How to Start a Business in Puerto Rico

If you don’t register with the Department of State and simply start selling a product or service—such as homemade jam or tap-dancing lessons—then congratulations, you own a sole proprietorship. If you let a friend or two join in, then you have a general partnership. This is all well and good, but if your business gets sued, a sole proprietorship or general partnership has no liability protection. This means that when someone sues your business, they’re suing you personally. And you risk losing personal assets, like your life savings, car, or house.

If you want to protect yourself from personal liability, you need to make your business its own entity. An entity is just something that has its own separate existence. A business entity is considered legally separate from the people who own it, which means it has separate liability. The most common business entity types with limited liability are LLCs and corporations.

Puerto Rico Limited Liability Company (LLC)

LLCs are a popular entity type among small business owners because of their flexibility. They have multiple options for how they can be managed, structured, and taxed. They also have strong liability protection. To start a Puerto Rico LLC, you’ll need to file a Certificate of Formation with the Department of State.

Puerto Rico Corporation

Corporations have been around longer than LLCs and have a more rigid structure. Shareholders appoint the board of directors, and directors elect officers who run the corporation. Because of their longer history and stricter rules, investors are often more likely to trust their money with corporations than LLCs. To form a Puerto Rico corporation, you’ll file a Certificate of Incorporation with the Puerto Rico Department of State.

Easy, right? Not exactly. There are some rules you’ll need to consider before you choose your business name. First of all, if you’re a sole proprietor, by law, your legal name is your business name. Sole proprietors and general partnerships that want to give their business a creative name need to file a “doing business as” name (DBA).

If you’re starting an LLC or corporation, consult Puerto Rico’s naming laws before forming your business. Basically, your business name must:

• Contain a word or abbreviation that identifies the business entity type, such as “LLC” for limited liability companies or “corp.” or “inc.” for corporations.
• Be distinct from any other Puerto Rico business name.

Find out if your desired name is available in Puerto Rico using the Puerto Rico DOS Corporations Search.

Sole proprietors and general partnerships don’t need to file formation documents with the Department of State.

However, LLCs and corporations need to file paperwork with the state in order to be legally recognized as distinct business entities.

• To start a Puerto Rico LLC, file the Puerto Rico Certificate of Formation.
• To create a Puerto Rico corporation, file the Puerto Rico Articles of Incorporation.

On these forms, you’ll need to name a Puerto Rico registered agent to accept legal mail on your business’s behalf. You can submit these forms to the Puerto Rico Department of State online, by mail, or in person.

Note: The information you put on these forms will become part of a public business database. That means that if you share your name and address here, anyone will be able to access that information online.

Your internal documents will be kept on record at your business and do not need to be submitted to the Puerto Rico Department of State, but they are just as important as the paperwork you file with the government. Even though these records are internal, you will probably need to share them with third parties, such as your bank, potential investors, and—if you ever face a lawsuit—a court.

Here are the most important internal documents that LLCs and corporations need:

Puerto Rico LLC Operating Agreement

For LLCs, your operating agreement is the document that lays out the rules and procedures your business will follow. Your operating agreement should cover everything from when you’ll hold meetings, how voting works, what percentage of ownership each member has, and even how you’ll handle things if the business dissolves.

Puerto Rico Corporate Bylaws

Corporate bylaws are the internal policies of a corporation. They should specify how directors and officers will be appointed, how shares will be distributed, and how you’ll handle conflicts of interest, among other things. Unlike most US jurisdictions, Puerto Rico law doesn’t specifically require corporations to have bylaws, but adopting bylaws is standard practice for corporations.

Operating agreements and bylaws are dense legal documents that need to hold up to scrutiny, so you should make sure to get yours right. You can use our Puerto Rico operating agreement or Puerto Rico corporate bylaws templates as a starting point. These templates were drafted by our attorney specifically for Puerto Rico businesses.

Starting a nonprofit? Learn all about Puerto Rico nonprofit bylaws.

According to the PR Department of Economic Development and Commerce, anyone doing business in Puerto Rico—including sole proprietors—must obtain a Merchant’s Registry Certificate from the PR Treasury Department. There are other licenses and permits many Puerto Rico businesses also need.

Merchant’s Registry Certificate

This certificate is similar to a state business license. If you have a storefront or office that is open to customers, you must display this certificate publicly so that the public knows that you’re legally compliant. To get this certificate, you must submit an Application for Merchant’s Registration Certification to the Puerto Rico Treasury Department at least 30 days before you start doing business. There is no fee to submit this application.

Permiso Unico (Single Use Permit)

The Single Use Permit combines multiple business permits into a single permit: Use Permit, Fire Prevention Certificate, Sanitary License, and the Categorical Exclusion. You will need a Single Use Permit before you can apply for the patente municipal.

Patente Municipal (Municipal tax license)

Puerto Rico businesses need to apply for a municipal tax license within thirty days of starting business operations in Puerto Rico. This license allows the municipality to tax your business.

Internal Revenue License

Businesses that plan to sell certain regulated products, such as cigarettes, gasoline, vehicles, and firearms, need to obtain an Internal Revenue License from the Puerto Rico Treasury Department before they begin operations.

Professional Business Licenses

Certain professions—such as medicine, law, and engineering—require a specialized license before they can start doing business. You need to apply for your professional license from the board that oversees your industry in Puerto Rico.

Learn more about How to Get a Business License.

The liability protection you get from forming an LLC or corporation is only as strong as the separation between you and your business. At a minimum, you’ll need to open a bank account for your business. And if you’re going to hire employees, you’ll need to tackle payroll, too.

Open a Business Bank Account

To keep your business spending separate from your personal spending, you’ll need to open a business bank account. If you don’t, a court could find that your business is not actually separate from you, the owner, under the Alter Ego Doctrine. Also known as piercing the corporate veil, this is the outcome when a judge finds that a company is not a separate entity but rather an alter ego of the owner. If this ever happens, you could lose your limited liability status.

Opening a business bank account as a sole proprietor is important, too. Though sole proprietors and general partnerships have no limited liability status to protect, both will benefit from organizing their business finances come tax season.

Set up Payroll

If you want to hire employees or independent contractors, you’ll neet to set up payroll. Here’s how:

• get an EIN
• register for a Puerto Rico Employer Account Number
• find your Employer Unemployment Insurance (UI) Contribution Rate
• determine whether you’re hiring employees or independent contractors
• prepare the forms your employees will fill out
• choose a payroll service or software
• decide on a payroll schedule

Setting up payroll yourself can be a headache, so you might consider using a payroll service or software that will automatically withhold payroll taxes, pay your employees, and file tax returns on your business’s behalf.

Forming an LLC or corporation protects your personal assets. But if anything disastrous befalls your business—like a lawsuit, burglary, flood, or fire—your business is on the hook to pay. Business insurance can help cover the costs.

What kinds of insurance does your business need? It depends on the type of business you own and the risks you’re willing to take. Certain types of insurance are required by Puerto Rico law, whereas others are optional.

Workers’ Compensation Insurance

This insurance is required in Puerto Rico for businesses with employees. Workers’ compensation insurance covers medical costs and lost wages for employees who are injured or become ill on the job. Unlike in some US states, Puerto Rico businesses aren’t allowed to buy workers’ compensation insurance through a private company. Instead, they’re required to buy into Puerto Rico’s government-sponsored workers’ compensation fund, unless they are self-insured—meaning they have set aside their own money to cover future accidents that may occur.

Liability Insurance

This covers the costs of claims against your business for injuries or damages to the property of others, like clients or customers. This includes medical expenses, legal fees, settlements, and judgments. Whether or not you need it depends on whether your business is likely to be sued and how many assets your business needs to protect. If it’s just you and your computer in your basement, you might feel comfortable skipping liability insurance. Or maybe you won’t. Beyond general liability insurance, you can purchase or add on more specific types, like professional, cyber, commercial, home-based business, or product liability insurance.

Corporations in Puerto Rico are required to file an annual report, which serves to update the Department of State on your business contact information. This report also includes a Financial Statement, which shows the fiscal condition of your company from the past year. If your revenue was less than $3 million, you can have your Financial Statement prepared by someone with general accounting knowledge. However, if your revenue was over $3 million, you must have the statement prepared by a certified public accountant licensed in Puerto Rico.

Puerto Rico LLCs do not file an annual report but do need to pay an Annual Statement fee. The Annual Statement also updates the state on your business contact information but isn’t as detailed as the Annual Report.

Both the Annual Report and the Annual Statement have a filing fee of $150 and are due by April 15th each year.

Read more about How to File the Puerto Rico Annual Report.

In terms of tax benefits, Puerto Rico is a sunny place for US residents to start a business, especially if they plan to export products out of Puerto Rico to the rest of the world. The Puerto Rico government offers tax incentives to attract US business owners to emigrate to Puerto Rico. But your tax burden isn’t determined by Puerto Rico alone—you’ll also have federal and local taxes to consider.

Federal Taxes

• LLCs. Puerto Rico is different from the other US states and territories in that Puerto Rico LLCs are taxed as corporations by default. If you instead want your LLC to be taxed as a pass-through entity (meaning the business itself is not taxed and the profits pass through to the owners as self-employment income) you will need to file a Classification Election with the Puerto Rico Department of the Treasury and a Federal Classification Election with the IRS.
• Corporations. Corporations are taxed as C-corps by default. This means that corporations pay the 21% federal corporate tax rate and the applicable Puerto Rico corporate tax rate.

One huge benefit of owning a business in Puerto Rico is that, as long as you are a full-time Puerto Rico resident and your business is based in Puerto Rico, you do not have to pay federal taxes on income from Puerto Rican sources. You will still need to pay federal taxes if you have income from outside Puerto Rico or if your company does business with the federal government.

To pay your taxes (and take a good deal of other steps required to start a business), you’ll need to get an Employer Identification Number (EIN). You can apply for one with the IRS or hire us to get one for you.

Puerto Rico Business Taxes

Don’t forget you also need to pay the patente municipal (municipal tax), which you file with your municipal government. This tax will vary depending on your municipality, but the maximum is 0.5% of your gross receipts, or 1.5% for financial businesses.

In 2012, Puerto Rico passed legislation to attract US residents to start businesses there. This legislation created appealing tax incentives for US residents who move to Puerto Rico and start businesses, including:

• No income tax on dividends and interest
• No capital gains tax
• Fixed income tax rate of 4 percent on income gained from export services
• No property tax for the first five years (Only 10% of the usual property tax rate afterwards)
• 60% reduction of the municipal tax rate

The only catch is that the business must actually be located in Puerto Rico and must employ at least five full-time Puerto Rico residents. Also, only certain industries qualify for these tax benefits.

Learn more about Puerto Rico Business Tax Advantages.

If you want puertorriqueños to find your business, they have to be able to find you online. This means you’ll need a website, a business email account, and social media accounts. Don’t worry if you’re not especially tech-savvy—you don’t have to be a web developer or an influencer to establish a robust online presence. You’ll just need the following:

• Domain name. Your domain is the address where your website will live. You’ll want a domain name that is short, unique, local, and—most importantly—available. If your domain is trademarked, you could face legal trouble.
• Domain registrar. Once you’ve decided on a domain name, you’ll want to register it with a domain registrar. Some domains are more expensive than others. Some domain registrars also offer hosting and most will provide you with a business email that includes your domain name (“[email protected]”).
• SSL certificate. An SSL certificate signals to your users that your website is secure. If your website will use forms—like a sign-up form or a “contact us” form—an SSL certificate is critical. But even if you don’t you use forms, you’ll still probably want one—it allows an encrypted connection, which means your users’ data is transported securely. There are several types of SSL certificates, and you can often get one through your domain registrar.
• Site design. The easiest option is to use a free website creation tool—there are a number of free options available. Most are easy even for a newcomer to use, with styles and built-in templates. For a more custom design, you can hire a web designer to work on your website, but this will be much more expensive.

A trademark is a design, symbol, word, phrase—or any combination thereof—that represents a brand’s goods or services exclusively. Only some businesses register trademarks.

You can apply to register your trademark with the territory of Puerto Rico or federally with the U.S. Patent and Trademark Office (USPTO). Registering your trademark in Puerto Rico is cheaper and easier than registering with the USPTO, but doing so only protects your trademark in Puerto Rico.

You can only register a trademark once you’ve started using it (so slap it on that website you just made), and not all applications are approved. Trademark law is complex, and the strength of a trademark application (and the trademark itself) depends on many factors.

Our attorneys can review your application, offer advice, and prepare and submit the application for you—Check out our Trademark Service.