Colombian Business Structures: What is an SRL?

Colombia has several business structures that entrepreneurs and investors aspiring to enter the market can consider.

In this series on Colombian business structures, you’ll learn about each option. Here, you’ll find out how an SRL (a limited liability corporation) functions in the country, so you can determine if this model is correct for your operation.

What is an SRL?

SRL stands for Sociedad de Responsabilidad Limitada, which translates to a Limited Liability Corporation. In this model, the partners’ liability is proportionate—that is, limited—to the capital amount they put into the business at its founding unless the bylaws state otherwise.

Key features of an SRL

The following are central defining aspects of the SLR model, some (but not all) of which separate it from the other business structures explored in this series.

The name: Business names in Colombia state the company type at the end. In this case, the Spanish word for limited (“limitada”) or its abbreviation “ltda” must appear in the company’s name. For example, if you plan to call your company Elite Real Estate, the name must always read Elite Real Estate, Ltda. Omitting this detail could have serious consequences: Third parties can hold partners unlimited and jointly liable.

Number of partners: An SRL has a limited amount of partners. The lower limit is two and the upper is 25. Should the company surpass this number of partners, it is no longer within the confines of the law and must be dissolved or transformed into another business model. Alternatively, the company can remove partners and return to the permitted range.

Duration: The duration of the company must be outlined in the bylaws. The duration can be infinite, or a dissolution date may be set in advance.

Capital: All capital must be paid in full at the moment of the company’s establishment. Any capital increase invested thereafter must also be paid in full.

Reserve: Colombian law stipulates that SRLs must reserve 10 percent of their net profits each fiscal year until reaching 50 percent of the share capital. This measure intends to help companies remain stable. The reserve counters losses and bolsters capital. As such, reserves cannot be paid out as dividends.

Transfers: A partner can transfer their participation in an SRL to another person, and in doing so, they give this individual any legal and financial responsibilities they once had, in addition to any economic benefits resulting from dividends and profits. Transfers must garner unanimous consent from all company partners and be formalized in writing and saved in the company’s shareholder register. A transfer does not change the amount of liability the new partner has, as this responsibility corresponds to the previously assigned shares.

Dissolution: Dissolution can only be decided by a partner majority. The company must prove the impossibility of operating or that its losses make its net worth less than half of the share capital. A company can also dissolve if its share capital falls below the amount mandated by law or if the business has experienced over a year of inactivity. Company bylaws may also stipulate other valid reasons for dissolution.

Inheritance: Should a partner in an SRL die, their shares are transferred to their heirs, unless otherwise stipulated in the company bylaws.

Administration: SRLs are directed by a legal advisor assigned by the partners. This administrator works for the company and is meant to protect its best interests. This representative is also liable for damages caused by their acts and omissions before the company’s partners and any creditors.

Companies of over 10 people or that have a certain amount of capital (it’s essential to check the current law on this amount) should also elect a tax auditor. The tax auditor keeps tabs on accounting books and financial statements with an eye for inconsistencies and makes sure that the company is up-to-date with tax responsibilities.

Key roles: Beyond its legal representative, the SRL must also have a partner assembly that holds shareholder meetings to decide on the operation’s future. The company may also have a board of directors, though this is not necessary.

Taxes: SRLs are liable for income tax and sales tax (VAT). The latter is charged to the consumer, meaning that the company is only a “stopping point” for these tax contributions.

Why establish an SRL

In general, limited liability corporations tend to present an advantage—and SRLs are no different—because the partners’ assets are not tied to the company’s liabilities and debts, which prevents partners from becoming personally responsible for business issues.

Other advantages include the low number of required partners (just two people can form an SRL) and the relative ease with which founders can establish the company.

Other considerations

Like any business model, SRLs have their drawbacks.

To start, partners must have liquid capital available at the moment of establishment that they can pay in full. And the required paperwork is a bit more involved than in other business structures.

How to start an SRL

Like other business models in Colombia, most SRLs are established through a public deed signed in the presence of a notary and, later, duly registered with the local Chamber of Commerce.

Some SRLs can be established through private documentation. Business owners must familiarize themselves with current Colombian regulations regarding SRLs to determine whether documentation must be public.

Other steps in this process include submitting tax documentation and the company’s essential details, like the partners’ names, the name and address of the business, the activities to be performed, the name of the legal representative, and a rundown of the capital distribution.

Read up on how to correctly establish your business in Colombia here.

Ready to start your business in Colombia? Get expert advice

Colombia aims to attract foreign investment with laws and governmental processes that streamline business establishment and capital involvement.

If you’re interested in investing in the Colombian market and are seeking advice on how to set up a business or participate in an established one, the experts at LaGrande Global can help.