Incorporating a Company
Establishing a Branch of a Foreign Company
Representative Agents and Distributors
Mercantile Obligations

Any foreign company or individual, regardless of its country of origin, is free to invest, operate, manufacture, provide and/or promote its products or services in El Salvador. By law, El Salvador grants national treatment to foreigners, which means that anyone - whether Salvadorian or foreign - will be treated the same under the law.

The usual ways in which to conduct commercial activities in El Salvador are as follows:

  • legally organize and incorporate a Salvadorian company;

  • establish a branch or agency of a foreign company; or

  • conduct business through representatives or distributors.

Incorporating a Company

Corporations of individuals and stock companies
A corporation of individuals is characterized by the personal attributes of its partners. In contrast, a stock company is characterized by the economic contributions of its shareholders, which are represented in the form of shares.

Fixed capital and variable capital
Under the variable capital regime, a company may increase or decrease the variable percentage of the stock with no formalities other than the authorization of the shareholders or partners meeting. This is not possible in the case of fixed capital companies.

Limited liability partnerships
In limited liability partnerships the partners are liable for the company's obligations to the extent of their individual capital contributions. These contributions are divided into 'quotas' or capital participations, which are never represented by shares.

The commercial name of a limited liability partnership may comprise either the names of one or more of the partners, or any other name so desired. However, this name must be followed by the word 'Limitada' or 'Ltda'. Failure to include this word in the company's name will trigger the partners' several and unlimited liability for the company's responsibilities and obligations.

A limited liability partnership may be formed by at least two and no more than 25 partners. Each partner will have only one quota or capital participation. Should one partner acquire a new quota or make additional capital contributions, the value (and not the number) of its quota will increase.

Mixed liability partnership
This form of company has some partners whose liability is limited and others whose liability is unlimited.

Joint partnerships
In a joint partnership the partners share joint and several unlimited liability with the company.

Stock companies
Limited share partnership
This type of company has at least one partner which has several and unlimited liability for the company's obligations, and one partner which is liable only to the extent of its shareholding. Limited share partnerships are generally governed by the rules applicable to stock companies, although many provisions regarding the limited partnership also apply.

Stock company
The capital stock of a stock company is represented by shares. Shareholders are liable to the extent of their participation in the company's capital stock. This is the most commonly used corporate form in El Salvador for several reasons, including the following:

  • Flexibility - in this type of company the shares may be freely transferred by simple endorsement once they have been fully paid. Any agreement contravening this principle will be null and void. Where shares are not fully paid, they may be transferred with the prior authorization of the administrators (board of directors or sole administrator);

  • Limited responsibility - shareholders are liable for the company's liabilities only to the extent of their shareholdings; and

  • Variation of capital stock - a company incorporated under the variable capital regime may increase or decrease the variable percentage of the stock with no formalities other than the authorization of the shareholders meeting in accordance with the law and the company bylaws. Such variations do not require amendment of the company bylaws.

Stock companies with variable capital
Commercial name

A stock company with variable capital may have its name of preference, followed by the words 'Sociedad Anónima de Capital Variable' or 'SA de CV'. A search must be conducted at the Registry of Commerce in order to confirm the availability of the chosen name.

Business purpose
The corporation must have a defined business purpose, based on the activities which it is to undertake in El Salvador. It is recommended that a broad definition be given, so as not to limit the company's future operations.

The law requires a minimum of two shareholders for incorporation. These may be either legal or natural persons.

A stock company incorporated in El Salvador will have Salvadorian nationality, irrespective of the number of foreign persons who hold shares in the company or form part of its management. Once it has filed with the Registry of Commerce, the company will be subject to Salvadorian law.

The law requires that a term be specified during which the company will conduct its activities. It is recommended that an indefinite term be specified, as this allows the shareholders to dissolve the company at any time should they wish to do so.

Capital stock
The minimum capital stock required to incorporate a company is ESc100,000 (approximately $11,428), of which at least 25% must be paid up at the time of incorporation. The capital will be distributed in shares with a nominal value of ESc10 or multiples thereof. The notary public who issues the deed of incorporation must verify that he has seen a certified cheque against a Salvadorian bank for the total paid amount of the capital stock. The cheque must be issued before the company can be incorporated.

Management of the company will be undertaken either by a board of directors, comprising at least two directors (usually the president and secretary) and their deputies, or by a sole administrator and his/her deputy. While the power to act as the company's legal representative usually rests with the president of the board of directors, it is recommended that both the president and the secretary of the board be given authority to exercise this power, whether jointly or separately. Where a sole administrator is responsible for the company's management, he or she will have the power of legal representation; when he or she is absent, this power will be exercised by his or her deputy. The directors or sole administrator may continue to act in this capacity for between one and five years, with the possibility of re-election at the end of this period.

External auditors
External auditors must be appointed either at the time of incorporation or later through the general shareholders meeting.

Establishing a Branch of a Foreign Company

In order to operate in El Salvador a foreign company must establish a branch through the Registry of Commerce, which will be subject to Salvadorian law. An application must be filed at the Registry of Commerce and the following documents submitted:

  • power of attorney granted in favour of the person who will follow the proceedings on the foreign company's behalf;

  • designation of a legal representative in El Salvador to deal with any issues in relation to the branch;

  • evidence of the foreign company's incorporation and legal existence, duly legalized to be effective in El Salvador;

  • duly legalized copies of the foreign company's articles of association and bylaws, which demonstrate that it has the capacity to establish branches in El Salvador and that its business purpose does not contravene Salvadorian law;

  • a duly legalized resolution of its corporate bodies demonstrating that the decision to establish a branch has been duly authorized;

  • an economic and financial study of the branch's proposed activities. The capital made available to establish the branch in El Salvador must be at least ESc100,000. The financial study must performed by the National Investment Bureau, a division of the Salvadorian Ministry of Economy; and

  • a balance sheet certified by an authorized public accountant which details the capital stock of the branch.

Representative Agents and Distributors

Companies must be vigilant of the protectionist legislation which governs the activities of representative agents and distributors in El Salvador, particularly in cases where one of the contracting parties is foreign. Disputes that arise between the principal and the representative agent or distributor will be resolved by the competent courts at the place of the representative agent's or distributor's domicile.

The parties to such arrangements should always enter into written agreements, as this allows them to define the basis of the relationship and to prevent undesired legal consequences if a conflict arises or if termination of the contract is intended.

Mercantile Obligations

Obligation to renew business permit
The necessary fees must be paid both prior to filing for renewal of a business permit, and within the first three months of each financial year. In the case of a corporation of individuals, renewal should be filed in the month of the individual's birthday, while in the case of commercial entities it should be filed in the month during which the company charter was registered.

Commercial entities and individuals that conduct operations within El Salvador have three months from the end of each financial year in which to submit to the Superintendency of Mercantile Obligations their balance sheets, financial statements, and annexes including technical reports performed by public accountants or external auditors, as the case may be.

Commercial entities are obliged to deliver a list of their representatives, administrators, managers, agents and employees with powers of representation to the Superintendency of Mercantile Obligations. If the commercial entity is a partnership or limited partnership, it must submit this information within three months of the end of the financial year. Stock companies, other limited partnerships and limited liability companies must submit this information within 15 days of publication of the balance sheet in the Official Gazette.

Foreign corporations and their agencies or branches that conduct business within El Salvador must submit to the superintendency the following documentation within the same period:

  • their balance sheet;

  • their annual profit and loss account; and

  • a list of their representatives, administrators, managers, agents and employees with powers of representation.

For further information on this topic please contact Lilian Zelaya at Arias & Muñoz by telephone (+503 2257 0900) or by fax (+503 257 0901) or by email ([email protected]).