Sociedad Anonima, The Costa Rican Corporation
The Costa Rican Business Code allows a number business structures to be created for the purposes of doing business. It mainly makes sense to incorporate if you are planning on running a business. While a business structure may provide some benefits for the average person, primarily while doing estate planning, the main goal of a business structure such as a corporation or a limited liability company is to allow a business to function separately from an individual.
What is a corporation?
For our purposes we will use the word corporation to make reference to the Sociedad Anonima or S.A. Under Costa Rican Law Sociedad Anonima stands for anonymous society which is a group of people who decide to invest together in a business. The anonymous element of if primarily refers to the limited liability bestowed in the corporation, by which the investors are sheltered from any liabilities from the company.
The Corporation has three components:
- The board of directors
- The shareholders
- The controller
The founding partners of the corporation do an initial assembly to approve and sign the articles of incorporation and to appoint the board of directors and the controller.
Who should use a corporation?
As noted, there are several business structures in Costa Rica, but the appropriate business structure for you will depend on a few factors such as:
How many partners are there?
The S.A. is appropriate for a large number of investors. If you start a business with five shareholders (or founding partners) it is appropriate to set up a corporation as it has a board of directors, which in turn will manage the business. If you plan to have at least five partners when starting the business, the board of directors will allow the partners to have a voice and vote in the management process. Some times, there are investors who only want to finance the start up but are not interested in making operational decisions for the business and feel more comfortable with delegating that responsibility to other people. Regardless of the role of the investor, the S.A. has been designed for large numbers of shareholders as it sets forth the processes to manage such a business and to protect the interest of the shareholders through the board of directors and the controller.
What type of business are you setting up?
Some professionals decide to join forces together to make a business, such as physicians, accountants, architects or engineers, attorneys, so on and so forth. In these instances, it makes sense to have a limited liability partnership and not a corporation. Maybe you are planning on selling financial services, for which a partnership is not permissible, or you are planning on starting up a condo for which a unique business structure is available, and there is no need to create a corporation.
Who will manage the corporation?
If you have a small business, and you are planning on managing the business yourself, it makes then sense to create an Individual Limited Liability Company and not a corporation. If you invest with some partners and your forté is computer science but not marketing or finance, then it makes sense to have a board of directors that help give direction to the business.
Do I want to bring in future investors?
If you are planning on growing your business and bringing an additional round of financing, it is a good idea to use a corporation as the structure allows you to issue additional stocks for future investors. Further, the corporation allows you to bring silent investors by issuing preferred shares which can have the benefit of additional earnings but at the cost of not having a vote in the shareholder’s meetings.
Once you have determined that a corporation is the right structure for you, then you need to take the next natural step which is to incorporate. You need to consider the following elements when incorporating:
- Articles of Incorporation
To create a corporation, you must have at least two founding shareholders, as noted the S.A. is designed for a larger number of investors, but you will initially need at least two.
The shareholders can either be Costa Rican or foreigners, the law does not prevent foreigners from incorporating in Costa Rica.
For the articles of incorporation, you will need at least the following information:
- The date and place of incorporation;
- Personal information from the founding partners or shareholders;
- The object of the corporation, which is to any particular type of business;
- The term which cannot exceed 99 years;
- The initial capital;
- Description of any assets if any that will be provided by the partners;
- The legal domicile;
- Enumeration of the powers of the officers of the corporation;
- Appointment of the officers. In a S.A. you must appoint a president, secretary, treasurer and controller.
- Description of the distribution of profits and losses.
- Description of the dissolution and liquidation process.
The articles of incorporation are printed in a notary public book and signed by all the founding partners and the notary public. A copy of it is filed with the Mercantile Registry (Registro de Personas Jurídicas) and within two to five days the registry will record the registration of the company and will issue an ID number for the company. A corporation in Costa Rica will have a number that looks like this 3-101-000000. The “3-101” denotes that it is a Sociedad Anonima, while a 3-102 denotes that it is a Limited Liability Company (socieda de responsabilidad limitada). The following sequence of six digits is the consecutive number given to the company and no two companies are going to have the same number.
Once the corporation is recorded, it is possible to issue a certificate of good standing.
- Initial Capital
It is required to invest money to start a business. If you are planning on opening a bakery, you must think of the rent for at least the first six months, you must invest, in equipment, furniture, displays, raw materials, salaries, insurance, marketing, utilities, so on and so forth.
The initial capital that you and your partners will invest in the business must be included in the articles of incorporation as it will state how the capital is distributed among shareholders, which will also dictate the possible distribution of dividends. Generally, the dividends are distributed on an amount equal to the percentage of shares owned by a shareholder. So, it you invest 60% of the capital to start the business, you will receive 60% of the profits when dividends are distributed. This information is to be included in the articles of incorporation.
- The Board of Directors
The Corporation is managed by a board of directors which must have at least the following appointments: president, secretary and treasurer. It can have as many directors as the shareholders can agree, but at the minimum it must have these three appointments.
Generally, these three members of the board of directors have unlimited powers of attorney to act on behalf of the corporation, but the shareholders can decide on the extent or reach of the powers of attorney and whether to grant such powers to any other members of the board of directors or any additional parties.
With these powers, the appointee has the authority to sign contracts and acquire obligations on behalf of the company.
The board of directors must meet on a regular basis to properly manage and direct the business. Each business must determine the appropriate frequency for which the meetings will take place.
The shareholders are those founding partners who initially signed the articles of incorporation when the company was created, and any other subsequent investors who have purchased shares of the company at a later time.
The company can issue new additional shares to bring in more capital and thus bringing in new additional shareholders. It can also be the case that an existing shareholder decided to share his or her shares to another party who will be a shareholder once the acquisition is completed.
The information of who owns shares of a given corporation is recorded in the books of the corporation, particularly in the shareholder registry book or Libro de Registro de Socios. Any new issuance of shares and transfer of shares must be recorded in this book and the stock certificates must be signed by the President, Secretary and Shareholder.
The Shareholders have the right to vote in the general assemblies and each share is represented by one vote. The assemblies can be ordinary which are at least once a year to issue performance reports, or extraordinary to decide on any other additional matters.
- The Controller
The purpose of the controller is to make sure that the corporation is compliant with its legal obligations. The controller is basically a compliance officer, and they cannot be member of the board of directors. The controller can be a shareholder or any other party.
When it comes to compliance it mainly refers that it complies with the regulations under the business code and tax code, and that the board of directors are acting in the best interest of the company and the shareholders.
As you can see, there is a significant number of elements related to creating and managing a corporation. There are additional factors that we will review in later installments. I hope this information gives you a good idea on how corporations work in Costa Rica.