Entrepreneurship Companies: An Option for MSMEs?
…It will be necessary to analyze in the short and medium term whether the LFE is effectively fulfilling its objective of “facilitating” wealth creation by “taking advantage” of the opportunities present in the environment…
By Edvin Montoya | Partner, Lexincorp Central American Law Firm
The Entrepreneurship Strengthening Law (LFE) came into effect on January 28, 2019, with the goal of encouraging and strengthening entrepreneurship in the country by streamlining the formalization process through a new legal entity. The LFE defines “entrepreneurship” as a way of thinking and acting aimed at wealth creation by taking advantage of opportunities in the environment to meet personal income needs through the innovation of processes and products that generate competitiveness, ultimately creating value for individuals, businesses, the national economy, and society.
Subsequently, in March 2019, the Ministry of Economy issued the LFE Regulations to establish the necessary framework for implementing Entrepreneurship Companies.
Key Regulatory Aspects of the LFE and Its Regulations:
Constitution Requirements:
a) Can be established with one or more shareholders.
b) Formalized through an electronic form available on the Commercial Registry portal with standard clauses.
c) One shareholder must obtain authorization from the Commercial Registry for the company’s name.
d) All shareholders must obtain an electronic signature certificate from the Commercial Registry.
Relevant Internal Aspects:
a) Shareholders have two years to pay for all subscribed shares.
b) The sale and placement of shares on the stock market or stock exchange is prohibited.
c) Only monetary contributions are allowed, which can be deducted from income tax (ISR) up to a maximum of 5% of gross income or Q500,000 annually.
d) If the company generates more than Q5 million in annual revenue, it must transition to another corporate regime under the Commercial Code within six months.
e) The company’s purpose must fall under one of the innovation categories outlined in the regulations.
f) The company’s purpose cannot be modified.
Financial Information Disclosure:
An annual financial report must be published electronically in accordance with regulations issued by the Ministry of Economy.
Dispute Resolution Mechanism:
Unless otherwise agreed, arbitration and alternative dispute resolution mechanisms are prioritized for disputes between shareholders and third parties.
Challenges and Considerations for MSMEs
A key question is whether Micro, Small, and Medium Enterprises (MSMEs) can truly benefit from this legal framework and whether it effectively simplifies the formalization process. Although the law aims to reduce the time and costs associated with business registration, several pre-requisites must still be met, including dealing with the Public Registry and fulfilling additional post-registration requirements.
Moreover, the requirement to resolve disputes through alternative mechanisms or arbitration is not necessarily cost-effective for entrepreneurs. Furthermore, frequent technical failures in the electronic platforms of the Commercial Registry and the Superintendence of Tax Administration (SAT) have significantly delayed formalization processes, contradicting the law’s objective of expediting business creation.
Conclusion
A year after the law’s enactment, as of March 16, only 50 Entrepreneurship Companies had been registered. This raises the need for further evaluation in the short and medium term to determine whether the LFE is truly fulfilling its mission of facilitating wealth creation, leveraging opportunities, and fostering innovation to generate competitiveness and value creation for businesses and society. This analysis is particularly relevant given the current economic and social challenges exacerbated by the State of Emergency and Presidential Decrees implemented in response to the COVID-19 pandemic.
