As a law firm in Panama, we have analyzed the pros and cons of the different legal entities that can be created in the country, and we can guide you to the most favorable option for your business idea.
Before diving head into this new adventure, choosing the proper legal structure is essential. This decision will significantly impact your business in the short, medium, and long term.
What is the legal structure of a business?
The business legal structure defines the company’s operation, the taxes it must pay, the distribution of profits, its daily operations, and, most importantly, its ability to grow. It is the skeleton of the company, and it will support all its growth.
The primary forms of business structure in Panama are the General Partnership, the Corporation (S.A.), the Limited Liability Company (LLC), and the Private Interest Foundations, among the main ones.
Panama’s most common legal structures are Corporation, Limited Liability Companies, and Limited Liability Entrepreneurship Companies. Each adapts to different business ideas for micro, small, and medium enterprises.
Corporation (S.A.)
It is a business structure that operates independently of its owners and does not require shareholders, directors, or officers to be residents or citizens of Panama. It offers excellent privacy and flexibility and is easy to set up.
It offers shareholders limited liability in which their personal assets remain protected, given that they only risk the capital they have invested in the company. It is also attractive for multinational businesses because it is not subject to local taxes on income generated outside Panama.
Nevertheless, there are annual costs to maintain the legal structure, including one-time fees and agent fees.
Limited Liability Company (LLC)
It offers its members the same protection as an Corporation (S.A.) but is usually preferred for smaller-scale operations with greater management flexibility and a less complicated tax figure. It is regulated by Law No. 4 of January 9, 2009. The capital will comprise participation quotas. They can be constituted indefinitely.
LLCs avoid double taxation since the income is taxed only once in owners’ tax returns. Another advantage is that the liability of the partners is usually limited to their investment in the company, and partners’ information is in the public domain. The Limited Liability Company can be converted into an Corporation at any moment and vice-versa.
However, they are less scalable due to fewer structuring options for investors, opening commercial bank accounts, and obtaining credit, which can be challenging when you need financing to expand your business.
Limited Liability Entrepreneurship Company
Defined in Law 186 of December 2, 2020, as that which is made up of:
“From two to five natural persons, of legal age, of any nationality, who are
domiciled in the Republic of Panama, may constitute an entrepreneurship company “.
One of its advantages is that the minimum capital required to create it is pretty low compared to other types of companies, US$500. The capital can be increased or reduced by implementing company statute changes.
However, the law clarifies that:
“No natural person who is previously part of an entrepreneurship company may belong to another entrepreneurship company.”
That is, although it does not limit the natural person from belonging to another type of legal entity, each partner can only belong to one (1) Limited Liability Entrepreneurship Company.
They also have income limits depending on the type of business. Microenterprises must be within an annual gross revenue of US$150,000; and small enterprises must be within US$1,000,000. They can be converted into another legal structure if they exceed these amounts.
Which one to choose?
Consider the nature and objectives of your business when evaluating the structure that best suits your company. During this process, value the professional advice of your legal advisors.
Careful consideration is paramount. As a first step, we recommend using your company’s financial projections to visualize its scalability and longevity as a starting point for this decision.
