Formation of Companies in Colombia

Since 1971, the formation of companies in Colombia has been regulated by the Colombian Commerce Code (Decree 410 of 1971). This Code, applies to the incorporation of different types of companies excepting the Simplified Corporation that was created via Law 1258 of 2008.

The Commerce Code allows for the creation of the following types of companies: (i) corporations, (ii) limited liability partnerships, (iii) limited partnership by shares, (iii) limited partnerships, (iv) partnerships, and (v) branches of foreign entities.
 
It must be noted that according with Colombian law the only type of company allowed to be listed in the Colombian stock exchange is the corporation.
 
The incorporation procedure applicable to all entities regulated by the Commerce Code is the same. It involves the execution of a public deed that contains the bylaws of the company. Once such a public deed is executed it must be registered with the Chamber of Commerce in the municipality where the company is going to have its principle place of business.
 
The Colombian Commerce Code provides specific rules applicable to the structure of each type of entity. The regulation set forth by the Code includes strict rules that only allow companies to establish their structure in accordance with the corresponding type of entity.
 
The Code also includes strict rules requiring the payment of part or all of the company’s capital, depending on the type of entity, at the time of its incorporation. For example, in the case of corporations it is required to pay at least one third of the subscribed shares at the time of incorporation and the remaining amount within the following year. In the case of limited liability partnerships and branches of foreign entities, all the capital must be paid at the time of incorporation.
 
Another aspect to note is that all the types of entities regulated under the Commerce Code require a plural number of shareholders or partners. These rules made the Colombian regime a formal one where investors did not have many options to structure their vehicles in accordance with their corporate culture and business plan.
 
With the opening of the Colombian markets to foreign investment and international trade in 1991, the corporate regime started to feel pressure to allow some flexibility. With the issuance of Law 222 of 1995 the evolution into a more modern regulation of corporate law was begun.
 
Yet, despite some updates to corporate regulations, the rules for company formations were not fundamentally altered. This started to change in 2006 with the approval of Law 1014 that allowed small and medium businesses to incorporate without the need of executing a public deed.
 
This approach was reiterated in 2008 with the approval of Law 1258 that provided different requirements from those established in the Commerce Code. This law though is only applicable to the incorporation of Simplified Corporations.
 
Although Colombia’s ranking in the World Bank Doing Business Report on starting new businesses (incorporating a new company) has improved in the last years, the 2016 Report ranked Colombia 61 out of over 190 economies. These reports prompted the Colombian government to promote measures to simplify and expedite the process of incorporating companies.
 
As mentioned above, one of the measures taken in this sense was the issuance of Law 1258 of 2008 that created the Simplified Corporation (S.A.S. for its Spanish acronym). The procedure set forth by this law to incorporate a S.A.S. was an innovation as the law provides different rules than the formal procedure established in the Commerce Code.
 
Law 1258 created the possibility to avoid many of the procedures that make the process of establishing any other type of company a longer and more costly process. The benefits of an S.A.S. are that: (i) S.A.S. companies allow single shareholders, (ii) its incorporation does not require the execution of a public deed, (iii) shareholders may establish the corporate structure as they deem appropriate, (iv) the shareholder may freely agree to the terms on which the capital of the company is going to be paid within a maximum of two years and (v) there are less restrictions on the shareholders’ agreements enforceable against the company.
 
The S.A.S. has become so popular that almost every type of entity being incorporated since the issuance of Law 1258 of 2008 is one of them. Yet, there are some benefits to the other types of companies included in the Commerce Code that should be protected by regulators. Among these benefits we find the protection of minority shareholders, the establishment of legal reserves and special majority requirements for some decisions in general meetings.
 
This being so, it appears that the next step in the evolution of the Colombian regime on formations of companies should be to extend some of the advantages applicable to S.A.S. companies to the other types of entities. The Colombian Superintendence of Companies has promoted the elimination of the formalities required for the incorporation of companies regulated under the Commerce Code.
 
Among the suggestions made by the Superintendence, we find the elimination of the requirement to execute public deeds as part of the incorporation proceeding. Unfortunately, the reforms that have been proposed so far have yet to be approved by the Colombian Congress.
 
At this stage the reforms continue to generate great discussion in academic circles and among practitioners. It is necessary to update the corporate law and in particular the rules regarding company formations in order to maintain viable the different types of entities. Otherwise, the Simplified Corporations will continue to be the primary model of choice.

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