A) Legal antecedents to adopt a corporate structure.
1.- General. In <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chile there are legally no one-person companies. Both LLCs and corporations require at least two shareholders or partners, respectively, who may be either individuals or entities, national or foreign.
In Chile there are no legal requirements as to minimum capital. The interests of partners or shareholders, respectively, may be apportioned as provided in the bylaws, without any minimum interest to be held by the minority partner or shareholder. There are likewise no impediments against the partners or shareholders being mutually affiliated companies (e.g. parent and subsidiary).
2.- Limited liability company. An LLC is basically governed by Law 3918, defined as a partnership and limited to 50 partners, based on trust, and therefore intuito personæ. Consequently, the entry or replacement of a partner requires an assignment of rights entailing amendments to the bylaws. So, both this aspect as well as any other amendment to the bylaws must have the unanimous approval or consent of the partners. The requirement for unanimous consent is usually a constraint with regard to divestment when the minority partner has a nominal capacity, since it may hamper the controlling partner's freedom of action in material issues such as early termination, dissolution, contribution of assets or liabilities, merger, assignment of rights, making majority control downright illusory (unless the minority partner is an entity controlled by the majority partner). It is less relevant in administrative matters since they are usually reserved to the majority partner, who exercises management and uses the company name directly or through agents appointed by a notarized instrument.
Besides amendments to the bylaws, an LLC suffers no major hindrances and may make its business purpose very broad, regulate management as best suits its partners' interests, e.g. having the majority partner manage directly or through agents, or entrusting management to both partners jointly, or even having the LLC be managed by a Board of Directors or Trustees as provided in the bylaws.
An LLC need not hold annual partners' meetings nor formal Board of Directors' meetings, if applicable, since it is usually managed directly by a managing partner or the agents appointed by the same.
Capital at an LLC may be established in any amount (no minimum or maximum), and the bylaws may provide for its piecemeal contribution - no contribution need be paid at the time of incorporation.
These companies are incorporated and evidenced by a notarized instrument, an excerpt of which must once be (a) registered in the Commerce Registry of the corporate domicile, and (b) published in the Official Gazette within 60 days from the date of incorporation. Amendments are subject to identical formalities and terms.
3.- Corporation. Private or public corporations are basically and comprehensively governed by Law 18046.
A corporation is a stock company and not a partnership. The identity of the partners is not as relevant as the fact of having made the contributions promised for furthering the business purpose. Consequently, shares may change hands freely without any amendment to the bylaws (although this right may be limited under a shareholders' agreement). Decisions are generally made by majority vote and not necessarily unanimously, even with regard to amendments to the bylaws.
The chief governing body is the shareholders' meeting, to convene at least once every year regularly and on an extraordinary basis whenever called. The regular meeting must examine and approve accounts and balance sheets, appoint the board of directors, appoint the account inspectors or external auditors, as applicable, declare dividends and decide on regular, material issues of the company. A special meeting, however, must make decisions regarding amendments to the bylaws and resolutions on early termination, merger, contribution of assets and liabilities, merger and spin-off of the company, the latter two being subject to a special majority vote
A corporation is managed by the board appointed by the shareholders, which can be removed by the same.
The board at private corporations must be composed of at least three individuals. Directors may be either Chilean or foreign and may reside or be domiciled in Chile or abroad. Resolutions and debates must be adopted or conducted at a duly constituted meeting, of which written minutes must be taken. Directors' duties may not be delegated but the bylaws may contemplate for the existence of alternate directors who are called to act incase the regular director is absent, so that the board may actually convene at the intervals provided in the bylaws.
The board must appoint a manager, who will be the company's regular representative, in whose absence there must be a person at least with sufficient faculties to be agent for service of process and represent the company in litigation.
Two regular account inspectors and two alternates are also required, or else independent accountants, who must report annually to the shareholders' meeting.
These companies are incorporated and evidenced by a notarized instrument, an excerpt of which must once be (a) registered in the Commerce Registry of the corporate domicile, and (b) published in the Official Gazette within 60 days from the date of incorporation. Amendments must be evidenced by a notarized copy of the Minutes of the relevant Special Shareholders' Meeting and are subject to the same formalities and terms as in (a) and (b) above.
4.- Foreign corporation agencies. Corporation Law 18046 provides that for a foreign corporation to establish an agency in Chile, its agent or representative must notarize, in the official language of the country of origin, translated into Spanish if originally in another language, the following documents:
a. The antecedents evidencing that the company is legally incorporated under the laws of the country of origin and a certificate of good standing.
b. Notarized copy of the current bylaws, and
c. A general power-of-attorney granted by the corporation to the agent, evidencing the legal capacity of the principal, clearly and accurately stating that the agent acts in Chile under the direct responsibility of the foreign corporation, with broad authority to engage in acts on its behalf. Usually foreign corporations are reluctant to operate as Agencies because they must grant a broad power-of-attorney to a single individual.
The above notwithstanding, the agent must represent in a notarized instrument on behalf of the foreign corporation, on even date therewith and before the same Notary, the following:
1. Name under which it will do business in Chile;
2. That the company is familiar with Chilean legislation and regulations that will govern the operation, its acts and contracts;
3. That the assets of the foreign corporation are subject to Chilean legislation, particularly to meet the obligations it incurs in Chile;
4. That the company agrees to keep liquid assets in Chile to meet any obligations it incurs in Chile;
5. Actual in-country capital to run its business and the date and manner in which the capital shall be paid into the Chilean agency's treasury;
An excerpt of the agent's representations must be published and recorded within 60 days from the date of the above.
The agent is required to publish the agency's annual balance sheet in a local newspaper within 4 months from the close of the relevant year, which could be unadvisable for your client because of the publicity.
5.- Transformation, merger, spin-off. Chilean law allows a company to undergo transformation by amending the bylaws, maintaining its legal existence. Therefore, an LLC may be transformed into a corporation or vice-versa at any time. Likewise, an agency may be changed into an LLC or corporation. Chilean legislation also allows for LLC and corporate reorganizations such as merger by creation or absorption and spin-off.
These are, in my opinion, the most relevant aspects to decide which company type best fits your needs. I am at your disposal to elaborate further if necessary.
B) Some tax considerations on deciding upon the type of company.
6.- General. The Chilean tax system is basically neutral. LLCs, corporations and agencies are subject to an annual 15% corporate tax levied on net taxable income, determined under the Revenue Law, as evidenced by full, reliable accounting. Additionally, there are personal (complementary or additional) income taxes levied on profits distributed by the company to the partner, shareholder or parent, respectively. In the case of partners, shareholders or parent companies not residing in Chile, i.e. the foreign owner, corporate profit distributions are taxed additionally at 35% minus a credit equivalent to 15% of distributed corporate profits. In other words, personal income taxes recognizes as a credit the corporate tax paid by the company on generating ...
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