How to Dissolve a Company
Stew Cameron asked us to elaborate a little more into the details of dissolving a company in Costa Rica. So here it goes.
The law allows us to create business structures (colloquially called corporations, and for the purpose of this article we will refer to them as companies) and it also tells us how and why to dissolve them. Please keep in mind that there are several types of companies such as Sociedad Anónima (the equivalent of a Corporation), Sociedad de Responsabilidad Limitada (the equivalent of an LLC), Sociedad en Nombre Colectivo (the equivalent of a Limited Liability Partnership), so on and so forth. But we are going to focus only the Corporation (Sociedad Anónima or S.A.) and LLC (Sociedad de Responsabilidad Limitada or S.R.L.) primarily because these are the two structures that most people use and thus the more familiar with, but also, they share the same grounds for dissolution while other types of business structures have other additional grounds for dissolution.
Section 201 of the business code sets forth the following grounds for dissolving a corporation:
- Expiration of the term. When corporations are created, one the requirements for the articles of incorporation is to set a term for the company up to 99 years. Most of the time, people choose to set a term for 99 years, but occasionally, people choose shorter terms of 10, 25 or 50 years. Under this ground of dissolution, when the company reaches that term, regardless of the length, it is required to dissolve the company.
- Impossibility to reach the goal of the business. You may recall the company Industrias Infinito. This was a Canadian Company focused on the mining industry. They had acquired a concession from the Costa Rican government to operate a gold mine in Crucitas, somewhere in the north of the country close to the Nicaraguan border. Due to pressure from local environmentalists, the government of Laura Chinchilla decided to rescind the contract for the concession. The sole purpose of the corporation that Industrias Infinito had in Costa Rica was to operate the mine in Crucitas. Considering that the government rescinded the contract, then the company could not reach its goal, and thus, this is a ground for dissolution. A more usual example is when the partners are unable to agree on the direction of the operations and the company gets into a gridlock or stalls. By not being operational it fails to achieve its business goals and thus it is possible to dissolve the company.
- Loss of 50% of the capital of the corporation. Under this scenario, if a company is created with a capital of $100,000 USD and due to bad management losses $50,000 of its capital, it is then possible to dissolve the company, unless one or some of the shareholders (partners) are willing to replace that loss of capital.
- Shareholder agreement. This is the most common of the grounds for dissolution, and what it means, is that the shareholders just agree to dissolve the company.
Since the purpose of this article is to educate the average folk on how to dissolve a company, will focus on the main ground for dissolution being the mutual agreement by shareholders. If you are a reader who intends to dissolve a company under the initial three grounds as listed above, and you will like further information or guidance, our suggestion is to contact your attorney and ask them about those options for dissolution, or you can reach us by email to schedule an appointment to review your situation. Here today, we will dedicate this post to what is the most familiar to the average reader who most likely only has a company but not an operating business.
There are five steps related to dissolving a company:
Step One. Cancel the registration with the Revenue Service (Hacienda)
Most companies in Costa Rica, roughly 60% are not operating a business and are not registered with the revenue service. However, it is important to determine if your company is registered with the revenue service, and if so, the first step is to cancel that registration. Before doing so, it is required to file any tax declarations that are pending. Any company that is registered with the revenue service must file a declaration for income tax every year. If the company did not make any income, then, it does not have to pay any taxes, but the filing the declaration is mandatory. The cost for doing a tax declaration with no income is $150 USD, if your company had income and profits, then it will have to pay income taxes. The cost of cancelling the registration is $150 USD. If your company is not registered with the revenue service, needless to say, you will not incur in these costs.
Step Two. Shareholder agreement.
The shareholders must have a meeting and carry a vote to agree on the dissolution. The vote is only a simple majority. This agreement should be incorporated in the Shareholder Meeting Book (Libro de Asamblea de Socios) where the meetings are recorded. The cost to complete the agreement to dissolve the company is $200 USD. This fee is calculated on a company valued at $1,000 USD.
Step Three. Liquidation.
If the company has any assets such as real estate, vehicles, or any other assets, then it is required to liquidate them, and therefore, the shareholders must agree on appointing a liquidator who will take on the task to dispose of those assets and then distribute the resulting cash equitably among the shareholders. That is, if you own 10% of the shares, then you receive 10% of the cash, unless otherwise stipulated in the articles of incorporation. The costs for the liquidation will depend on the value of the assets. You can expect to spend between 5% and 10% on liquidating the assets. One of the purposes of the liquidation process is to pay to any creditors the debts the company has. If the company does not have any debts, it is recommended to dispose of the assets even prior to do the shareholder agreement in order to have a simpler less costly dissolution process.
Step Four. Publication in the paper.
Once the shareholders have done the agreement to dissolve the corporation, it is required to publish a notice in the government paper La Gaceta. The purpose of the notice is to allow any creditors to claim any debts the company may have, thus the purpose of the liquidation process above. Provided that there are no creditors and there are no assets of the corporation, the liquidation process will be avoided. Nevertheless, the requirement to publish the notice is mandatory. The cost for the publication of the notice in La Gaceta is $100 USD.
Step Five. Recording of the dissolution agreement.
Provided that the notice was published, and no creditors appeared, or if any creditors with a valid claim appeared and it was paid off (liquidation process completed), then it is possible to file the shareholder agreement to dissolve with the National Registry. It roughly takes two to three weeks for the registry to review the shareholder agreement and dissolve the company. The cost in government fees are $100 USD.
At the end…
I am an advocate for people to only use companies for the purposes of registering a business. I do not support the idea to create companies for the only purpose to hold assets. Recently, there has been an increase of dissolutions as a result of the new corporate tax. People should do a cost benefit analysis to determine whether it is reasonable to dissolve the corporation.
For simple companies with no assets and not registered with the Revenue Service, the total cost to complete the dissolution is $400 USD. The costs will add up if it is required to cancel the registration with the Revenue Service and to complete the liquidation process. The processing time to complete the liquidation for a simple company can be six weeks between the time the shareholders sign the agreement to dissolve and the time the Registro Nacional records said agreement.
I hope this information to be helpful. Feel free to reach us with further questions or comments.