Starting a business in El Salvador: what are the requirements?

What are the requirements to follow when starting a business in El Salvador?

El Salvador defines the steps to create companies in the country through its commercial code. This code outlines several types of legal entities.  These include such entities as collective name companies, limited liability firms, and anonymous corporations.

Variable capital stock companies are most common in the country. To start a business with this type of legal entity, the following steps must be adhered to:

The name and activity defined, the identity document of each partner (or resident card or passport, in the case of foreigners), and the Tax Identification Number of El Salvador, with a minimum of two partners, are presented.

The minimum share capital of US$ 2,000 is then presented, also defining the legal representative and who will be the alternate. Additionally, the makeup of the company’s board of directors must be specified.

The principals of the business must execute the deed of incorporation of the company, and the company must be registered with the commercial board. In addition to this, a document containing the articles of incorporation of the company must be drawn up and registered with the Salvadoran commercial board.

After the company’s formation, other mandatory procedures are required for starting a business in El Salvador and for the company to begin operating. This step is carried out under the following guidelines:

• Obtaining the Tax Identification Number and the Value Added Tax ID.
• Registration in the municipality where the company is incorporated.
• Enrollment in the National Department of Statistics and Census.
• Registration in the Salvadoran Trade Registry.

Then other steps must be carried out when starting a business in El Salvador and when the company has employees:

• Registration of employees in the Salvadoran Institute of Social Security.
• Registration of the company’s workers in the Pension Funds Administration.

Finally, it is also necessary to establish the company’s accounting system, which must be authorized by a public accountant that is duly registered with the Salvadoran Accounting Council.

Types of contracts that are used when starting a business in El Salvador

In El Salvador, a legal framework regulates the types of employment contracts that a business may use. They specify clear parameters that the companies and workers must verify to ensure that the agreements are respected. These standards are established within the labor code, regulated by the Ministry of Labor.

For this reason, the type of contract that a company offers must be clear and must outline the details pertaining to legal benefits. These include those related to social security and the voluntary provisional saving funds (AFP), the percentage of income that will be deducted, and the maximum work hours that can be required a week, among other details.

The types of contracts to use when starting a business in El Salvador are presented below:

Employment contract for an indefinite period

With this contract, the employee joins a work team to permanently carry out activities within the company. The agreement does not define an expiration date.

However, as with most contracts, it is established that both the contractor and the employee can terminate the agreement at any time. Indefinite-term contracts are generally used for:

• Managerial and high-level positions.
• Representatives of international companies.
• Places dedicated to the provision of specific services.
• Employment contract for a fixed period

This type of contract is used to develop short and medium-term projects. Both parties can sign it for a period of days to several months and even years. However, the expiration date of the agreement is set in the document. This is usually because temporary service is required from the employee. More specifically, this type of contract is used for construction jobs, consultancies, and projects executed for a certain period.

Employment contract for professional services

These contracts are executed when a company requests specific services from a professional who usually works as a consultant. In most instances, the contract for professional services is an agreement made in writing based on specifically defined deliverables that the company will receive in an agreed-upon manner. At the same time, this contract class does not recognize legal benefits nor grant the employee a fixed position within the company’s facilities.

This type of contract includes elements previously agreed upon by both parties, such as delivery times, total payment for services, rent withholding or VAT payment, as the case may be, and specific products the consultant must deliver. Companies use these contracts to request:

• Consulting services on particular topics.
• External assistance for a brief period of time.
• Products that can be made in a “freelance” relationship by an adequate professional.

Regarding this type of contract, it is necessary to highlight that both the professional and the contracting party must respect what was initially agreed upon. This avoids difficulties that may require legal intervention to be resolved.

On the other hand, the professional who accepts this type of contract must make an effort to provide quality service, which allows him to gain new clients to maintain good personal and professional relationships as an independent consultant.

Employment contract for a trial period

It is common for companies starting a business in El Salvador to give new hires a temporary contract. This enables the organization’s management to decide whether to offer the employee a permanent agreement.

These contracts usually have a duration of three months. This time period is considered to be long enough for the employee to get to know the company and the company to know the employee. This allows for a solid start of a professional relationship between the parties.

The Labor Law of El Salvador indicates that when entering into this type of contract, and the defined period of the agreement elapses and neither of the parties decides to terminate, the contract will become for an indefinite period. This is the case unless a new pact is created for a fixed period. Regardless of circumstances, the trial period agreement between the parties may not be entered more than once.

Work contract for internships for starting a business in El Salvador

This agreement is usually utilized when a position has become vacant, and the company needs to fill it temporarily while it searches for a new permanent employee. One of its main characteristics is that it allows employees who will fill the position to enjoy the same rights as permanent employees.

When the company has found an individual to assume the position permanently, management can terminate the interim contract when it wishes.

Tips to follow before signing the contract

Even when the Labor Code establishes the types of contracts for starting a business in El Salvador, those described above are the most common for Salvadoran companies. However, it is necessary that when considering any one of them, the following considerations are taken into account:

• Read the contract in detail. Then, before signing the agreement, be sure to understand all the conditions in it.
• Ask questions as they arise. If you do not agree with any section in the document, express this promptly to evaluate a feasible alternative.
• Know the rights and responsibilities of an employee. Investigate the legal framework that supports the company’s type of contract. Also, be aware of the obligations that must be fulfilled as an employee when signing a particular contract.
• Comply with each of the agreements. A new hire should do this to avoid the termination of the contract by the company. In addition, taking this action will help prevent possible sanctions for failure to comply with the provisions of the signed contract.
• Request the contract before starting employment. This is critical if the agreement is for consulting services. Having the contract lets you know details such as delivery dates, requested products, and payment dates, among other important points.

For information on starting a business in El Salvador, consult with one of the Central American Group’s professional staff members.