The CAFTA Report
Business laws in Costa Rica
Main consideration is limiting liability
Investors have choice in company structure
By Garland M. Baker*
Special to The CAFTA Report
There are six different types of companies in Costa Rica. Most people are only familiar with one or two, the most common types like sociedad anónimas and S.R.L.s. In these times of changing tax regulations everyone, business people as well as individuals, should know the differences between the company structures available under the commercial law.
The most common company structure in Costa Rica is a sociedad anónima, which is equal to a standard corporation in the United States and other parts of the world.
What is a corporation? By definition, a corporation is a legal entity engaged in a business activity. A corporation has its own rights, privileges, and liabilities distinct from those of the individuals who own or manage them. A corporation can acquire assets, enter into contracts, sue or be sued, pay taxes and take tax deductions in its name. Corporations issue shares of stock to individuals who supply ownership capital. A corporation is a desirable organization for a business entity for many reasons including tax savings, asset and lawsuit protection. The law considers a corporation to be a separate legal person.
Sociedad anónimas, referred to as S.A.s, have a constitution or corporate charter, four directors, a president, secretary, treasurer and a fiscal, stock certificates representing stockholder ownership and six legal books.
S.A.s are the business structure of choice for selling stock to raise capital for a company. This is also the weakness of S.A.s. Stock is too easy to transfer facilitating fraudulent transactions. Many of the thefts of property in Costa Rica are due to the movement of stock without the rightful owner’s permission.
The second most popular company structure in Costa Rica is the S.R.L., which stands for sociedad de responsabilidad limitada or society of limited responsibility. An S.R.L. is similar to a limited liability company in other parts of the world.
Liability is one of the most important considerations in choosing a company structure. If something goes wrong and a company runs into financial problems, the liability of the problem should stop with the company.
This means ones personal assets are safe because legally a properly formed company is a separate entity in the eyes of the law and solely responsibly for its debts.
S.A.s and S.R.L.s share the benefit in that liability is limited to investment of shareholders. In some parts of the world, for example the United States, "piercing the corporate veil" is possible to get at shareholders personal assets. This ordinarily happens in litigation where a company has inadequate assets to cover its liabilities, and a plaintiff alleges that the corporation is actually a sham. That is, the corporation is not really a distinct individual, but is merely an extension or "alter ego" of its shareholders being used to advance their private interests or to perpetrate a fraud. "Piercing the corporate veil" in Costa Rica is very difficult to do.
S.R.L.s are easier to administrate and safer than S.A.s. They have a constitution or charter like a sociedad anónima but do not have directors — only a manager or managers. The most important aspect to an S.R.L. is shares cannot be transferred by simple endorsement, and any shareholder has the right of first refusal in the case of any share transfer. Any movement of shares also needs confirmation written in the shareholders’ book.
Even large companies in Costa Rica are changing their corporate structure from a sociedad anónima to sociedad de responsabilidad limitada because of these facts.
Both S.A.s and S.R.L.s need at least two people to form them. However, in some cases, there is only one owner of stock or shares, and this is an impediment. The trick everyone uses to get around this restriction
is to give one share of a company during setup to a surrogate until the paperwork is done at the Registro Nacional and than transfer the share back to a single owner.
Another form of an S.R.L. is an E.I.R.L., an empresa indiviual de responsabilidad limitada This is a limited liability company formed by one person. It works somewhat like a sub-chapter S corporation in the United States where personal tax returns include income and depreciation of the company.
Most people in Costa Rica have no idea what or how E.I.R.L.s work, so it is better to avoid them.
A collective name company is a legal figure originating in Italy. They are recognized by y compañía, meaning “and company” or y sucesores meaning “and heirs” in their name, for example Baker y Compañía or Baker y Sucesores. In the past, family groups working together in similar activities use this kind of legal structure.
In this type of company legal liability, including personal liability, is absolute. All shareholders respond personally in an unlimited way regarding all obligations and liabilities.
Why would someone use this type of business structure? One reason is to establish credit since company and personal assets work together.
Sociedades en comandita are silent partnerships. This kind of company has two kinds of shareholders: Managing partners called comanditados or gestores who take care of the administration and legal representation, and silent partners comanditarios, who contribute the capital investment. These companies are named something like Baker Sociedad en Comandita or Baker S. en C. This company structure does not protect personal assets, as do S.A.s and S.R.L.s.
The last type of company organization is that of a branch of a foreign company doing business in Costa Rica. Companies created in other countries need to open a division or branch called a sucursal in this country to carry on business. It is necessary to register the entity to get a company I.D. card called a cédula juridica. The identification certificate is necessary to do any kind of business in Costa Rica including, but not limited to, opening bank accounts, acquiring property, legal representation in the courts, or participate in other companies in the country etc.
Most people do not know that any company structure in Costa Rica can have a name in any language of the world and capital stock or capital investment represented in any currency.
The rule in Costa Rica is never own anything in a personal name. It is too dangerous because thieves read the obituaries to find properties of recently deceased persons to steal real estate and other assets. In addition, owning a business personally risks personal assets because liability is not limited.
Another principle is keeping every property owned in a separate company, and never mix properties with vehicles or employees whenever possible because of liabilities.
*Garland M. Baker is a 35-year resident and naturalized citizen of Costa Rica who provides multidisciplinary professional services to the international community. Reach him at email@example.com. Copyright 2006. Use without permission prohibited.