Starting a Business in Colombia: Preliminary Considerations PART 2
The following is intended to complement our video tutorial “Starting a Business in Colombia 101: Preliminary Considerations.” Anyone planning to start a business in Colombia should review all the videos and articles in this series prior to starting this process.
This article is a follow up to Starting a Business in Colombia: Preliminary Considerations PART 1, which outlines key considerations foreign investors should keep in mind before starting a local business in Colombia.
One of the most important decisions foreign investors will need to make is how to structure their business in Colombia. Below are three main options available to foreign investors:
- Local Subsidiary: Most foreign investors structure their Colombian businesses as local subsidiaries. This usually means that their main operating company outside of Colombia will own all or a majority of the ownership interests in the local business entity. This structure has several advantages including, but not limited to:
- Liability Buffer: Most local civil liability risks will be limited to the local Colombia subsidiary. This includes potential employment liability claims which tend to be the most frequent and expensive for companies operating in Colombia.
- Tax Efficiency: Local corporate tax obligations are limited to the local Colombian subsidiary.
- Corporate Governance Efficiency: Decision-making is managed locally while allowing corporate parent to maintain control. This is not the case in other ownership structures including in structures involving Branch Offices where action by the corporate parent is required whenever a decision is taken by the Colombian subsidiary.
- Direct Ownership: Some foreign investors choose to own a local business entity directly, bypassing the need for corporate ownership. This means that these foreign investors prefer to personally own all or a majority of the ownership interests of the local business entity. Foreign investors may choose this structure because they (i) are budget-conscious; (ii) are being consistent with an overall tax strategy; (iii) prefer to maintain direct, personal control over the local business; or (iv) prioritize receiving a Company Owner Visa in connection with their personal investment.
Foreign investors should choose a local subsidiary structure unless there is a good reason not to. For example, having a foreign entity own a local brick and mortar businesses (i.e., bars, restaurants, local hostels) may be clunky so individual ownership may be the way to go.
Unlike in other countries, the title of “legal representative” is crucial in a Colombian company. A Legal Representative will have complete access to the company’s books and bank accounts and will be able to bind the company when signing legal agreements. Keep in mind that the Legal Representative should be someone who is based in Colombia because they will need to sign documentation on a regular basis. This is why many foreign investors will retain a “primary” legal representation title while granting “supplementary” legal representation status to a local office manager or partner that they trust. In addition, make sure that your local Legal Representative has a local national ID card (“cédula”) so they can manage your local corporate bank accounts.
Choose a Legal Representative that you can trust. If you don’t have any good local options consider designating your local attorney as your legal representative.
LEGAL REPRESENTATIVES: RISK MANAGEMENT
Legal Representatives can sometimes generate certain risks for foreign investors precisely because they are so indispensable. These risks range from a disgruntled Legal Representative using their position as leverage against foreign owners in business disputes to actual fraudulent activity.
For this reason, foreign investors should seriously consider implementing any number of risk-management strategies in order to minimize any potential issues. These include:
- Corporate Restrictions: Foreign investors can build in specific restrictions in corporate documentation that limits the Legal Representative’s ability to act without the express, written approval of the board of directors, shareholders and/or specific company officers. This can include things like limiting the type of legal agreements Legal Representatives can sign on behalf of the local company or even assigning a maximum monetary value to legal agreements that Legal Representatives can actually sign.
- Banking Restrictions: Foreign investors can also place specific restrictions on the type of access Legal Representatives can have to company financial accounts.
- Employment Agreements: Foreign investors should also include specific restrictions in any employment agreement signed by their local Legal Representatives to ensure compliance with company policies.
- Supplementary Legal Representative: Many foreign investors will direct their local attorneys to serve as “supplementary” Legal Representatives in order to limit any risk posed by their existing, “primary” Legal Representatives.
Keep in mind that certain industries in Colombia receive additional regulatory scrutiny by local authorities. Companies that focus on mining, any aspect of the cryptocurrency/blockchain business as well as those that are involved in the manufacture of CBD products and/or cannabis cultivation can face significant headwinds establishing a local business and registering a local corporate bank account. Foreign investors planning to expand into these industries should consult with our Firm in order to evaluate viable expansion strategies applicable to their businesses.
COMPANY OWNER VISA
If a foreign investor plans to apply for a Company Owner Visa based on their personal investment in the local S.A.S. entity, they will need to ensure that the value of the company’s paid-in capital meets or exceeds the standard threshold of 100 times the local minimum wage prior to applying for a visa. Most foreign investors will register a company with the requisite value from the start, though they could register a company at a lower value and eventually increase the value before actually applying for a visa.