Principal Forms

The principal forms of business organization in Colombia are joint stock corporations (sociedades an1/2nimas), used by most medium-sized and large enterprises; limited liability companies (limitadas), used by small enterprises; and branches of foreign companies (sucursales de compaØðas extranjeras). Other types of entities include partnerships with mixed liabilities, sole proprietorships, and consortia and temporary unions. Registration in the mercantile register of joint stock corporations, limited liability companies, and branches is required. Each business must have a legal representative domiciled in Colombia.

Joint stock corporations are the most flexible form of entity, allowing a mixture of foreign and local capital. Limited liability companies are useful as closed companies, but they have disadvantages with respect to the sale and transfer of capital and are usually not the best choice for foreign investors. Most foreigners choose to use joint stock corporations or branches to set up business in Colombia.

Joint Stock Corporations

In Colombia, shareholders are liable up to the amount of their contribution in a joint stock corporation. The joint stock corporation's registered name must be accompanied by the words Sociedad An1/2nima or the letters SA. It cannot be incorporated with fewer than five shareholders.

Management of the joint stock corporation is vested in the general shareholders' assembly, the board of directors, and the legal representative (see 6.12). Each share represents one vote in the general shareholders' assembly.

The joint stock corporation's capital is represented in shares with the same value. Capital is discussed further at 6.10.

Joint stock corporations are authorized to issue securities that represent debt (bonds) and equity (shares). These securities may be sold on a public stock exchange.

Limited Liability Companies

In a limited liability company (Ltda), partners are liable up to the amount of their contributions. The limited liability company's registered name must be accompanied by the word Limitada or the abbreviation Ltda. A limited liability company cannot have more than twenty-five partners.

Management and administration of the limited liability company is vested in the partners' board and the legal representative. The capital of a limited liability company is represented in quotas of the same value (see also 6.10).

Limited liability companies may issue bonds exclusively through a trust company.

Branches of Foreign Companies

A branch, under Colombian law, is a commercial establishment set up by a foreign company in Colombia. The board of directors of the parent company abroad and the parent's legal representative in Colombia are charged with the entity's management and administration.

The home office's responsibility is unlimited. Under Colombian law, there is no minimum requirement for a branch's corporate capital amount.

A branch is generally easier than a company to set up, but this factor should not be the overriding consideration in deciding what type of entity to use. See 9.08 for some tax considerations.

Partnerships with Mixed Liabilities

Partnerships with mixed liabilities are business associations that have two types of partners, which are classified by their respective responsibilities to the business. The first type of partner is the managing partner, who has unlimited responsibility to the business and whose decisions may bind the partnership. The second type of partner is the limited partner, whose responsibility to the business is limited and is akin to that of shareholder.

There are two different structures under which a partnership with mixed liabilities may operate. The choice of structure depends on the type of capital employed. The partnership with mixed liabilities may have share capital; such a partnership is known as a joint stock corporation with mixed liabilities. Alternatively, its capital may be made up of quotas. The regulations applying to limited liability companies also apply to partnerships with mixed liabilities.

Sole Proprietorships

The sole proprietorship was only recently adopted via the Commercial Code reform. This business form may be created by any individual or legal entity that separates a portion of its net assets to undertake a particular commercial activity. A sole proprietorship is considered a legal entity in Colombia once it is registered in the mercantile register.

A sole proprietorship must follow the same regulations as a limited liability company. Its capital is also made up of quotas. Liability of members is limited to what has been contributed or assigned by the individual or legal entity.

Consortia and Temporary Union

Consortia and temporary unions are the forms used by businesses that contract almost exclusively with the state. These forms are governed by Colombian administrative law. They may also be used for private joint ventures, in which case commercial legal norms would apply.

Private and Public Entities

Whether an entity is public or private in Colombia is determined by ownership. An entity that belongs to the state or has shareholder participation larger than that of a private company is considered a public entity.

Special rules, intended to protect an entity's efficiency and resources, apply to public entities. Particular public-sector contracting rules apply, for example, to public bids and other administrative law procedures.

Private entities are understood to be corporate and partnership-related structures, in which the state has minimum participation or none at all.

Formation of a Business

Any of the above-mentioned business forms may be chosen to perform activities in Colombia. However, specific industries, such as public utilities, must use determined structures to guarantee continuity of the service in Colombia.

An investor that decides to incorporate or create any type of business must follow basic legal requirements. For example, a limited liability company is required to have at least two partners, and a joint stock corporation is required to have at least five shareholders. A partner or shareholder may be an individual or a business entity.

It generally takes ten working days to incorporate a business.

This time frame includes filing registration requirements with the appropriate authorities. The formation procedure is usually entrusted to local counsel and professional advisers.

Formation of a business entity involves the preparation of articles of incorporation and bylaws. In general, the articles of incorporation and bylaws must specify the following:

  • The name of the business entity and its domicile
  • The names of its members, unless the business entity is a joint stock corporation
  • The chosen corporate structure
  • The corporate purpose
  • The life span
  • The bylaws must be legalized by a notary public, resulting in a public deed.

The entity's name must indicate its business form, such as joint stock corporation or limited liability company.

Before a name is assigned, a name search must be conducted to make sure that no other business has the same name. The name search is conducted via the mercantile register.

After all these procedures are complied with, the business must be registered at the chamber of commerce. The chamber of commerce maintains a mercantile register of all Colombian businesses and certifies compliance with the necessary requirements of incorporation.

The costs incurred in forming a business are notary public fees and fees for registration in the mercantile register (at the chamber of commerce). The total cost may vary, depending on the size of the capital.

Capital

The capital of a business must also be determined at the moment of incorporation. Different requirements apply depending on the type of entity chosen, but there is no minimum capital requirement to constitute a business.

Joint stock corporations must establish three kinds of capital: authorized capital, subscribed capital, and paid-in capital. The authorized capital is the estimated amount of capital that the joint stock corporation will require in the following years for its activities. The subscribed capital must be one-half of the authorized capital, and the paid-in capital must be one-third of the subscribed capital. These percentages must be complied with at the time of incorporation. The percentages may be increased during the joint stock corporation's life. When subscribed shares are paid for in installments, the term for paying the installments may not exceed one year from the date of subscription.

The capital of a limited liability company is required to be paid in full at the moment of the limited liability company's creation and at any time the capital is increased. The capitalization rules applicable to joint stock corporations do not govern in this case. Capital is represented in quotas with a value stipulated in the bylaws of the company. The assignment of quotas requires reform of the bylaws.

Dividends and Distributions

Dividends, as in other countries, are the most common form of distribution in Colombia. Another kind of distribution is the return of capital (ROC). The ROC is not taxable in Colombia; however, the capital of the business entity must be reduced after the distribution. Prior authorization by the appropriate superintendency is encouraged before an ROC is distributed to protect the rights of the creditors.

Distributions may be made at any time. The board of directors must approve the business's financial statements before any distribution is made.

A business may decide not to distribute its earnings; it may instead leave them in the company. However, accumulated earnings will subject the shareholders (or quotaholders) to a tax liability when a distribution is made.

Commercial regulations require that 10% of net profits be left in the business as a legal reserve until 50% of the subscribed capital is reached. The main purpose of the legal reserve is to shield the business from its creditors. If the business is not financially sound, the reserve may be used for compensating losses, thus saving the business from dissolution.

Management

Management and representation of a business will depend on what is provided in its bylaws. The kind of business form will also dictate how the business is managed. The management of a joint stock corporation is discussed below.

Board of Directors

As in other countries, the board of directors of a Colombian joint stock corporation is in charge of its administration and management. Members of the board of directors are elected by the shareholders for terms determined in the bylaws. The frequency of these elections is also stipulated in the bylaws.

Legal Representative

The general manager is the legal representative of the joint stock corporation. Alternates are also elected, and their names are recorded in the mercantile register, which is administered by the chamber of commerce.

General Shareholders' Assembly

The general shareholders' assembly is another administrative and management body of a joint stock corporation. The law grants the assembly power to approve financial statements and decide the distribution of profits. The assembly takes place at least once a year on a date determined in the joint stock corporation's bylaws. This meeting must occur within the first three months of the financial year and is known as the ordinary meeting. The administrators, the statutory auditors, or the controlling entity may require a special meeting, which may be set on a date different from that of the ordinary meeting.

Decisions must be adopted by a majority (as established by law or in the bylaws, depending on the nature of the decision), according to shareholder participation (voting shares present or represented). Decisions must be reflected in the minutes of the meeting and must be duly signed by the general manager or president of the board of directors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Mario Andrade, Deloitte & Touche, Santafe de Bogota, Colombia on Tel: +57 1 256 1548, Fax: +57 1 256 1557