Ecuador

The most common for-profit organizational forms used in Ecuador are i) the stock corporation or sociedad anónima (SA); ii) the limited liability company or compañía de responsabilidad limitada (LLC); and the iii) simplified stock corporation or sociedad por acciones simplificada (SAS).

Stock Corporations: SAs are the corporate vehicles most frequently used in Ecuador. Its shareholders are liable up to the limit of their contributions only and the capital stock is divided into common, registered and indivisible shares creating a legal person entirely distinct from its shareholders. Shares are freely transferable. SAs are usually governed by its shareholders meeting, which is the body of control and government. Depending on their internal structure, it is possible to include boards of directors and other administrative and controlling bodies for its administration.

Limited Liability Companies: LLCs are very similar to SAs, including their incorporation proceedings. LLCs, however, have the following important particularities:

• The maximum number of partners is fifteen, unlike a stock corporation which does not have a limit.
• For the transfer of shares, all partners must agree and approve it at a shareholders meeting. This decision must be formalized through a public deed and subsequently registered before the Mercantile Registry where the company has its domicile.

Simplified Stock Corporations: SAS were introduced in the Ecuadorian legal system in 2020. This new type of entity gives greater flexibility regarding regulation and costs than the traditional types of companies. The incorporation of SAS is increasing, and we expect them to be the new default type of corporate organizational form due to their flexibility.

Notarial and registry expenses are avoided in all corporate acts (e.g. incorporation costs, capital increases, bylaw’s amendments, etc.). Given that SAS are only subject to the supervision of the Ecuadorian Superintendence of Companies, their corporate acts may be contained in a private document (unlike the other type of companies that need to formalize these corporate acts before a notary public) and without the need to register them in the Mercantile Registry.

SAS, amongst others, have the following particularities:

• As SAs and LLCs, shareholders are liable up to the limit of their contributions
• SAS can be incorporated with only one shareholder, unlike SAs and LLCs, which need at least two shareholders.
• SAS can be incorporated by means of a private document executed in Ecuador with no need of a public notary.
• The incorporation document does not need to be registered with the Mercantile Registry. SAS will be incorporated once they are registered before the Ecuadorian Superintendence of Companies.

Benefit Corporation Category: In addition, LLCs, SA, and SAS may adopt the category of “Benefit and Collective Interest” corporation (“Sociedad de Beneficio e Interés Colectivo” or BIC). This is not a different type of entity, but a category that may be opted in.

The BIC category is designed for LLCs, SAs, or SAS whose equity holders seek to build a unique, focused, and specifically chosen mission into their organizational documents, where the company’s management will have obligations to pursue that mission in parallel to their obligation to maximize enterprise value.

a. Enterprises that seek financing from investors and will have multiple owners tend to form SAs, less frequently LLCs, and lately SAS´ popularity is increasing due to their flexibility.

b. SAs, LLCs, and SAS are the most common for-profit organizational forms used by Social Enterprises.

Yes, LLCs, SA, and SAS may adopt the category of Benefit and Collective Interest corporation (or BIC). This is not a different type of entity, but a category that may be opted in. The BIC category is designed for LLCs, SAs, or SAS whose equity holders seek to build a unique, focused, and specifically chosen mission into their organizational documents, where the company’s management will have obligations to pursue that mission in parallel to their obligation to maximize enterprise value. 

Yes, the SAs, LLCs and SAS that have adopted the BIC category. Please see question No. 1 above.

When adopting the status of a BIC, a company is obliged to create a positive material impact on society and the environment. New or existing companies that wish to adopt this status must incorporate into their bylaws the general obligation to create a positive social or environmental impact and submit it for registration in the Mercantile Registry.

The measures adopted to achieve the general or specific objectives must be detailed in management impact reports. The administrators of a BIC may consider, among others, the following aspects:

• The interests of the company and its shareholders;
• The consequences, in the long term, of any decision related to the operational progress of the company they represent;
• The maintenance and protection of the reputation and good name of the company;
• The need to treat, fairly and equitably, all partners or shareholders;
• The expansion in the diversity of the administrative and supervisory composition of the company.

Regarding the expansion of the fiduciary duties of administrators, managers and directors of a BIC, these must consider the effects of their actions or omissions regarding:

• The partners or shareholders of the BIC;
• The workers of the company, its subsidiaries and its suppliers;
• The clients and consumers of the company;
• The community;
• The local and global environment;
• The performance of the company in the short and long term;
• The company's ability to fulfill its corporate purpose.

The expansion of the fiduciary duties of administrators, managers and directors does not imply the creation of an obligation enforceable by third parties who do not participate in the capital stock of the BIC.

Adopting the BIC category is purely optional. SAS corporations and the BIC category were introduced in 2020. The incorporation of SAS is considerably faster than SAs and LLCs, as it is done electronically and with no need of formalities before a notary public or the local Mercantile Registry. Adopting a BIC status might require the amendment of bylaws or the name of the company, which usually takes a couple of weeks.

In Ecuador the following are considered private non-profit organizations: i) Corporations, which need a minimum of five members and have as purpose the promotion and common good of their members, the public good in general or of a community in particular; ii) Foundations, which may be established by one or more founders, to promote the common good of society, including activities to promote, develop and encourage said purpose in different fields, such as social, cultural, educational, environmental, sports, as well as activities related to philanthropy and public charity; and, iii) Other forms of national or foreign social organization, such as communes, water boards, irrigation boards, agricultural centers, chambers of agriculture, and others.

In general terms, formation process for Nonprofits differ from those of for-profit Enterprises and usually take more time. Ecuadorian Nonprofits have been frequently and traditionally used to establish entities with specific social or environmental objectives. For-profit Social Enterprises are new in the Ecuadorian legal framework, but we expect these entities to become more frequently used in the future. Please see the Benefit Corporation category above.

Social Enterprises that do organize as Nonprofits enjoy the same tax benefits as other Nonprofits and have the same burdens and restrictions, All Nonprofits benefit from an income tax exemption as long as the assets and income are used for the Nonprofit’s specific objectives and only in the part that is directly invested in them.

Ecuador does not have a particular entity for worker-owned Enterprises, but workers may own equity in the discussed entities above. Also, a company that adopts a BIC status may expressly take into consideration the interests of its workers.

Yes. SAs, LLC, and SAS that have adopted a BIC status, in addition to the traditional reporting requirements, must issue a management impact report.

The legal representative of the society of benefit and collective interest must prepare, annually, a report on the impact of the management of the respective society, in which he will report on the activities adopted to create a positive and verifiable material impact on the society and the environment. The report must be issued on the basis of one, several or all of the items in the areas of impact foreseen in the company’s organizational documents, in the event that the benefit and collective interest society has decided to adopt them.

If a specific social or environmental purpose has been voluntarily included in the corporate purpose of the BIC, the management impact report must detail the measures implemented to achieve that purpose.

The administration of the company, for the preparation of its management reports, may choose independent standards, whether national or international, which, in its opinion, are the most appropriate to inform the highest corporate body about progress in the development of the activities of benefit and collective interest that have been expressly indicated by the BIC.

The management impact report must be available to the partners or shareholders of the BIC, together with the financial report for the corresponding fiscal year, at least eight days before the General Meeting, which will approve it.

The report must also have a certification issued by an independent entity specialized in the areas in which it is intended to achieve a positive social and environmental impact.

Reporting for Nonprofit Social Enterprises:

Depending on the purpose of the Nonprofit, the competent Ministry will oversee and regulate the procedures related to the granting of legal status, registration of directives, reform of statutes, and in general all activities related to the operation and control of these organizations.

Nonprofits are required to deliver documentation and information generated as a result of the operation of the social organization, and they must render accounts to their members through their directors, at least once a year, or at the formal request of a third or more of the members.

There are also different special requirements for Nonprofits. For instance, foundations and non-governmental organizations registered with the Technical Secretariat for International Cooperation (SETECI) may be subject to special reports or anti money laundering reports, if different thresholds are met.

Since the Enterprise forms such as the SAS corporation and the BIC category are new, there is no case law on point.

Not mandatory ones, but please see the optional regulations for the new BIC category described above. The Superintendence of Companies has also issued regulations on corporate governance, which mirror these requirements.    

Please see the optional regulations for the new BIC category described above.  The BIC category requires that the entity have a material positive impact on society and the environment. SAs, LLCs and SAS may choose their mission, which tend to align with certain ESG factors. 

No.

No major investor classes are required to look at ESG issues.

Notwithstanding, major investors such as investment funds may include ESG issues as their purpose and in their internal investment guidelines. As such, provided that they invest in those products which are permitted by Ecuador’s Securities’ regulations, then they could make investments that pursue ESG issues.

Social Enterprises receive grants, charitable investments, and traditional investments.

NGO’s and non-profits such as foundations, usually receive grants and charitable investments. Many companies from the private sector support local non-profits via donations, be it in-kind or monetary donations.

Certain for-profit enterprises, such as B-Corps or Bic-Corps usually receive traditional investments from people looking to make impact investments.

Ecuador recently has legally recognized for-profit investment corporations. This are what are known B-Corps and BIC-Corps. These types of companies look to have a positive impact either on society or on the environment while looking for a corporate benefit.

With the introduction of these types of companies, for-profit impact investments have grown and are expected to keep increasing.

There is no special government funding specifically available to Social Enterprises as such. Depending on the Enterprise form and industry, government grants, loans, bonds, and guarantees may be available. For example, there could be certain grants for SEGs in the education sector.

Notwithstanding, it is not easy to access government funding, and doing so submits the SEG to compliance of certain obligations and scrutiny arising from public funds.

No.

They are not required to disclose ESG factors, though some choose to do so for marketing reasons. There are not many publicly traded Enterprises in Ecuador.

These are not prevalent in Ecuador. 

No.

Crowdfunding was recently regulated in Ecuador and therefore it is legal in our jurisdiction. 

Crowdfunding provides smaller businesses or Social Enterprises access to non-institutional investors’ funds, which can be donations, investments for equity, debt or investments for rewards, or early access to products.

There are tax exemptions available for Nonprofits generally, but there are no tax exemptions that are uniquely available for Social Enterprises structured using a for-profit organizational form.

Nonprofits (whether or not Social Enterprises) have two key tax exemption provisions, one being that they do not have to pay income tax themselves, and the other being that donors may take deductions on their reported income.

As stated above, only the assets and income that are directly invested towards the Nonprofit’s objectives will benefit from the tax income exemption.  

No.

No.

No.

Not at the moment.

In 2020, the Organic Law of Entrepreneurship and Innovation established that the Monetary and Financial Policy and Regulation Board (an organ part of the Executive Function and responsible for the formulation of public policies and the regulation and supervision of monetary, credit, exchange, financial insurance and securities) may establish financial instruments for the formation of seed capital, venture capital and angel capital funds, for the financing of ventures, innovation and technological development. Importantly, the Law also provides that entities of the financial sector will establish the credit program of the public financial sector on an annual basis, mainly oriented in innovation, entrepreneurship and technological development that strengthens the entrepreneurial ecosystem.

Recently, the Ecuadorian Ministry of Production, Foreign Trade, Investments and Fisheries, leading the Venture Capital Trust, announced the "Fondo Emprede: Ecuador Productivo” fund, in which US$10'050,000 have been allocated to support start-ups, their growth, and innovation projects in different fields.

Yes. SAs, LLC, and SAS that have adopted a BIC status, in addition to the traditional reporting requirements, must issue a management impact report. Please see question No. 7 in Section I above.

Nonprofit and for-profit Enterprises are overseen by different governmental entities. For instance, Nonprofits are overseen by the relevant Ministry, depending on the purpose of the nonprofit (e.g. education, environment, culture, etc.). For-profit entities, such as SAs, LLCs, and SAS, are overseen by the Superintendence of Companies and the Mercantile Registry. 

Also, in 2020, the Organic Law of Entrepreneurship and Innovation created the National Council for Entrepreneurship and Innovation (CONEIN), as a permanent strategic body to promote and encourage entrepreneurship, innovation and systemic competitiveness of the country, through inter-institutional coordination, public-private alliance and academia. The Law also created the Consultative Council of Entrepreneurship and Innovation, a body that will act as an adviser and supporter of the CONEIN, to monitor public policies that affect entrepreneurship, innovation and competitiveness.

Yes, there is a new special restructuring proceeding for startups, introduced in 2020 by the Organic Law of Entrepreneurship and Innovation.

Depending on the current processing times and whether the documents are filed online, in person, or by mail, it can take approximately a couple of weeks to form a legal entity in Ecuador. Depending on the type of entity formed, notary public fees and mercantile registries fees may apply, which in turn will vary depending on the capital of the Enterprise.

B Corporation Certification: This certification is the most prominent, and is provided by B Lab, which is an independent Nonprofit Enterprise. To become a “B corporation” an Enterprise must:

1. take and pass the B Impact Assessment;
2. adopt the B Corporation legal framework, which requires that Enterprises incorporate certain provisions in their charter and governance documents;
3. sign a term sheet agreement with B Lab; and
4. pay certain fees.

To maintain the certification, B Corporations must pay annual fees and comply with ongoing reporting and compliance requirements.

Product, Safety and Environmental Certifications: There are a wide variety of certifications available to Social Enterprises depending on the industry and purposes of the organization.

The recent legal and regulatory changes in Ecuador aim to achieve this goal. Startups can easily be incorporated, and transactional costs have been reduced significantly. In the next months, several secondary regulations shall be issued.

Social Enterprises can form relatively easily if they want to organize as a for-profit Enterprise. Nonprofits must go through a lengthier incorporation process.

The recent changes in the Ecuadorian legal framework aim to facilitate the formation of Social Enterprises, particularly of SAS and adopting a BIC status. Directors and officers must use their powers in the best interests of the company and shareholders and while they are not prevented from considering other interests, adopting a BIC status allow them to do so.

Yes, in public procurement proceedings particularly.

• Providing tax benefits, such as tax exemptions or simplified tax compliance procedures, to Social Enterprises utilizing for-profit Enterprise forms.
• Local regulators should allow Regulatory Sandboxes to allow small-scale and live testing of innovations in a controlled environment under the regulator’s supervision.
• Crowdfunding was recently regulated by the Organic Law of Entrepreneurship and Innovation. The subsequent regulations that will follow need to make crowdfunding easy, cheap and accessible to broaden public investment in Social Enterprises.
• In more general terms, digitalization and reducing the regulatory burden of entrepreneurs, while maintaining effective oversight, is still an ongoing objective that the local authorities should have in mind for the upcoming regulations and further legal initiatives in these fields.

Implementing a uniform set of standards for ESG policies would make it easier for investors and consumers to compare and evaluate which enterprises are proceeding accordingly. The optional ESG requirements for the new BIC category described above and the regulations on corporate governance are a good first step. Yet any change in the law would be limited if there is no proper accountability. Hence, any future change in the law should consider both accountability but also the benefits that implementing ESG practices could bring to an Enterprise.

No.