What is the main source of law authorising this entity form?
Puerto Rico General Corporations Act of 2009, as amended (the “Act”)
Give a brief summary of the entity form:
Does the entity possess separate legal personality?
LLCs have separate legal personality.
(Maximum) period of existence
The is no maximum period of existence. LLCs may have an indefinite period.
Governing document(s)
LLCs are governed by the Articles of Formation (equivalent to the Articles of Incorporation of a Corporation) and the Operating Agreement.
Liability of incorporators / shareholders
Members of an LLC are not personally liable for the debts of the LLC, except to the extent of their capital contributions.
(Governing) bodies
LLCs may be member managed, manager managed or have a board of directors to manage the day-to-day operations of the LLC.
Other particularities
LLCs have the most flexibility with regards to their operational aspects with very few imposed requirements.
Can this type of entity be involved in international transactions and restructurings (e.g. cross border mergers, asset acquisitions, equity acquisitions, etc.)?
The Act provides for LLCs to participate in international restructurings. Depending on the surviving entity, certain notification requirements are imposed.
Can this type of entity be publicly listed or held?
Yes. It is important to note that Puerto Rico LLCs are subject to US federal regulations as well. Publicly listed entities will be subject to the Securities and Exchange Commission requirements, among other applicable federal laws.
Can this type of entity be used for a non-profit or charitable organization?
Yes. However, it is important to give notice of such intention when organizing the entity with the Puerto Rico Department of State.
Give a brief summary of the process of incorporation, formation, or organization, including:
(1) Main documents requiredl (2) Involvement of notary, company register, governmental authorities; (3) Timing (estimate); (4) Main costs, including registration and similar fees (excluding legal fees); (5) Is a description of the anticipated business or purpose of the entity required for incorporation, formation or organization?
An LLC is organized upon filing of such with the Puerto Rico Department of State’s online portal. The Department of State will issue the Certificate of Organization and the Articles of Formation. The filing fees related to the organization of an LLC is $250.00. An annual report must be filed to maintain the LLC as a validly existing entity within the jurisdiction. Generally, the annual report has a filing fee of $150.00 due by April 15th of each year.
The organization of an LLC is not subject to a specific waiting period. Everything is done through the Puerto Rico Department of State’s online portal.
An LLC is required to obtain an Employer Identification Number from the United States Internal Revenue Service. It also must register with the Puerto Rico Treasury Department.
An LLC also needs to have in place an Operating Agreement, which will serve as the ground rules for the management of the LLC.
The anticipated business or purpose of the LLC is required to be stated in the Articles of Formation.
Minimum number of incorporators / shareholders and residency requirements
Each LLC must have at least one (1) member. Currently, there are no residency requirements.
Minimum number of directors (or other applicable officers) and residency requirements
Each LLC must have at least one (1) member, director or manager, there are no residency requirements.
Minimum share capital, or equivalent, and payment requirements (including opening a bank account)
The minimum initial capital contribution may be as low as $0.01. Currently, there are no payment requirements.
Is the physical presence of incorporators / directors required in the jurisdiction for incorporation, formation or organization?
There is no requirement of physical presence of incorporators/directors. However, certain tax implications may apply.
Is a tax identification number, or equivalent, required? If so, how is it obtained?
LLCs are required to obtain an Employer Identification Number from the United States Internal Revenue Service.
What is the title of the applicable company registry?
The Puerto Rico Department of State.
What types of information must be filed at the (company) register, and which of them will it be publicly available, e.g.:
In order to register a LLC, a party will need to file the Articles of Formation with the Puerto Rico Department of State. The Articles of Formation must include the following information:
- name of the entity;
- principal office and telephone number;
- resident agent’s name, address, email and telephone number;
- nature of the business;
- information related to the authorized person organizing the entity;
- administrators or officers (optional, as it may be included in the limited liability company agreement); and
- term of existence of the entity.
What is the title of the executive body and its members? What are their main duties, tasks and responsibilities?
An LLC may be managed by the members, managers or a board of directors.
They are responsible for day-to-day management and make all necessary decisions of the LLC.
How are the members of the executive body appointed, dismissed and replaced?
The managers or members of a board of directors are appointed, dismissed and replaced as is established in the Operating Agreement. There is no particular requirement under the Act.
Is it possible to appoint corporate directors or must all directors be natural persons?
A corporate director may be appointed. However, certain decisions may need approval from the Board of Directors, managers or shareholders of such corporate director in order for it to act as a director of the entity.
Is there a requirement to have non-executive directors? How are they appointed, dismissed and replaced? Do non-executive directors serve on a separate body (two-tier structure) or can a one-tier board (with executive and non-executives) be appointed, or is some alternate structure used?
There is no general requirement under the Act. However, the Operating Agreement may delineate the powers each executive/non-executive director, officer, manager and/or board of directors will have.
Depending on the purpose and objective of the LLC, a two-tier structure may provide additional benefits than a one-tier board (and vice versa).
What is the title of the body of owners / shareholders / members, and what are the main tasks / responsibilities / powers of that body?
The owners are called members in the LLC. The Members have distribution rights and may have other preferential rights related to the transfer or issuance of additional membership interest.
There is no title for a member. If an LLC is member managed, then the member will be responsible of all management decisions and day-to-day operations. Otherwise, if managers or a board of directors are appointed, then it is they who will be responsible for management decisions and day-to-day operations. It is important to note that the Operating Agreement may reserve certain important business decisions to the members rather than the appointed manager or board of directors.
What are the majority and quorum requirements for decisions by the shareholders? Can they be varied or changed?
The Operating Agreement will establish what will constitute majority and quorum for purposes of making decisions. This majority/quorum may be changed by amending the Operating Agreement.
Any special governance regimes (e.g. depending on size, being listed at a stock exchange, or other criteria)?
There is no particular special governance regime. However, for tax purposes certain LLCs may be required to obtain audited financial statements depending on its volume of business.
What are the periodic accounting obligations incumbent upon the entity? To whom must those accounts be submitted?
The LLC is subject to an annual report with the Department of State. In addition, the LLC will be required to prepare and file a yearly income tax return, volume of business tax return and personal property tax return.
An LLC may also be required to file monthly sales and use tax returns and quarterly/yearly payroll-related returns.
The LLC may also be required to issue information returns related to payments made to independent contractors, employees, dividends, interest, among others.
Is the entity permitted to determine its own financial year?
Yes.
Is the entity subject to any statutory (external) auditor obligations?
Depends on the volume of business. An LLC with a volume of business above $10 million will be required to submit audited financial statements.
Requirements to appoint other persons (officers, secretary, internal auditor / accountants). If so, what are their functions? Are there any residency requirements?
The Operating Agreement will state the rules relating to the appointment of other officers/secretary/internal auditor or accountants. Usually, this function is reserved to the person handling day-to-day operations (i.e., the members, managers, or board of directors). There are no residency requirements.
What is the title designated for 'ownership interests' (e.g. shares, quota, interests, membership)?
Membership Interests.
Are different classes of ownership interests possible? If so, what are some examples of different classes?
Yes. The Operating Agreement may provide for the issuance of different classes of membership interests. The Operating Agreement includes the rights and powers of each class.
What documentation is required for the transfer of ownership interests?
Generally, a Written Consent and the document evidencing the transfer. Once the transfer is complete, an amendment to the Operating Agreement should be prepared to update the ownership of the LLC.
Are there any additional formal requirements required for the transfer of ownership (notary, approvals, stamping, filings, corporate records)?
No.
Are there any applicable stamp duties imposed when transferring ownership interests?
No.
How are shares issued? (including information on payment obligations, registration requirements)
The number of units of membership interest is established in the Operating Agreement. The Operating Agreement may allow the issuance of certificates to evidence the units any member owns, but it is not required under the Act.
Further information on equity contributions, e.g., non-cash payments on shares, (share premium) contributions without issuances of shares, can partially paid shares/ownership interests be permitted and what are the restrictions on them?
The rules governing the equity contributions are established in the Operating Agreement.
Any requirements with respect to share cancellation, share repurchase and other capital reductions
The rules governing the unit cancellation/repurchase and other capital reductions will be established in the Operating Agreement. Any LLC treated as a partnership or disregarded entity shall also abide to the partnership rules established in the United States Internal Revenue Code of 1986, as amended.
Any requirements with respect to distributions to shareholders?
Generally, distributions are made based on the members percentage ownership. However, the Operating Agreement may include certain preferential provisions between different classes of membership interest and it provides rules regarding the authorization of distributions..
Can the owners or shareholders adopt a restrictive or governing agreement among themselves such as a Shareholders Agreement?
Yes. The equivalent of a Shareholders Agreement for an LLC is the Operating Agreement.
Which are the typical annual maintenance costs of maintaining the existence and legal good standing of such an entity (excluding legal fees)?
The annual report fee is $150.00.
What are the general corporate tax rates? (Specify if there is a national versus local distinction).
An LLC may be treated as a partnership or corporation. If treated as a corporation, the LLC is subject to a graduated tax rate that ranges from 18.5% to 37.5% in Puerto Rico. Generally, Puerto Rico entities are not subject to federal taxes unless they have US source income.
An LLC that qualifies for tax exemption under the Puerto Rico Tax Incentives Code and obtains a Tax Incentives Grant generally is taxed at a flat rate of 4% in Puerto Rico for the eligible income. This tax benefit does not reduce applicable federal taxes if the entity has US source income.
If an LLC is treated as a partnership, the LLC will not be taxed at an entity level, but the income/loss will flow-through to the owners and will be subject to the member’s applicable tax rate.
Summary of any specific matters, e.g. recent or prospective major legal developments
Puerto Rico has extensive tax exemptions under the recently enacted Puerto Rico Tax Incentives Code. Tax benefits may apply to manufacturing, exporting services, individual investors that relocate to Puerto Rico, doctors, start-up business by young entrepreneurs, green energy, film/television, among others.