INCORPORATION IN COSTA RICA

Simply viewed, a business form is a fictitious being independent of its shareholders, legally empowered to conduct business in its own name. This note will provide a general overview of the different forms of business organizations in Costa Rica. Additionally, it will aim to describe the incorporation procedure and explain the issues that must be comprised in their articles of incorporation.

Forms of Business Organization

Costa Rican law recognized the following forms of business organization:

1. Corporations

(Sociedad Anonima)

2. Limited Liability Companies

(Sociedad de Responsabilidad Limitada)

3. Limited Partnerships

(Sociedad en Comandita Simple)

4. General Partnerships

(Sociedad en Nombre Colectivo)

In Costa Rica, corporations are the most common entity given their structural flexibility. Since local laws define a corporation as a bilateral agreement, they must be formed by at least two parties. However, immediately after its incorporation, a single party may legally own 100% of the shares of stock, without altering the legal status of the original corporation. Founding parties (and any shareholders thereafter) may be individuals and/or any type of registered legal entity, regardless of citizenship and domicile.

Incorporation Procedure

In order to incorporate a legal entity, it is necessary to follow the steps described below:

• Draft and execute a deed of incorporation before a Notary Public

• Publish a notice of the incorporation in the Official Gazette and record the incorporation deed before the Public Registry.

• Once Incorporated, the corporation must request the approval of the legal and accounting books before the Tax Authorities.

• After the books are authorized, the shareholders registry book must be updated accordingly and the share or shares certificates must be issued and executed.

• Incorporation oscillates around two months.

Shelf Corporations

It is a common practice that for purposes of avoiding the burdensome bureaucracy involved in incorporation, Costa Rican law firms may provide a “shelf corporation” that is already incorporated and registered. A client that considers this option must make sure that the law firm or lawyer providing it can certify that such shelf corporation has never been involved directly or indirectly in any kind of business transaction, whether public or private and no contentious law suits or claims of any kind are pending or have ever been brought against it. The advantage of acquiring a shelf corporation is that this is fully operational upon the assignment of the shares and upon appointment of a new board of directors and statutory examiner. This process oscillates around fifteen days.

Articles of Incorporation

By law, the entity must have the following corporate characteristics:

• Company Name. This may be in English provided it is accompanied of the corresponding Spanish translation and consist of a word or a number of words with or without a meaning as long as it is not deemed generic and provided it has not been previously registered. In any event, the company name must be followed by the words “Sociedad Anonima” or S.A. (equivalent to “Incorporated” or “Inc.”) with the purpose of identifying the nature of the business entity.

• Legal Domicile. Since incorporation takes place according to local laws, the company or corporation is legally Costa Rican-based and thus domiciled thereat. Notwithstanding this concept, Agencies and Branches may be created to carry out activities in or out of the country. Corporations are allowed to carry out businesses all over the world.

• Legal Term. Indefinite terms are not allowed by law. Therefore a fixed term must be determined at will. This term may be shortened or extended also at will and convenience and generally ranges between 50 to 100 years.

• Corporate Purpose. As opposed to other jurisdictions where comprehensive, meticulous and lengthy descriptions of the corporate purpose are required, the business purpose and local activities are broadly implied in the law. Thus, simple and general provisions thereto are sufficient, although detailed descriptions are also allowed.

• Share Capital. This consists of the amount of money for which the company will be capitalized. The Share Capital (necessarily a fixed amount) is divided into common par value shares each entitled to one vote. These shares must be registered (nominative) since local regulations do not allow bearer or non-par value shares. However, shares may be endorsed openly and therefore perform, for all practical purposes, as bearer shares. There is no minimum Share Capital requirement. Shares are freely transferable unless provided otherwise in the Articles of Incorporation (i.e. Right of First Refusal and other lawful restrictions). Shares may be issued as single units or as stock certificates thereof.

• Board of Directors. Every corporation must have a Board of Directors comprised of a minimum of three individuals to hold the positions of President, Secretary and Treasurer, which must be eighteen or older. Additional Board members may be appointed at will. It is not required that Board members be simultaneously shareholders.

• Officer Authority. As the (statutory) legal representative of the corporation it is mandatory for the President to hold full powers of attorney. However, if deemed suitable other Director or Directors, as well as managers and outside individuals may hold powers of attorney of any kind to act individually or jointly on behalf of the company. These powers of attorney may be limited or restricted (including those held by the President) by several means to meet the company’s internal controls.

• Statutory Examiner. Corporations may appoint one or more Statutory Examiners (individuals and/or companies, mainly auditing forms). The main responsibilities of this officer are to watch over and ensure that all corporate rules, statutory obligations and procedures are duly and adequately met as a protection of the interests of shareholders and other related parties.

• Registered Agent. Corporations which legal representative is not domiciled in Costa Rica must appoint a Registered Agent, whose sole (passive) legal duty is to be served with administrative and court actions on behalf of the corporation. Appointment thereto must fall upon a local practicing lawyer with registered business offices within the country.

• Legal Reserve. Corporations in Costa Rica are required to assign annually 5% of net earnings to form a legal reserve up to 20% of its Share Capital. Such reserve need not be funded.

• Legal Books and Records. Corporations must open Legal Books (journal, general ledger, financial statements, shareholders’ registry and minute books for shareholders’ and board meetings); such books must be bound and stamped by local Tax Authorities.

OTHER FORMS OF BUSINESS ORGANIZATION

A limited liability company is composed of partners whose liability is limited to their capital contributions. The limited liability company’s legal structure may be equivalent to the Unites States concept of “Partnership,” and thus, may qualify as such for US tax purposes. Its incorporation procedures and costs are very similar to those of corporations and the more significant differences when compared to a corporation, are the following:

• Share Capital: limited liability companies divide their share capital into what local regulations called “quotas” as opposed to shares. Unless specifically provided otherwise in the articles of incorporation, transfer of “quotas” requires unanimous consent of all partners.

• Management: they are run by one or more managers or assistant managers who hold power of attorney as provided for in the articles of incorporation.

In regards to Limited Partnerships and General Partnerships, these are seldom used in Costa Rica, mainly because of the direct personal liability and exposure to which its partners are legally subject to. Its incorporation procedures are basically the same as for corporations.

The selection of the most appropriate business form usually relies on:

1. the advantage of the shareholders in regards to the selected business form

2. tax considerations regarding its shareholders and specifics of the pursued business venture

3. operating and management complexities and expenses.