Corporation vs. Limited Liability Company: Choosing Between a Corporation (Sociedad Anonima) and a Limited Liability Company (Sociedad de Responsabilidad Limitada)
The most commonly used corporate structures are the Corporation (Sociedad Anonima or S.A.), and the Limited Liability Company (Sociedad de Responsabilidad Limitada, Limitada, S.R.L., or Ltda.). Generally, clients are generally advised to open a Corporation, however, the choice of corporate structure should not be taken lightly and requires proper guidance. When picking the right structure, there are some key factors you shouldn’t overlook.
Governance and Representation:
– Corporation: Governed by a Board of Directors consisting of at least three individuals holding the positions of President (who serves as the legal representative), Treasurer, and Secretary, along with a fourth person acting as a Comptroller. Small businesses and startups usually don’t adhere to a structured Board of Directors. Frequently, people close to the business, like family, friends, or employees, are chosen for these roles without fully grasping the legal obligations outlined in the Commercial Code.
– Limited Liability Company (LLC): Managed by one or more managers, it allows for a simpler organizational structure. Unlike the Corporation, where at least four people are involved (a fifth if a Resident Agent is required), the LLC can have a single manager.
Relationship with Partners:
– Corporation: Shares (Acciones) can be freely transferred to third parties unless otherwise agreed upon.
– Limited Liability Company (LLC): Quotas (Cuotas: equivalent to shares in this type of company) cannot be transferred to third parties without the consent of other partners. The LLC is considered a closed structure, ensuring control over the entry of new partners.
Social Capital:
– Limited Liability Company (LLC): requires the capital to be in Costa Rican colones by law.
– Corporation: the Corporation allows capital to be in any currency, offering flexibility. Additionally, quotas in the LLC must be in multiples of one hundred colones. This limitation may be important for ventures involving financing or foreign investors.
Corporate Books:
– Limited Liability Company (LLC): This entity is required to maintain only two record books: i) Minutes of Quota Holders’ Assemblies ((Actas de Asambleas de Cuotistas) and ii) Quota Holders Registry (Libro de Registro de Cuotistas).
– Corporation: must maintain three legal record books: i) Minutes of General Assemblies (Acta de la Asambleas Generales); ii) Shareholders Registry (Libro de Registro de Accionistas), and iii) Board of Directors Minutes (Acta de la Junta Directiva)
Complexity and Flexibility:
– Limited Liability Company (LLC): Provides a simpler structure, suitable for less complex ventures.
– Corporation: Provides a wider range of options for advanced corporate management.
Lastly, it’s crucial to recognize that both types of entities share common ground. The liability of partners in both structures is confined to their contributions. Additionally, they entail identical registration costs, necessitate a minimum of two partners for establishment, and adhere to equivalent tax regulations, including the payment of Corporate Tax. Despite these similarities, the choice of the suitable entity should be guided by a careful evaluation of the specific activities the business plans to engage in. Across Borders Legal can provide expert advice to ensure the right decision tailored to your business needs.
Contact us at info@acrossbordersrealty.com.
Written by Edward Gudeman, Attorney and Notary
