EL SALVADOR Law and Practice Contributed by: Héctor Torres, Annette Herrera, Daniel Leiva and Raquel Santos, Torres Legal
2. Establishing a New Company, Early-Stage Financing and Venture Capital Financing of a New Technology Company 2.1 Establishing a New Company New regulations offer a series of tax incentives for companies looking to operate in the technology mar- ket in El Salvador, allowing them to maintain some of their operations and profits tax-free. Therefore, this has served as an attractive option for investors look- ing to establish an entity in El Salvador. The time it takes to incorporate a new company varies depending on the industry and the operations to be carried out, but it is approximately two to four weeks. The initial capital will vary depending on the business model, but for a limited liability company (LLC) the amount is USD2,000. Furthermore, a new business model has been created for small entrepreneurs, called the simplified stock company ( sociedad por acciones simplificada SAS), which only requires one person and can be set up with only USD1. 2.2 Type of Entity The type of entity entrepreneurs choose depends on their business goals, their needs and the nature of their operations. The most common types are as follows. • Corporation: This entity is suitable for businesses seeking to raise capital through the issuance of shares. It allows for limited liability, meaning share- holders are not personally liable for the company’s debts. • LLC: Often preferred by small to medium-sized businesses, this structure offers limited liability and is generally easier to manage than a corporation, with fewer regulatory requirements. • SAS: This newer entity type is designed for entre- preneurs with more informal operations who are looking for flexibility and simplicity. It has no minimum capital requirement and can be founded by just one shareholder, making it very suitable for start-ups.
• Partnerships: These entities can be suitable for smaller ventures or professional services where the partners want to share responsibilities and profits directly; however, they are less common. The choice of entity affects factors like taxation, lia- bility and governance, so entrepreneurs and inves- tors are usually advised to carefully consider which one suits them best. However, regulations allow for changes during the process, and businesses often start with one idea regarding the entity type but switch to another as they evolve. 2.3 Early-Stage Financing Commonly, early-stage financing comes from local investors, family offices and government-sponsored funds. However, with new market regulations, more seed investment and foreign investors looking for cur- rent business opportunities in El Salvador are being seen. The new frameworks for investment banks and private alternative investment funds (PAIFs) introduce locally regulated vehicles for sophisticated investors, which may channel growth and buy-side capital to technol- In El Salvador, a typical source of venture capital (VC) is government-sponsored funds that offer grants to start-ups. These grants are more common than overall VC funding. Additionally, foreign VC firms are gradu- ally becoming more active in providing financing, but the availability of home-country VC for start-ups remains limited. 2.5 Venture Capital Documentation The VC ecosystem in El Salvador is still developing. As such, standardised documentation practices are evolving. 2.6 Change of Corporate Form or Migration As mentioned before, it is common for start-ups to begin with a very basic structure – ie, a corporation or SAS structure – as they are easier to set up and are the industry standards. However, as start-ups develop and seek VC financing, they may be inclined to con- sider changes in their structure or jurisdiction. For ogy and fintech targets. 2.4 Venture Capital
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