undocumented immigrants with companies that need employees for three-year periods. At the end, some workers would be allowed to apply for permanent green cards. Bush has argued that his proposal would help employers fill jobs that Americans don't want (at least not at existing wages) and let immigrants already here work legally without forfeiting ties to their home countries. In May legislators introduced a bill known as the Secure America and Orderly Immigration Act of 2005, which encompasses much of Bush's proposal. It doesn't, however, address the specific situation of illegal immigrants who are entrepreneurs. Millions of the nation's nine million to 20 million illegal immigrants could, however, become eligible for work permits if it passes. That would make it the most sweeping immigration proposal since President Reagan granted one-time amnesty to about 2.7 million illegal immigrants in 1986.

Expect lots of shouting before Bush's reform comes up for a vote. Critics say that the proposal would increase competition against Americans looking for jobs. Advocates for the immigrants say the measure doesn't go far enough to help them, leaving their fate in the hands of big companies. And some illegal-immigrant entrepreneurs—scarcely considered in the debate so far—see no advantage in applying for legal status.

Consider "David"(not his real name), 36, a stocky Mexican immigrant with a sun-worn face who owns a pool-cleaning business in the San Fernando Valley. He doesn't pay taxes on the $80,000 a year that he earns in cash, doesn't intend to apply for a green card no matter what happens in Congress, and plans to retire to Mexico. "I don't take anything from the government—no Social Security, no medical benefits—so why should I give them anything?" he asks, shrugging off any consideration of national defense and police protection.

But for business owners such as José and Maria, who have sunk deep roots here, the proposal offers tantalizing hope that the ambition and risk-taking spirit that propelled them across the border will pay off. "They understand America to be the land of opportunity, while they struggled with bureaucracy and corruption in their home countries," Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., says of the area's illegal business owners. "They'll work very hard because they have no fallback plans." Kyser estimates that illegal immigrants who are paid off the books added $163 billion to the $673 billion of gross domestic product generated by businesses within Los Angeles and the four surrounding counties in 2003, the most recent year for which he has statistics. University of Southern California professor Harry Pachon, an expert on immigration, estimates that 8% to 10% of undocumented immigrants across the country run businesses, but notes that no one has gathered actual data.

Though living in the shadows of the U.S. Economy is difficult for José and Maria, they regard it as a big step up from conditions in their home countries. One of 11 children in a family so poor that he did not own shoes until he was 12, José couldn't find work in Honduras, so at 18, he illegally worked his way west and north into El Salvador, Guatemala, and Mexico. He took jobs at banana, mango, and sugar-cane plantations. One night, a year after he left Honduras, he sneaked into California near San Diego and traveled north by foot and bus. He knew no one in the U.S. and spoke no English. Sleeping on the streets of East Los Angeles, he waited each day with other immigrants at busy intersections to get construction and painting jobs, for which he was paid in cash. He sent much of his earnings to Honduras to buy his parents a house and to help his older brother join him in the U.S. "The jobs that paid $400 here would have paid $50 in Honduras," José recalls.

Looking for a better-paying job, José traveled to Miami and then Boston, where he worked as a janitor until he realized that his poor English would prevent him from advancing. So he moved back to heavily bilingual Southern California, taking a job in a plastics factory, then in a sweatshop sewing dresses. Paid by the piece, he toiled without breaks for ten to 12 hours at a stretch. "We were taken advantage of. We didn't know any better," José says with a shrug. He still made it pay off. By working as many hours as he could, six or seven days a week, he brought home about $400 a week, off the books. Since then, as his pay has soared, he's managed to send about $400,000 back to his family in Honduras. The money has paid for eight houses for his siblings as well as an apartment building and a store for his sister to run.

José's lucky break came when a buyer stopped by the factory where he worked, searching for a finishing that required a machine the plant didn't have. José, who had been saving money to start his own business, discreetly accepted the man's business card. Once José had saved $15,000, he took out an equal-sized bank loan. His brother, who had obtained a green card with the help of his employer and had built up credit, co-signed the loan. José bought the specialty machine, phoned the buyer, and got his first order. He stayed up for two days straight to learn how to run the machine, then kept it going around the clock. He paid friends to run it while he handed out about 100 business cards a day to potential clients on the streets of the garment district. "I always wanted to work for myself," José says. "You get cheated otherwise." As clients referred more business his way, José hired employees, including relatives who had come across the border. Remembering how his former boss had cheated him, he always paid his workers by the hour, offering at least the minimum wage. Working long hours broke up his first marriage, to a Mexican woman who had also immigrated illegally, but by 2000 he had hired Maria, and they fell in love. That year his company hit about $200,000 in revenue.

Maria had much in common with José. When she was 7, her father, who had worked in the U.S. for five years, paid a "coyote" to smuggle her, her mother, her grandmother, and her 1-year-old sister across the border to escape poverty in Mexico. "We had to jump over a wall, and my grandmother got stuck on a spike. Her jacket stayed behind," she recalls. By her high school graduation, Maria had become fully bilingual and was an A student. The job as José's office manager felt familiar to her as soon as she arrived for her interview. Her father had worked in similar factories. Surprised that the company didn't have a computer, she began making improvements and soon played an integral role in growing the business.

A year after Maria joined the company, she and José married, and she soon became pregnant with their son. Her now flawless English and computer know-how helped her solicit customers. To achieve a particular effect that clients were seeking on their garments, José invested in a new machine but found it created new problems. "At first we lost thousands of dollars because we didn't have the right $7,000 software to run the machine," he recalls. Once he had bought the software and hired more experienced workers, though, he found that the machine could do 18 times the work of his other devices, generating higher margins and allowing him to compete with the many sweatshops in his industry.

To avoid any missteps that might derail their dream of becoming naturalized citizens, José and Maria have paid state and federal taxes each quarter. They use a federal-tax ID number that the government assigned the business, which they have incorporated in their names. They have obtained all necessary licenses. They contribute payroll taxes for their employees—even the third of them who are are illegal and use fake Social Security numbers bought on the street. The undocumented employees probably will never be able to reap government retirement benefits that they would accumulate if they were citizens. However, accepting the workers' phony Social Security numbers allows the factory to win jobs from large companies that require suppliers to show that all of their employees have this government identification.

With their company on track for about $1.2 million in sales for 2005, Maria and José are charging ahead and trying to ignore the legal cloud that hangs over them. They are considering the purchase of the building that houses the factory, which would allow them to generate rental income from other tenants. Though he is concerned that overseas competitors could hinder his company's growth, José says he is committed to staying in the U.S. He is optimistic that his company will qualify as having $1 million in profits over the next three or four years, which will allow him to reapply for a green card. But he hopes the President's plan will speed up the process. "I pay taxes. I want to do everything legally," José says in his heavy accent. "I would go to war for this country!"