Entity Structures
Most common in Puerto Rico
Sole Proprietorships
Any individual who does not form a corporation, partnership, or limited liability company and conducts business in Puerto Rico is a sole proprietorship. While there are no filing requirements with the Puerto Rico Department of State, the individual is required to obtain a merchant registry certificate with the Puerto Rico Department of Treasury and Employer Identification Number with the IRS if the business has employees. A trade name may be registered with the Department of State for protection. However, there is no liability protection offered to the individual. Income is reported on the individual’s personal income tax return at current individual income tax rates. The individual maximum marginal tax rate is currently 33% in Puerto Rico.
Corporations
Corporations may be organized by one or more individuals or entities under Puerto Rico General Corporations Law. A corporation will offer liability protection and is considered an entity separate from its owners. A Puerto Rico corporation must maintain a designated principal office and agent to serve process in Puerto Rico. The Annual Corporation Report, balance sheet, and fee must be filed and paid electronically by an officer or authorized representative of the corporation by April 15.
If gross revenues exceed ten million dollars, the accompanying corporate balance sheet as of the preceding fiscal year must be audited by a licensed Puerto Rico Certified Public Accountant and submitted with the Annual Corporation Report. A three-month extension is available if the annual fee is paid in full.
A Foreign Corporation must obtain authorization from the Department of State prior to conducting business in Puerto Rico. The corporation is required submit certified copies of the certificate of incorporation and company charter to receive authorization. Annual fees are $150.
Partnerships
A Partnership does not require a formal agreement by two or more persons to be engaged in business for profit. While unincorporated, partnerships are pass through entities for tax purposes.
A Limited Partnership is made up of both managing and limited partners. Managing partners are considered active investors and jointly liable for partnership obligations. Limited partners are passive investors and their liability is limited to partnership contributions.
A General Partnership is made up of one general partner, and limited partners. The general partner is jointly liable, while limited partners are liable up to their contribution to the partnership.
Limited Liability Companies
Limited Liability Companies are organized in the Puerto Rico Department of State and must submit of the articles of organization or operating statement. As with corporations, limited liability companies are required to maintain in Puerto Rico a registered office and a resident agent, who can be an individual or corporation registered or authorized to do business in Puerto Rico. The annual fee is $250.
Limited liability companies are taxed as corporations for income tax purposes. The LLC may file an election to be treated as partnership. If the LLC is treated as a corporation for US or other foreign country income tax purposes, it shall also be treated as such for Puerto Rico income tax purposes.
Nonprofit Organization
A nonprofit entity organized in Puerto Rico is required to file the annual report and an annual Informative Return for Income Tax Exempt Organizations (Form 480.70(OE)).
Religious organizations exempt under Section 1101.01(a) of the Puerto Rico Internal Revenue Code, government owned organizations, and retirement plans are not required to file the annual informative return for income tax exempt organizations.
If a nonprofit entity earns Unrelated Business Income, as defined by the federal tax code, or generates gross receipts above $50,000, and is not a listed exception to the annual filing requirement, it must file Form 990 to the Internal Revenue Service, or Form 990-N if gross receipts are under $50,000.