Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

RETAIL OPERATIONS NEED TO UNDERSTAND THE CLOSING LAW TO AVOID STIFF FINES

Puerto Rico’s ‘Closing law’ requires retail commercial establishments to remain closed during certain hours and days. In the case of Sundays,  an establishment may only open for business from 11:00 a.m. to 5:00 p.m. There are exceptions depending on the type of store involved, the nature of the goods sold and the number of employees.

Besides civil and criminal penalties for requiring employees to work on Sundays, a commercial establishment risks severe penalties for selling merchandise outside the allowed hours of operation.   The Department of Justice of Puerto Rico investigates and files administrative complaints against commercial establishments that fail to abide by the opening/closing schedule. 

The charges are filed before the Department of Consumer Affairs (DACO) which ultimately decides the applicable fines. The fines can later be appealed in a court of law.

Penalties are stiff- up to for $50,000 for each violation. Here are some real-life examples (some of which were later revoked):

• ELA v. Frigorifico, 2001 JTS 125: A supermarket  operation received a      $50,000.00 fine.
• Supermercado Selectos de Venus Gardens: A supermarket fined $15,000 by DACO.
• Supermercado Jardines de Caparra, 2002 JTS 103:  DACO issued a $10,000 fine to the merchant.
• Servicentro v Justicia,  PR Court of Appeals, KPE01-0823 (907): A gas station franchisee was facing  over $50,000 in fines.
• DACO v. CM Cash and Carry,2002 TCA 1574: Supermarket  sold a pack of lightbulbs to an undercover agent from the Justice Department and later was fined $5,000. When IT refused to pay, DACO obtained a court order  against the owner for criminal contempt.
• E.L.A. v. Diaz Arocho, 2000 TCA 839: In 1999 a business was fined $20,000 for violations that had occurred in 1994.
• ELA v. Farmacia La Nueva Modelo De Bayamón, 2000 TCA 1662: A pharmacy was fined $10,500 for selling to  an undercover agent three items (on Sundays before 11:00 a.m.)  totaling $6.47.
• ELA v. Fairview Service Station, Inc., 2001 TCA 486: A circle K franchisee was fined 9,500 for selling merchandize to an undercover investigator totaling .94 cents.
• ELA v. Royal Motors Corp,  98 TCA 343: Car dealer fined  $5,000 for opening on a holiday.
• ELA v. Caguas Expressway Motors, 2000 TCA 1582: Car dealership fined $10,000 for opening before 11:00 a.m. on Sundays.

The biggest danger I see for commercial establishments is that the Justice Department takes a long time to complete the complaint process.  It may gather evidence in the course of several years and then simultaneously file a dozen charges which could ultimately cripple a small business. The case also moves at a slow pace in  DACO; often taking more than a year to adjudicate a complaint.

WHEN BUYING A BUSINESS IN PUERTO RICO PAY ATTENTION TO SENIORITY ISSUES

From a labor/employment standpoint, anyone considering acquiring a business in Puerto Rico needs to take into account the "Transfer of Going business" clause under Wrongful Discharge Act No. 80 of May 30, 1976.

When a business changes ownership, the employees that remain with the new owners will be credited with the seniority they accrued under the previous owner (plus the seniority they accrue under you). This is important because under Act 80, a business must indemnify an employee who is discharged without cause and; the actual indemnity will vary depending on the years of employment. 

Under the Act every employee contracted without a fixed term, who is discharged without good cause shall be entitled to receive:

(a) The salary corresponding to two (2) months, as indemnity, if he/she is discharged within the first five (5) years of service; the salary corresponding to three (3) months if he/she is discharged after five (5) years and up to fifteen (15) years of service; the salary corresponding to six (6) months if he/she is discharged after fifteen (15) years of service.

(b) An additional progressive compensation equal to one (1) week for each year of service if he/she is discharged within the first five (5) years of employment; two(2) weeks  for each year of service between five (5) and fifteen (15) years of service and; three (3) weeks for each year of service after completing fifteen (15) years of service.

The purchaser is not obligated to keep the employees. Under the law, if the acquirer decides not to commence operations with the services of all or any of the employees and hence does not become their employer, the former employer shall be liable for the compensation provided under the Act;  “and the purchaser shall retain the corresponding amount from the selling price stipulated with respect to the business.” In case the purchaser opts to continue with the workers and later discharges them without good cause it  shall be liable for severance payment under the  Act.

While the final decision on the fate of the employees is often a point of negotiation between the parties, knowing the actual liability will help the purchaser decides the best course of action.

CLOSE CORPORATIONS IN PR CAN HAVE 75 SHAREHOLDERS

Act 276 of December 2, 2006 amended Puerto Rico's Internal Revenue Code to increase the number of allowed shareholders in a  close corporations electing special tax through provisions -  from 35 to 75.

EIGHT STEPS TO COMPLETE BEFORE OPENING UP FOR BUSINESS

If you are planning to open a business in Puerto Rico here are  eight  steps that you must follow to be in compliance.

1. Decide and create the type of legal structure  (corporation, proprietorship, limited liability corporation, partnership).
2. Register the company with the Puerto Rico Department of State. The Department issues an identification number and a certificate.
3. Apply for an employer identification number (EIN) with the  U.S. Internal Revenue Service.
   
4. Obtain occupancy permit from ARPE (requires several endorsements). This is assuming you are moving to an office building. Construction is more complicated. It requires the developer to obtain a  land use permit followed by a building permit.
5. Apply for a municipal business license (patente municipal). This is channeled through the appropriate county or municipality.Businesses are generally taxed up to .5% of the yearly gross receipts. Financial businesses pay more.
6. File with the Registry of Merchants and Business, the Commercial Development Administration and the Treasury Department (Hacienda). The law requires all persons or entities doing business in Puerto Rico (or are planning to do so) to register their activity with the Secretary of the Treasury. The registry will be the official record of a business in the Department. Merchants must fill form SC 2914 known as the Application for Merchant's Registration Certificate and Exemption Certificate.
7. If you will have employees, request unemployment and disability account numbers from the local Department of Labor (Departamento del Trabajo y Recursos Humanos).
8. Obtain a workers' compensation insurance policy for your employees with the State Insurance Fund Corporation (Corporacion del Fondo del Seguro del Estado (CFSE).

Incorporation Forms

The other day I rushed to file an LLC and was surprised to learn that If I wanted it effective  the same day, I had to pay $100.00 above the regular $50.00 filing fee. Otherwise  there was an approximate two-week delay.   It made no sense because anyone can file and activate  a  regular or closed corporation  the same day for the regular $110.00 fee. Anyway, if you are planning to open an LLC be aware of this administrative detail.   Also, as of now there is no online filing so  filing is done  by mail or in person. 

If you are planning to open a Stock Corporation in Puerto Rico, here is the form you need to complete and file  in the   Puerto Rico's State Department: Download Cert_Incorp_Acciones.pdf . If it's a closed corporation the form is this one:  Download Cert_Incorp_Intima.pdf . Limited Liability Corporations use a different form:   Download crl_certificado_organizacion.pdf.  If on the other hand you are foreign corporation and want file for authorization to do business in Puerto Rico, here is  the Certificate of Authorization to Do Business in Puerto Rico: Download Cert_Foranea.pdf.  Annual reports are completed in this form: Download informe_anual_de_corporaciones.pdf.   Additional forms can be found in the  Corporations Division of the State Department .

In all cases fees apply; check the appropriate form.

Restrictions on Social Security Number Use Now Extended to Employers

I had reported earlier that the government of Puerto Rico had enacted legislation on September 1, 2006  banning all educational institutions from using the Social Security as an identification number. A similar law was enacted on September 27, 2006- Act No. 207- covering   private employers (and public corporations).  It prohibits the use  social security numbers in identification cards, routine documents or other  documents of general circulation.  The Department of Labor is charged with enforcing this law.

An earlier law, Act, No. 187 enacted on September 1, 2006,  imposes similar requirements on entities that do business with the government or receive funds or donations.

Similarly, laws governing the purchase of property in PR eliminated the requirement to include in the deed of purchase the social security number of the parties to the agreement.

7% Withholding for Services Rendered

In Puerto Rico, people or entities  engaged in trade or business must withhold 7% from every payment made for services rendered in connection with their trade or business.  It is not an additional tax.  Rather, it is advanced payment of income tax that the taxpayer being retained may later claim as a credit in his/her tax return. No withholding needs to be done when the payment is for a personal non-business activity.

Certain payments are excluded from the withholding requirements.   These include: the first $1,500 paid, payments to hospitals and clinics that offer hospitalization services, payments to non-profit organizations, payments to contractors or subcontractors for construction projects (excluding engineering, architectural and design services), commissions paid to direct sellers for the sale of consumer products.

Certain payments to partners by a partnerships are also subject to 7 % withholding.

Corporations and partnerships  that do not owe taxes and have filed all required income tax returns can request a  Waiver Certificate. This document grants a waiver from withholding.  The waiver can be partial (3% withholding) in the case of corporations or partnerships or total in the case of the first three years of rendering services by individuals, corporations and partnerships.

The withholding agent must deposit the amounts withheld with the Secretary of the Treasury no later than the 10th day of the month following the month in which the withholding was made. Deposits must be made with Form 480.9A- a payment voucher.

An annual informative return covering payments and withholdings for the previous year  must be filed no later than February 28 of the following year.  This return is filed using the Informative Return- Income Subject to Withholding, Form 480.6B and Form 480.5, Summary of  the Informative Returns.   Form 4806A is used to include payments of compensation for services rendered not subject to the 7% withholding.

The New Merchant Registry

Puerto Rico's Act 117 of July 4, 2006 requires  all persons or entities doing business in Puerto Rico (or are planning to do so)  to register their activity with the Secretary of the Treasury. The registry identifies them as resellers or manufacturers and will  be the official record of a business in the Department.  Merchants must fill form SC 2914 known as the Application for  Merchant's Registration Certificate and Exemption Certificate: AS 2914.1.pdf (application/pdf Object).  The form can be filed via fax or on-line going to the Department's website- Departamento de Hacienda de Puerto Rico.  Current merchants must file the application before October 16, 2006 and those planning to do business must file the application at least 30 days before commencing operations.

Businesses shutting down  must notify the Secretary of the Treasury by filling the same form and marking the box labeled 'Amended'  (upper right hand) and selecting the - cease of operations box on Part 1, line 1 of the form. 

Foreign businesses must include with the Application, the corresponding authorization to do business issued by the State Department.

Once the Secretary of the Treasury approves the Application, it issues a Merchant's  Registration Certificate.  The Certificate will be the authorization for the merchant to do business in Puerto Rico.  They are not transferable.

Four  types of Certificates are issued Merchant, Exhibitor, Mobile (such as a street vendor) and Temporary  (operating for six months or less). Exhibitors and temporaries must provide the dates commencing and ending operations.

Merchants whose Certificate identify them as withholding agents must retain, declare and pay sales tax.  This duty also includes filing a monthly sales tax return.

The law imposes stiff fines for providing false information in the Application ($5,000), for  operating a business without a Certificate ($10,000) and for not making the Certificate visible to the general public ($1,000).

New Corporate Online Services

Puerto Rico's  Department of State is entrusted with administering the public register of all private legal organizations in the Island.

Among its  services, the Deparment has enabled certain online services.  Two key features are online forms (in both English and Spanish) on pdf files and  to ease the filing process of corporate paperwork and a search page that enables anyone to find whether a particular name or corporation is registered.  The current link to said page is:
www.estado.gobierno.pr/formularios_Corporaciones.htm

The search page is located at: www.estado.gobierno.pr/CorpOnLine/CorpOnLine.aspx.

The online forms are simple and straighforward.  They are an excellent low cost alternative to  tailor made paperwork. These include Articles of Incorporations for regular and close corporations, professional services corporations, LLCs, register of foreign corporations, annual reports and many other forms.   

TYPES OF BUSINESS ORGANIZATIONS IN PUERTO RICO

In Puerto Rico businesses can operate under several legal arrangements.  The most common ones are sole proprietorships and corporations.

Ways of incorporating may include  regular or closed corporations, limited liability corporations (L.L.C.) and professional services corporation (P.S.C.). This last one being exclusively for businesses that provide professional services such as doctors and lawyers.

For small or  family owned businesses, closed corporations offer several advantages over a traditional corporation including legal provisions that allow shareholders to remain shielded from personal liability even though they fail to follow all corporate formalities. Also, these corporations may operate without a board of directors and a single officer may hold multiple offices.

Certain closed and professional corporations and  may elect to qualify  as individual  or 'N Corporations;  a tax treatment similar to Subchapter S corporations.

Besides corporations, businesses may organize in partnerships including limited liability partnerships (L.L.P.) and special partnerships.