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?
Corporations have separate legal personality.
(Maximum) period of existence
The is no maximum period of existence. Corporations may have an indefinite period.
Governing document(s)
Corporations are governed by the Articles of Incorporation, Bylaws and Shareholder Agreement.
Liability of incorporators / shareholders
Shareholders of a Corporation are not personally liable for the debts of the Corporation, except to the extent of their capital contributions.
(Governing) bodies
Corporations have a board of directors to manage the day-to-day operations.
Other particularities
Corporations must comply with certain legally imposed requirements such as keeping minutes of the meetings and holding annual meetings, among others.
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 Corporations 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 Corporations 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 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?
A Corporation is incorporated upon filing of Articles of Incorporation with the Puerto Rico Department of State’s online portal. The Department of State will issue the Certificate of Incorporation and the Articles of Incorporation. The filing fee related to the organization of a Corporation is $150.00. An annual report must be filed to maintain the Corporation as a valid existing entity within the jurisdiction. Generally, the annual report has a filing fee of $150.00 due by April 15th of each year.
The incorporation of a Corporation is not subject to a specific waiting period. Everything is done through the Puerto Rico Department of State’s online portal.
A Corporation 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.
A Corporation should also have in place a Shareholders Agreement and Bylaws, which will serve as the ground rules for the management of the Corporation and as rules governing the relationship between shareholders.
The anticipated business or purpose of the Corporation is required to be stated in the Articles of Incorporation.
Minimum number of incorporators / shareholders and residency requirements
Each Corporation 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 Corporation must have at least one (1) director. Currently, 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?
Corporations 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 corporation, a party will need to file the Articles of Incorporation with the Puerto Rico Department of State. The Articles of Incorporation must include the following information:
- name of the entity;
- designated office address and telephone number;
- resident agent’s name, address, email and telephone number;
- nature of the business;
- types of stock, number of authorized shares and par value;
- denomination, faculties, preferences and rights of each class of stock (optional, as it may be fixed through corporate resolutions);
- information related to the incorporator;
- administrators or officers; 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?
A Corporation is managed by a board of directors.
They are responsible for day-to-day management and make all necessary decisions of the Corporation.
How are the members of the executive body appointed, dismissed and replaced?
The members of a board of director are appointed, dismissed and replaced by the shareholders with voting rights.
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 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?
The Act requires having a Board of Directors, which may be composed executive and non-executive directors.
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 shareholders of the Corporation. The Shareholders have voting and distribution rights and may have other preferential rights related to the transfer or issuance of additional shares.
There is no title for a shareholder. The board of directors is responsible of management decisions and day-to-day operations.
What are the majority and quorum requirements for decisions by the shareholders? Can they be varied or changed?
The Bylaws establish what constitutes a majority and a quorum for making decisions. This majority/quorum requirement may be changed by amending the Bylaws.
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 corporations may be required to obtain audited financial statements depending on their volume of business.
What are the periodic accounting obligations incumbent upon the entity? To whom must those accounts be submitted?
The Corporation must file an annual report with the Department of State. In addition, the Corporation will be required to prepare and file a yearly income tax return, volume of business tax return and personal property tax return.
A Corporation may also be required to file monthly sales and use tax returns and quarterly/yearly payroll-related returns.
The Corporation may also be required to issue information returns related to certain 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. A Corporation 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 Bylaws will state the rules relating to the appointment of other officers/secretary/internal auditor or accountants. Usually, this function is reserved to the board of directors who handle day-to-day operations. There are no residency requirements.
What is the title designated for 'ownership interests' (e.g. shares, quota, interests, membership)?
Shares.
Are different classes of ownership interests possible? If so, what are some examples of different classes?
Yes. A Corporation may issue different classes of shares with different rights (i.e. voting, distributions, among others).
What documentation is required for the transfer of ownership interests?
Generally, a Corporate Resolution and the document evidencing the transfer. Once the transfer is complete, the certificate evidencing the shares transferred will be cancelled and a new one will be issued to the new owner. The transfer ledger must be updated accordingly.
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)
Through the issuance of certificates to evidence the amount of shares any shareholder owns. Certificates of shares are not required to be noted in a public registry. The Board of Directors may authorize new shares, but in certain situations approval from the shareholders may be required.
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?
N/A.
Any requirements with respect to share cancellation, share repurchase and other capital reductions
N/A.
Any requirements with respect to distributions to shareholders?
Generally, distributions are made based on the shareholders percentage ownership. However, different classes of shares may include certain preferential provisions. Generally, the Board of Directors is the governing body with the power to authorize distributions.
Can the owners or shareholders adopt a restrictive or governing agreement among themselves such as a Shareholders Agreement?
Yes. A Corporation should adopt a Shareholders 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).
A Corporation 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.
A Corporation 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% for the eligible income. This tax benefit does not reduce applicable federal taxes if the entity has US source income.
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.