Estrella Legal Insight – Choosing an “INC” or “LLC” For Your New Business
Choosing An “INC” or “LLC” For Your New Business In Puerto Rico
Entrepreneurs eyeing Puerto Rico for business opportunities must navigate its unique blend of U.S. and local laws. Critical to this process is choosing the right business structure, with LLCs and traditional corporations being popular options. The choice between an INC (corporation) and an LLC (limited liability company) depends on different factors like taxation, regulatory compliance, and management structure.
Both structures provide protection to the entrepreneurs’ personal assets and limit the personal exposure for the liabilities, debts, and obligations of the business. An LLC, or “Compañía de Responsabilidad Limitada” (CRL) in Puerto Rico, offers a mix of partnership flexibility and corporate liability protection. It’s favored for its simplicity, operational flexibility, and option of pass-through taxation.
Conversely, a traditional corporation, or “Corporación,” appeals to those seeking investment, offering a familiar structure with a board of directors, shareholder meetings, and potential for stock issuance. They face double taxation, with both the corporation and shareholders being taxed.
When deciding between an INC and an LLC for your new business, consider these four main issues:
1.Taxation:
LLCs, if selected, can benefit from pass-through taxation, meaning the business itself does not pay taxes. Instead, profits and losses “pass through” to the owners’ personal tax returns, where they are taxed at individual income tax rates. This can be advantageous for small businesses and startups, as it avoids double taxation. Corporations (INC) are subject to corporate income tax on their profits. Additionally, if dividends are distributed to shareholders, they are taxed again at the individual level, leading to potential double taxation.
2. Ownership and Management Structure:
LLCs and corporations have different management structures where LLCs allow for more flexibility in ownership and management arrangements compared to Corporations. LLCs are managed by members or designated managers with ownership interests distributed unevenly. This flexibility enables customized management structures to fit the business and owners’ needs. With no formal requirements for a governing board with structured meetings this easiness allows the owners to focus on growing their business.
In contrast, corporations have a stricter management setup. They are usually governed by a board of directors elected by shareholders, who make key decisions and appoint officers for daily operations. This hierarchical arrangement may be favored by businesses looking for a traditional corporate governance model.
3. Regulatory Filings and Costs:
Corporations are required to file annual reports with the Puerto Rico State Department. LLC’s only need to pay an annual fee. The filing for the annual report or annual fee is currently $150. Compliance for a traditional corporation is more complex due to more regulatory requirements, such as holding regular meetings, maintaining detailed records, and filing financial results including audited financial statements if business volume exceeds $3 million dollars annually. This requirement of financial reports requires the services of a certified public accountant incurring additional fees. Also, in Puerto Rico, the annual report filed by an INC is publicly available including financial information. This is an important consideration for some businesses to select an LLC and not have their information public.
4. Investor Attraction:
Corporations are often preferred by investors due to their well-defined governance structure, transferability of shares, and established regulatory framework. On the other hand, some investors may prefer LLCs for their flexibility in management, tax treatment, and distribution of profits. LLCs can offer more direct involvement in decision-making processes and potentially more favorable tax treatment compared to corporations.
Deciding between an LLC and a traditional corporation in Puerto Rico involves considering several factors, including the nature of the business, taxation preferences, and regulatory compliance. Both entities offer distinct advantages, each business’ unique circumstances will influence the decision, so it’s essential to consult with legal and financial professionals to make the best choice for your specific situation.
Our Commercial and Corporate Practice at Estrella LLC can assist you in evaluating and selecting the best corporate structure to position your business for successful growth.
For more information, please contact us at corporate@estrellallc.com.