Do I need a corporation?
This is a recurring question among expats. We are going to address this issue from two perspectives, from a business perspective and from an expat perspective.
Corporations have two primary purposes:
- To amass capital from different investors or partners for the furtherance of common business goals, and
- To separate the personal assets of the investors or partners from the business assets.
The corporation is commercial in nature, as its purpose is to further business activities. So, from this perspective, the answer is quite simple: You need a corporation if you are planning on doing business.
The Commercial Code in Costa Rica allows for five business structures:
- Sociedad en Nombre Colectivo. Section 17 a) This is the equivalent of a General Partnership, where partners retain full, shared liability among them. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
- Sociedad en Comandita. Section 17 b) This the equivalent of a Limited Liability Partnership formed by two types of partners: one or more general partners who direct business and’ are jointly and severally liable for debts, and one or more limited partners whose liability is limited to the amount of equity paid in.
- Sociedad de Responsabilidad Limitada or SRL. Section 17 c) This is the equivalent of a LLC, and is the appropriate structure for companies with small number of investors. It is a hybrid type of legal structure that provides the limited liability features of a corporation and operational flexibility of a partnership. The “owners” of an SRL are referred to as “cuotistas.” While in the USA some states allow the company to be formed by one single individual, in Costa Rica the SRL must be formed by formed by at least two members. Contrary to the SAs, SRLs do not have a board of directors and is administered by one or more managers.
- Sociedad Anónima or SA. Section 17 d) This is the equivalent of a corporation. A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures. They are required to have a board of directors which is elected by the shareholders. The shareholders need to meet in a general assembly at least once a year. SAs tend to have costly administrative fees and legal requirements. SAs are generally suggested for established, larger companies with multiple shareholders.
- Empresa Individual de Responsabilidad Limitada. Chapter II. The name stands for Individual Limited Liability Company, and as it implies, it is for an individual person. Thus, the company is registered with only one owner. This type of structure is suggested for people doing business on their own with no partners.
There are other business structures created by specific laws and not contained in the commercial code, for instance: professional partnerships and cooperatives.
Registration of a Company
In order to register a company, you are required to hire a notary public. (click here to read the distinction between a notary public and an attorney). If you are planning on doing a business with other partners, then you and your partners need to appear before the notary public in order to draft and sign the articles of incorporation. Once you and your partners have signed the articles of incorporation, the notary public needs to file a copy (testimonio) of the articles of incorporation with the Mercantile Section of the National Registry. In addition, a notice (edicto) must be published in the government paper (La Gaceta) in order to let the people at large know that the company is to be registered. Once the draft of the notice has been given to La Gaceta, and the taxes have been paid, the notary public can file the articles of incorporation, and a few days later the registration will be completed by the National Registry and an ID number (cédula jurídica) will be issued.
To summarize, the following steps need to be completed in order to register a company:
- Meeting of the founding members of the company with the Notary Public
- Signing of the articles of incorporation
- Payment of the Taxes
- Filing of the edicto with La Gaceta
- Filing of the articles of the incorporation with the Mercantile Section of the National Registry.
Currently, it is possible for notary publics to register SAs and SRLs through the electronic signature system, which expedites the process which can be completed within a week from the date the founding members signed the articles of incorporation. Other types of companies, such as the Individual Limited Liability Company, the Partnerships, Coops, and many others are still required to be completed the old fashion way by filing the copies of the articles of incorporation with at the National Registry.
Business and Licenses
Since we are talking business, it is relevant to mention that it is required to obtain the appropriate licenses and permits for the business that you are trying to start. The list includes:
- Patente Municipal (business license) from the local county. If you are planning on having a store, restaurant, office, hotel, or any other business that requires a location, you will need to obtain a license from your county.
- Permiso de Salud (health permit) from the Health Department. The purpose of this is to establish that your business or its location is safe for the public at large. Depending on the type of business, you may require an specific health permit. For instance, if you are planning on having a restaurant, you will need additional permits and particular requirements for those permits.
- SETENA permit or Environmental Permit. Depending on the type of business, you will need to get this type of permit. For instance, if you are planning on opening a hotel, or a factory, you may need to have approval from SETENA. In other instances, regardless of the type of business, but the location is close to a protected area or aquifer, you will need the SETENA.
- Tax Registration. Everybody has to pay taxes, and in order to do so, you will need to register with the revenue service or Dirección General de Tributación Directa (DGTD)
- Additional permits or licenses. Depending on the business activity or industry, you may be required to obtain license or registration, some of these activities include but are not limited to:
- Teaching and Schooling
- Medical Services
- Insurance agencies
- Food and beverage
- Liquor production, retail and distribution
These are the six Ps for success: Prior Planning Prevents Pissed Poor Performance.
If you are planning on opening a business, the most important thing to do is to do some research and plan ahead. Part of that plan includes registering the appropriate company and obtaining the appropriate licenses, as well as doing the required marked research for that particular business.
Neither the Commercial Code nor the Constitution prevents foreigners from creating, owning or managing corporations. Similarly, neither the Constitution nor the Civil Code prevents foreigners from owning property, whether real estate, a vehicle or any other type of chattel.
As initially stated, expats ask in a consistent basis whether they need a corporation. As noted above, it is recommended to register a company if you are planning on doing a business. But frequently, expats ask this question not from a business perspective, but from the perspective of being able to function in Costa Rica.
Attorneys have sold the idea to foreigners that it is required for them, or that it is in their best interest to have a corporation to own a car, or a home, or a cell phone, or to open a bank account, so on and so forth. The answer is no, you are not required to register a corporation to own a home, or any or the other items listed above.
A common justification used by attorneys in their sales pitch is: “what happens if you hit a car or a person while you are driving? Protect your assets from liability by putting them in a corporation”. Well, fortunately you can find insurance companies in Costa Rica. Go ahead and get good coverage for your car, just the way that you used to do back home in the US, Canada or Europe. If this is really a concern to you, then do not get a corporation, get insurance. In my opinion, the reason why attorneys recommended expats to open corporations was to collect fees from the registration and administration for the corporation. They were not going to make any money by telling their clients to go get insurance.
A recurring issue that I have noticed, particularly with corporations created for the purpose of owning real estate, is that attorneys tell their clients that it is required to have a tico in the corporation. Usually, what happens is that the client, upon recommendation from their attorney, appoints a tico in the board of directors with sufficient powers of attorney to transfer assets, and then, assets are transferred. A significant number of property fraud is done through corporations where the attorney or other person in his office or family is included in the corporation and later on sells the client’s property without appropriate consent. This is particularly true to SAs. Although, SAs only require two people to sign the articles of incorporation, it calls for the appointment of at least three people in the board of directors: the president, the secretary, and the treasurer. So even an expat couple is required to name a person in the corporation that is not related to them. Why would you do that? Why would you put in your corporation a person that has no stake in your property? Even if that third person would not be a share holder, it would not make sense to appoint them in the corporation. Think about it, since we are talking about real estate, is like having your neighbor living in the attic.
The lack of good faith from attorneys in this country is so evident, that they even recommend SAs instead of SRLs. If you drink the Kool-Aid and want to get a corporation under these pretenses, the best would be to register an SRL which does not require the appointment or inclusion of any other parties other than you and your spouse. If it is only you, then you can use the EIRL. So, even if your attorney has the “good faith” to protect your interest by selling you a corporation that you do not need, they are nevertheless ignorant enough not to know that a EIRL will serve you better.
My suggestion to you is:
- If you want to buy a house, then buy a house,
- If you want to buy a car, then buy a car,
- If you want to open a bank account, then open a bank account,
- If you want to open a business, register a company
- If your attorney cannot do these things for you, then get a new attorney