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From catering to cruise passengers to operating rum distilleries, Puerto Rican small businesses can form an LLC to protect their owners’ personal assets from liabilities incurred by the business.
FORMING A PUERTO RICAN LLC
- Choosing a Name
Puerto Rico requires one of two corporate designators, or an abbreviation of a designator, in every LLC name. The two designators are “Limited Liability Company” and “Compania de Responsabilidad Limitada.” The name must also be distinguishable from all other domestic and foreign business entities on the Department of State’s records.
- Filing a Certificate of Formation
For an LLC to be registered with the Department of State and legally do business, an authorized person from a Puerto Rico LLC must file a Certificate of Formation. This Certificate, which is available in both English and Spanish, must contain the LLC name and principal office address, the name and address of the registered agent, the purpose of the company, the term of existence of the LLC, the address of the organizer, and when the LLC will be effective. Filing and forming an LLC in Puerto Rico requires a $250 filing fee.
- Drafting an LLCA
Under Puerto Rico law, an LLC uses a limited liability company agreement, or LLCA, to govern the internal affairs and administration of the LLC. This is valid regardless of what it is called, but the law says that they must be written. We recommend a written LLCA that is signed by all members.
- Continuing Compliance
EIN: Employees of an LLC or members in a multi-member LLC will need an EIN for taxes. The LLC is responsible for obtaining this, either through the IRS or an incorporation service.
Annual Fee: Every Puerto Rico LLC owes a $150 annual fee to the Department of State by April 15 of each year.
WHY FORM AN LLC IN PUERTO RICO?
- Advantages of Forming a Puerto Rico LLC
The Act gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses. An LLC’s members can specify a method for allocating profits and losses in an LLC agreement that is greater or lesser than their portion of capital contributions. 14 L.P.R.A. §3982 states: “The profits and losses of an LLC shall be allocated among the members, and among classes or groups of members, in the manner provided in an LLCA.” This gives members contractual flexibility to tailor their income and risks of loss to further their big-picture asset management plans.
In addition, an LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests. Under section 14 L.P.R.A. §3968a, “[a]n LLCA may provide for classes or groups of members having such rights, powers and duties as the LLCA may provide, and may make provision for the future creation of additional classes or groups.” This facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests.
Preventing Unwanted Business Partners
The Puerto Rico LLC Act allows members to protect their control of an LLC. An LLC agreement may prohibit members from assigning their membership interests. But, if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to participate in management or to become a member. Instead, the assignee may receive only the distributions and allocations of profit and loss to which the assignor would have been entitled, and all the non-assigning members must consent to the assignee becoming a member.
Creditors Only Get Passive Rights, Not Control Rights
14 L.P.R.A. §3994 provides that if a judgment creditor of a member obtains a charging order against the member’s interest, “the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled.” That is, a charging order requires the LLC to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor. But the judgment creditor does not have a right to participate in management.
In addition, the Act states that unless an LLC agreement provides otherwise or all members give written consent, a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, files a voluntary petition in bankruptcy, is adjudicated insolvent or bankrupt, or fails to contest a petition seeking his or her reorganization, liquidation, dissolution, or similar relief. These events are considered “events of bankruptcy.”
- Puerto Rico Registered Agent
A Puerto Rico LLC must continuously maintain an agent for service of process in the state. A commercial registered agent service may act as a Puerto Rico registered agent. IncNow’s annual registered agent fee is $199.
Because of the advantages of forming an LLC in Puerto Rico, new LLCs are formed in the state each year. Should you wish to have more flexibility and protection, you may instead form a Delaware LLC, even if you operate in Puerto Rico. What are the advantages of a Delaware LLC? (Delaware LLC Advantages). We can then help you file an application for registration to do business in Puerto Rico with your Delaware LLC (Form Delaware LLC).
- Puerto Rico LLC Act Statutory References
14 L.P.R.A. §3954 14 L.P.R.A. §3968a 14 L.P.R.A. §3982 14 L.P.R.A. §3993 14 L.P.R.A. §3994
Puerto Rico vs. Delaware LLC's: Which State Is Better?
|States||LLC Filing Fee||Required to Name Members or Managers||Report Frequency||Annual Fee?||Reduce Fiduciary Duties?||Series?||Charging Order as Exclusive Remedy||Maximum Freedom of Contract||Separate Equity Court?|