How to Incorporate in Puerto Rico vs. How to Start a Puerto Rico LLC

A Guide to Choosing the Best Business Entity in Puerto Rico

If you’re ready to start a business in Puerto Rico, the first big decision you’ll make is which business entity is best for your company. The Limited Liability Company (LLC) and corporate entities are the most popular structures within the US states and territories, and have the most desirable elements from all the business entities, such as limited liability protection and flexible tax structuring options. This guide to Puerto Rico LLC formation and incorporation will help you learn about both business structures, down to their basic characteristics. We’ll dig into the details of starting both a Puerto Rico LLC and a Puerto Rico corporation, what to expect with their annual maintenance, and the advantages and disadvantages of the LLC and corporation.

After we’ve figured out which business structure suits your needs best, your next step is hiring Active Filings to get you where you need to be in the quickest amount of time. Our starter package begins at $25 (plus fees). Hire us and you’ll quickly understand why Active Filings is America’s most reliable business incorporation service.

Hire us to form your LLC or Corporation in Puerto Rico!

LLCs vs. Corporations

There are basic characteristics true of all LLCs and corporations that you can generally base your decision on:

  • Maintenance
    With LLCs, you can expect a low amount of maintenance and a user-friendly structure. LLCs will need only minimal paperwork, have flexibility when a decision is needed, and have low annual upkeep. An LLC is your best bet if you have a small to medium-sized business and can only handle a low amount of maintenance. With a corporation, expect a high level of maintenance on both a day-to-day and annual basis. Corporations have more legal formalities than an LLC, like electing a board of directors, holding shareholder meetings, and maintaining internal records such as meeting minutes and stock issuance.
  • Tax Structure
    LLCs are the simpler and less expensive option in terms of time and paperwork for business owners during tax season, since an LLC is not a separate taxable entity from its owners. LLCs are pass-through tax entities, where income and losses pass through the business and onto the members to report on their personal income tax return. Corporations are more advanced for a business owner to take care of during tax season. A standard corporation defaults to a tax structure called a C corporation, and is known for what’s called double taxation, where a business’s net income is taxed initially by a corporate tax, and then taxed again on personal income, after shareholders receive their profits (dividends) and losses. C corporations are typically taxed at a lower rate on profits, and have opportunities for tax deductions such as health care and travel, and can retain its earnings to be reinvested into the company’s growth.
  • Investors
    Forming a corporation is the suitable choice if you will be expanding your business with funds coming mostly from investors. Investors are more comfortable investing their time and funds in a reputable business structure that offers stock, like a corporation. Investors don’t have to worry about complicating their personal taxes when they invest in a corporation, and only get taxed on profits actually distributed to them. Investors view corporations as a dependable business structure that will provide them with a return on their investment. Having a corporate structure will profoundly impact the ability to raise investment money. On the other hand, investors can still invest in an LLC by owning a percentage of that LLC. Owners of LLCs will have to pay taxes on their distributive shares, even if they haven’t received a distribution on those profits, and can’t issue stock, which is a turn-off for many investors. Consider a corporation if you plan to expand your business.
  • Prestige
    Every business starts with its appearance, and having the “LLC” or “Inc” ending on your business name will give it a level of prestige. These endings convey permanence and encourage trust from potential investors or clients, and show that you are serious about your business. While both entities provide a level of prestige, incorporating provides a higher level of prestige for your business, since the corporation is the oldest and most traditional entity type. Keep in mind the LLC has surpassed corporations in popularity in most states, and the prestige of an LLC is continuing to grow.

PR LLCs vs. PR Corporations

After covering the basic characteristics that apply to all corporations and LLCs, next is to discuss the more specific characteristics of what makes a Puerto Rico LLC or Puerto Rico corporation different from other states and territories, bringing us to the final answer on which entity you should choose for your business. Each state and territory has its own unique statutes and tax laws that govern the way its businesses operate, and these unique details must be considered when choosing your business entity.

In this section, we’ll provide specifics for the Puerto Rico LLC and the Puerto Rico corporation.

  • Puerto Rico Corporate Income Tax
    The Puerto Rico corporate tax rate is 37.50% for all C corporations. This rate is comprised of an 18.5% base tax plus a variable graduated surtax. This corporate tax rate seems high, but can often be greatly reduced through the 2012 Tax Incentives Act (Act 20 & Act 22), and a tax professional should be consulted to determine the exact rate you will pay.
  • Puerto Rico Graduated Surtax
    The Puerto Rico graduated surtax is a tax levied in addition to the corporate income tax. This surtax is computed on the “surtax net income,” which is the net taxable income subject to regular tax minus a $25,000 deduction. This can get fairly high in comparison to other territories and states, and should be discussed with a tax professional.

    The graduated surtax rates are as follows:

    • 5% for surtax net income up to $75,000
    • $3,750 plus 15% of surtax net income from $75,001 to $125,000
    • $11,250 plus 16% of surtax net income from $125,001 to $175,000
    • $19,250 plus 17% of surtax net income from $175,001 to $225,000
    • $27,750 plus 18% of surtax net income from $225,001 to $275,000
    • $36,750 plus 19% of surtax net income in excess of $275,000 for a maximum nominal tax rate of nearly 39%

  • Puerto Rico Alternative Minimum Tax
    The Puerto Rico Alternative Minimum Tax (AMT) applies to C corporations at two different rates. If a corporation has a volume of business of $3 million or more, the corporation will be subject to a 23% AMT rate. For corporations with less than $3 million in volume of business, the AMT will be the greater of $500 or 18.5%.
  • No Federal Personal Income Tax in Puerto Rico
    Once you’ve lived in Puerto Rico for the entire tax year, and your only income is from sources inside Puerto Rico, you will not need to file a US federal income tax return. If you source income from outside Puerto Rico, including the US, you will need to file a US federal income tax return.
  • No Worldwide Taxation for Puerto Ricans
    The US is one of the few countries in the world with a worldwide income tax, meaning US citizens must file and pay taxes no matter where in the world they live. Bona fide Puerto Ricans will not have to worry about this taxation.
  • Act 20 & Act 22 – Tax Incentives in Puerto Rico
    Act 20 – Export Services Act: This tax incentive act applies to businesses in Puerto Rico that are engaged in the exportation of services to non-resident individuals and/or foreign entities. Eligible businesses can potentially see the following perks:
    • A 4% maximum tax rate on exportation services income
    • Total exemption on income taxes on dividends or profit distributions
    • A 60% exemption on municipal license taxes
    • A 90% exemption of real estate and property taxes
    • A 20 year tax decree (renewable)
    Act 22 – Individual Investor Act: This tax incentive provides a total exemption from Puerto Rico income taxes on all capital gain and passive income accrued after a business owner becomes a bona fide Puerto Rico resident. These passive income exemptions include Puerto Rican dividend and interest income.
  • Puerto Rico LLC Protection From Creditors
    LLCs in Puerto Rico have a strong level of protection against creditors (a person who is owed funds or assets by a debtor of an LLC). In other states and territories, creditors can have the courts order a foreclosure on the LLC. In Puerto Rico, creditors only have one remedy against the debtor of an LLC, which is a charging order that puts a lien on a debtor’s interest (funds and assets) and creditors then have a right to receive any distributions made to the debtor from the LLC, if the LLC makes a distribution. Often times, this leads to the creditor ending up with nothing, since creditors can’t order the LLC to make distributions (14 L.P.R.A. §3994).

Puerto Rico LLC or Puerto Rico Corporation? Final Answer.
Choosing either an LLC or a corporation as the structure for your company means considering the size of your business, priority of investors, level of maintenance you’ll need, and the most beneficial tax structure for the future of your business.

Starting an LLC in Puerto Rico will be your best bet if you have a small to medium-sized business. LLCs in Puerto Rico stay true to design in terms of easy formation and maintenance, simple management, strong flexibility in decision-making, and limited liability protection. If growing your company large with investors is not your top priorities, you’re looking for the least expensive and sophisticated taxes and annual maintenance, and you’re just needing limited liability protection for your business, form an LLC.

Incorporating in Puerto Rico will be your best bet if you plan to grow your business big with the funds from investors, and you have the means for the amount of maintenance required. a Puerto Rico corporation remains true to character in its substantial amount of paperwork, higher maintenance, and involved yet beneficial tax structure.

How to Incorporate in Puerto Rico

If you’re ready to form a corporation in Puerto Rico, you’ll need to file the Certificate of Incorporation with the Government of Puerto Rico Department of State to make it official. You can download the Certificate of Incorporation PDF online at the Puerto Rico Department of State website. Once your Certificate of Incorporation is approved, your corporation is officially formed.

You can file the Certificate of Incorporation in a few ways:

  • Online at the Puerto Rico Department of State website
  • By postal mail

We recommend filing your Puerto Rico Certificate of Incorporation on the website since it’s the fastest, most secure, and preferred method by the Department of State. The fee for filing your Certificate of Incorporation costs $150. The territory of Puerto Rico processes business formation documents in about 1 business day. You can pay an extra $100 if you would like to guarantee an approval time of 24 hours, or $500 if you need your corporation formed within 2 hours.

To complete your Puerto Rico Certificate of Incorporation, include the following information:

Enter your corporation’s name exactly as you would like it to appear. Your corporation name must include one of the following designations: “Incorporated,” “Corporation,” “Corp,” or “Inc.”

Your corporation name can’t imply it is organized for a purpose other than what is mentioned in the Certificate of Incorporation. The name can’t already be in use, and can’t sound similar to the name of any other company in Puerto Rico.

Enter both the mailing and physical address of the designated office of your corporation.

A resident agent (sometimes referred to as registered agent) is a person or entity who resides in the same state or territory and receives service of process from the government on behalf of a business. List the name of your resident agent here.

A resident agent office is where your company receives service of process from the government on behalf of a business. Enter both the mailing and physical street address of your resident agent office here.

Describe the purpose for creating your corporation. The purpose doesn’t need to be specific, and is best left as a general statement. For example, a business that provides writing services would use a purpose statement such as “To provide writing services and to engage in any other lawful activity for which corporations may be incorporated in Puerto Rico.”

State the class and number of capital stock (common and preferred shares) your corporation is authorized to issue (most corporations start out with between 100 – 1,500). Be sure to include par value (face value) of shares, even if they don’t have par value.

If you have any additional limitations, conditions, or restrictions regarding your stock, list them here.

Enter the name, mailing address, and physical address of the incorporator(s) of this document.

If the incorporators won’t continue involvement after this document is filed, enter the names, mailing addresses, and physical addresses or the persons who will act as directors until official directors are elected at the first meeting.

Check the appropriate box depending on whether you’d like your corporation to be perpetual (continuous), indefinite, or to dissolve on a specific date.

Check the appropriate box depending on if you would like your corporation to become effective on the filing date, or a later date (not more than 90 days from filing date).

Have the incorporator(s) print their name, date, and sign in this section.

If you’d like to receive notifications about this document, enter your email address here.

How to Start an LLC in Puerto Rico

If you’re ready to form an LLC in Puerto Rico, you’ll need to file the Certificate of Formation with the Puerto Rico Department of State to make it official. You can download the Certificate of Formation online at the Department of State website. When your Certificate of Formation is approved, your LLC is officially formed.

You can file the Certificate of Formation in the following ways:

  • Online at the Puerto Rico Department of State website (recommended)
  • By postal mail

We recommend filing your Puerto Rico Certificate of Formation on the website since it’s the fastest, most secure, and preferred method by the Department of State. The fee for filing your Certificate of Formation costs $250. The territory of Puerto Rico processes business formation documents in about 1 business day. You can pay an extra $100 if you would like to guarantee an approval time of 24 hours, or $500 if you need your corporation formed within 2 hours.

To complete the Puerto Rico Certificate of Formation, include the following information:

Enter your LLC name exactly as you would like it to appear. Your company name must include the words “Limited Liability Company,” “L.L.C.” or “LLC.”

Your company name can’t imply it is organized for a purpose other than what is mentioned in the Certificate of Formation. The name can’t already be in use, and can’t sound similar to the name of any other company in Puerto Rico.

Enter both the mailing and physical address of the main office of your LLC.

A resident agent is a person or entity who resides in the state or territory and receives service of process from the government on behalf of a business. List the name of your resident agent here.

Describe the nature or purpose for creating your LLC. The purpose doesn’t need to be specific, and is best left as a general statement. For example, a business that provides writing services would use a purpose statement such as “To provide writing services and to engage in any other lawful activity for which LLCs may be organized in Puerto Rico.”

Enter the name and complete address of the organizer(s) of this document.

If the authorized person(s) won’t continue involvement after this document is filed, enter the names, mailing addresses, and physical addresses or the persons who will act as organizer(s) until official organizers are elected at the first meeting.

Check the appropriate box depending on whether you’d like your LLC to be perpetual (continuous), indefinite, or to dissolve on a specific date.

Check the appropriate box depending on if you would like your LLC to become effective on the filing date, or a later date (not more than 90 days from filing date).

Have the organizer(s) print their name, date, and sign in this section.

If you’d like to receive notifications about this document, enter your email address here.

Puerto Rico Annual Report

To keep your business in good standing with the Puerto Rico Department of State every year, you must take care of a few annual maintenance tasks.

  • File your annual report
  • File your Puerto Rico business tax returns

In this section, we’ll explain the basic instructions and resources you’ll need to help you take care of your tax-related upkeep and annual maintenance.

What is a Puerto Rico annual report?
A Puerto Rico annual report updates or confirms the records for your business, such as officer/member names and addresses or resident agent. This report lets your business remain in good standing with the Department of State. Both LLCs and corporations that do business in Puerto Rico are required to file annual reports with the Puerto Rico Department of State.

How do I file my annual report in Puerto Rico?
Puerto Rico corporations and LLCs need to file their annual reports online at the Department of State website.

How much does it cost to file an annual report in Puerto Rico?
Corporations and LLCs in Puerto Rico pay a $150 fee when filing their annual report each year.

When are Puerto Rico annual reports due?
All Corporations and LLCs in Puerto Rico must file annual reports by April 15 each year.

Puerto Rico Business Taxes

The filings can get complicated and you may need the help of a tax service or CPA to complete these requirements, but regardless of your accounting skills, we’re here to help get you started.

Check out our Puerto Rico Business Tax FAQ below:

What is the Puerto Rico Corporate Income Tax?
The Puerto Rico corporate tax rate is 37.50% for all C corporations. This rate is comprised of an 18.5% base tax plus a variable graduated surtax. This corporate tax rate seems high, but can often be greatly reduced through the 2012 Tax Incentives Act (Act 20 & Act 22), and a tax professional should be consulted to determine the exact rate you will pay.

What is the Puerto Rico Graduated Surtax?
The Puerto Rico graduated surtax is a tax levied in addition to the corporate income tax. This surtax is computed on the “surtax net income,” which is the net taxable income subject to regular tax minus a $25,000 deduction. This can get fairly high in comparison to other territories and states, and should be discussed with a tax professional.

The graduated surtax rates are as follows:

  • 5% for surtax net income up to $75,000
  • $3,750 plus 15% of surtax net income from $75,001 to $125,000
  • $11,250 plus 16% of surtax net income from $125,001 to $175,000
  • $19,250 plus 17% of surtax net income from $175,001 to $225,000
  • $27,750 plus 18% of surtax net income from $225,001 to $275,000
  • $36,750 plus 19% of surtax net income in excess of $275,000 for a maximum nominal tax rate of nearly 39%

What is the Puerto Rico Alternative Minimum Tax?
The Puerto Rico Alternative Minimum Tax (AMT) applies to C corporations at two different rates. If a corporation has a volume of business of $3 million or more, the corporation will be subject to a 23% AMT rate. For corporations with less than $3 million in volume of business, the AMT will be the greater of $500 or 18.5%.

Is there a Personal Income Tax in Puerto Rico?
Once you’ve lived in Puerto Rico for the entire tax year, and your only income is from sources inside Puerto Rico, you will not need to file a US federal income tax return. If you source income from outside Puerto Rico, including the US, you will need to file a US federal income tax return.

What are Act 20 & Act 22?
Act 20 – Export Services Act: This tax incentive act applies to businesses in Puerto Rico that are engaged in the exportation of services to non-resident individuals and/or foreign entities. Eligible businesses can potentially see the following perks:
A 4% maximum tax rate on exportation services income
Total exemption on income taxes on dividends or profit distributions
A 60% exemption on municipal license taxes
A 90% exemption of real estate and property taxes
A 20 year tax decree (renewable)

Act 22 – Individual Investor Act: This tax incentive provides a total exemption from Puerto Rico income taxes on all capital gain and passive income accrued after a business owner becomes a bona fide Puerto Rico resident. These passive income exemptions include Puerto Rican dividend and interest income.

Hire us to form your LLC or Corporation in Puerto Rico!