Simplified Corporations: Commercial and Tax Issues
Through law 1258 of December 2008 Congress made one of the most substantial reforms in colombian commercial law. It created a new and innovative legal figure known as the Simplified Corporation. This new legal institution immediately proved that easy to establish companies, that allow shareholders to determine how their entity will work, was what traditional corporate law in Colombia needed.
To understand the advantages and the characteristics of this innovative figure to their full extent it's important to focus on both the commercial and the tax issues involved in the creation and management of a simplified corporation.
Commercial Issues
When thinking about a corporation, the typical definition that comes to mind is a group of investors sharing an interest with the desire to join forces in order to establish a specific kind of business or develop a certain activity. However, new legal figures around the world, in this case, the simplified corporations have helped in making the word corporation a very vast concept due to the multiple objectives found for the use of such a figure.
The first point to mention when refering to this new legal figure is the possibility it provides of establishing a corporation with only one share holder, whether it's a colombian or foreign person or company. This allows for an easy way to start a new business project or in most cases it's the ideal tool for an international company to expand its operations to Colombian territory.
The forementioned law allows for a private document to contain the bylaws of the company and the express consent of the shareholders as the only requirement needed to establish the company(when property is being provided as an initial investment in the company, a public document suscribed through a notary is mandatory) This can be seen as an important advantage since public notary costs are avoided and legal proceedings are greatly reduced.
As its name clearly states it, the biggest advantage of this type of company is the simplicity of the rules by which it's bound. The shareholders are in charge of determining key aspects of the company that were previously imposed by law. The entities created under this law can enjoy the benefit of organizing their structure according to their needs and as a direct response of the activities for which the company is created. In this matter, the selection of a specific purpose as it was the case before is now optional, increasing the possibility for the company to intervene in different grounds. A board of directors has also, under the new legislation, become an optional governing body for the company. The type of shares available can also be agreed upon by the share holders and these include amongst others, shares with or withouth the right to vote, shares with a fixed dividend for a period of time, or shares for the payment of obligations. The possibility to agree upon all the structural aspects of the corporation allows for a great legal flexibility which enables the investor to adjust the company to the required needs.
Tax Issues
Since the simplified corporation is still a company established under the laws of Colombia, corporate tax treatment for the most part is identical to other forms of corporations available in the country. Therefore, it's subject to income tax, net-worth tax, sales tax, stamp tax and bank debit tax as well as the applicable local taxes as any other company would be. However, a simplified corporation has some important tax issues that can prove very favorable when analizing tax or estate planning.
Considering the influence the new legislation has from the French Simplified Companies and the Limited Liability Companies in the United States, this new kind of Colombian corporation allows share holders to respond to fiscal obligations only up to the amount of their own contribution, providing a limited liability for the share holders and protecting their personal assets.
When considering estate and tax planning, the simplified corporation is definitely an esential tool due to the adaptability of the bylaws to the specific factual situation. As mentioned earlier, the fact that a private document is the only requirement to establish the corporation and considering the flexibility of the bylaws, most tax structures can be easily encompassed through a simplified corporation. Considering the minimum time spent in legal proceedings and that there is no minimum number of share holders needed, these companies have proven to be an important part of any tax or estate planning.
Another very important feature of these type of companies, results from the mergers and splits and the tax treatment Colombian laws have given to these operations. As established by law, the simplified corporations have a special treatment regarding both splits and mergers. In both operations, the share holders of the divided or merged corporations can be entitled to receive money in cash, shares, or any other assests, making it an interesting option when considering tax effects. Another exceptional proceeding is the possibility of an abbreaviated merger. As article 33 of law 1258 states, when a company owns 90% or more of another company, an abreviated merger can take place, with only the consent of the legal representatives or of the board of directors expressed in a private document. Therefore, considering the tax treatment given in Colombia to both splits and mergers, the possibility of making any of these operations in a quick and effective manner, allows for interesting tax planning and for favorable tax effects.
The simplified corporations, due to their important advantages in both the commercial and tax fields will become in the near future, the most established corporation in Colombia, replacing even the most traditional forms of association.
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.
