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|Forming a company or companies in Chile: How many?|
|Chile Business, Corporate, and Commercial Law|
The possible reasons a company in Chile may be split in to more than one corporate entity are really endless. What is different about Chile is the corporate divisions tend to also be done along functional lines within the company, to limit liability between the different parts of the business. Often partners or shareholders will own the incorporated parts directly, rather than one company owning another company, to further firewall the risky activities. Broadly, the two main reasons to divide a business in Chile in to multiple corporate entities is liability and taxes, normally divided by function.
A few situations or reasons where it is common to form a new company in Chile:
Labor law liability in Chile
Due to Labor laws in Chile, companies often split the portion of their business that deals directly with labor contracts and employees in to a separate divisions. This is mostly done to protect assets of the business from labor law claims.
Hard Asset Protection in Chile
Hard assets in Chile such as buildings, real estate, machinery, perhaps certain intellectual property rights, trademarks, water rights, mineral rights, and so on are placed in to a separate holding company both for protection from other liabilities of the business and sometimes to increase tax advantages and company efficiency in managing those assets. For example, perhaps the company leases certain real estate to other parties, and needs to deal both with the income for tax purposes and the liabilities generated by that lease in an isolated fashion.
Clarify Division of Activities
Due to the way articles of incorporation are detailed in Chile and also how the Chilean Internal Revenue Service classifies certain activities for tax purposes, companies often will separate in to one or more companies to simplify their corporate structure. As a clearly defined company engaging in a smaller set of specific well defined activities, the Chilean tax law may provide for greater tax advantages for that particular set of activities. Essentially, a company should be divided when the overall list of allowable activities of the company becomes too strangely conjoined to be manageable. For example, a company in Chile is both in the real estate development business building factories, engages in running manufacturing of a plant owned by that company, and also is selling agriculture products from a property owned by that company.
The reason is simply the complexity of articles of incorporation in Chile. Articles of incorporation in other countries might be able to use a simple wording such as “all activities related to investment” to capture every possible activity. In Chile, all activities are spelled out in detail in the articles of incorporation creating a rather awkward list of activities such as “purchase real estate, engage in construction, lease buildings, open bank accounts, close bank accounts, write checks, sell agricultural products, negotiate the price of agricultural products, enter in to labor contracts, terminate labor contracts, ...”. If any activity is not included, and they need to later be included in the articles of incorporation, the articles of incorporation must be modified and the modifications published. On a practical level, it can be more cost effective to separate the corporate activities, and limit the amount of modifications to the entire entity. As a company expands, such modifications might also create problems or conflicts with existing activities already listed in the articles of incorporation.
Real Estate Development Liability in Chile
Companies that build structures in Chile are responsible for those structures for up to five years after their construction, and sometimes longer. Often real estate development companies will form separate divisions on a per project basis to firewall that liability from other developments or activities the company may undertake.
Debt and Credit in Chile
It is common also for companies to maintain certain credit risks, and the assets related to that credit or debts are placed in to a single company; this might free the remaining assets to be used more efficiently somewhere else, and protect them should that debt go bad. Often bank accounts are held in diffrent corporate entities or structures, prescribed or required to have certain characteristics by the banks in Chile.
Tax Advantages and Liabilities in Chile
The division for tax purposes can be both to gain a tax advantage, but also limit the tax liability from spilling over in to other parts of the business and other assets.
Administrative Checks and Balances
It is very common in Chile to limit management and the company legal representatives from being placed in too much of a power position in regards to the assets that are not essential to the daily operation of the business, and this provides an ultimate firewall from them making a mistake or intentionally engaging in misconduct that might put those assets at risk. This is most typically done in addition to other measures, but can act as an additional layer of security from the damages of mismanagement or misconduct in one portion of the business spreading to other parts.
Partnerships Involving Foreign Corporate Entities or Foreign Partners in Chile
Most commonly foreign companies wishing to open a branch or subsidiaries in Chile, may gain tax advantages outside of Chile for having their activities in Chile divided in to multiple corporate structures inside Chile. Also, occasionally strategic foriegn partnerships, contracts, or other arrangements present a risk to the buisness in Chile; or the otherway around, to the partner outside of Chile. Thus, there may be an advantage gained by creating some distance between the entities directly involved with the partnership. There may be many other reasons that foreign partners or foreign corporate parent companies may wish to divide the company in Chile in to discreet parts.
Again, the reasons to divide a business are nearly endless. Not every business in Chile needs multiple corporate entities. It should be done with careful legal and tax planning. Please feel free to contact us to make an appointment to consult with one of our attorneys in Chile in regards to how your company or companies in Chile should be structured, and find out if there are any advantages using multiple corporate structures in Chile.