Common Mistakes to Avoid When Incorporating a Startup in Panama

Panama has relied on the same core corporate law for nearly a century, making it one of the world’s oldest continuously used company laws. This long-standing framework still governs how corporations are created and run today, offering entrepreneurs stability but also requiring a clear understanding of its quirks and local rules. Combined with Panama’s territorial tax system, these features attract international founders, but yet they can also create risks if misunderstood. This article highlights the most common mistakes entrepreneurs make when incorporating in Panama, and how to avoid them.

Assuming Absolute Anonymity Still Exists

Panama’s reputation for privacy is real, but it isn’t the old “blank-check anonymity.” Bearer shares are immobilized, ultimate beneficial owners must be identified through the registered agent, and banks expect to understand control and source of funds. Treat confidentiality as guarded transparency: keep your cap table clean, document UBOs from day one, and make sure any changes are promptly reflected with your agent. If you plan to use nominees, pair that with clear powers of attorney and well-drafted board resolutions so control and compliance never come into conflict.

Ignoring the Mandatory Registered Agent Requirement

Every Panamanian entity needs a licensed local attorney or firm as its registered agent. That role isn’t a formality: they’re your interface with the Public Registry and the conduit for UBO and compliance obligations. Two Panama-specific traps here are easy to miss: (i) if your agent resigns and you don’t replace them in time, your company can fall out of good standing, and (ii) if your accounting records are kept outside Panama, you still have to tell the agent where they are and produce them on request. Choose an agent who will outlast the incorporation day and treat them like a compliance partner, not just a document runner.

Neglecting the Territorial Tax System Rules

Panama taxes Panamanian-source income, not foreign-source income. The nuance is in what counts as “source”: local sales, a team on the ground, or a dependent agent in Panama can flip your revenue into the taxable bucket. If you’ll touch the local market even lightly plan for a municipal Aviso de Operación, tax registration, and possible ITBMS (VAT) compliance. Conversely, if you’re truly offshore, keep the paper trail that proves it (contracts, delivery terms, ops outside Panama), because banks and auditors will ask.

Overlooking the Accounting Record-Keeping Obligation

Even holding companies must maintain accounting records for inspection, typically for five years. That includes ledgers, supporting vouchers, and documents showing asset ownership — wherever the records sit physically. Many founders assume “inactive” equals “no books”; in Panama, it doesn’t. Decide early who keeps the books, where they’re stored, and in what language. If you operate bilingually, keep your Spanish and English versions synchronized to prevent discrepancies when a notary or the Registry reviews a filing.

Underestimating the Difficulty of Opening a Panamanian Bank Account

Local banks are selective and procedure-heavy. Remote onboarding is rare; economic substance, a clear business model, and named counterparties matter more than sleek pitch decks. Expect requests for apostilled IDs, proof of source of funds, contracts, and sometimes local ties (office lease, local director, or staff). If your operations are fully international, consider whether Panama actually needs to be your transactional bank; many teams incorporate in Panama but bank where revenue originates, then use Panama for corporate holding and governance.

Misunderstanding the Role of Nominee Directors

A Panamanian S.A. needs three directors recorded in the Public Registry (any nationality). Many startups use nominees for privacy, but problems arise when the paperwork is thin: unsigned resignation letters, no clear fee/indemnity terms, or missing authorities for day-to-day banking and contracts. Another Panama-specific wrinkle: S.R.L.s don’t issue “shares” but quotas; if you promise investors share certificates in an S.R.L., you’ll create a mismatch. Choose S.A. if you’ll raise capital and need share classes; choose S.R.L. if you want a simpler, closely-held structure: then document governance accordingly.

Assuming Fast Incorporation Means Ready-to-Operate

Registering an entity can be quick; operating can’t be shortcut. Beyond the Public Registry, many founders still need a notarized Spanish set of bylaws, apostilled foreign documents, translations, municipal registrations, employer and social security onboarding if hiring, and depending on the activity sector approvals. A particularly Panama-specific mistake is using a Private Interest Foundation for active trading: foundations are great for holding IP or assets, not for commercial operations.

If you’re already past incorporation, don’t miss our guide on Annual Maintenance for Panama Corporations: What Startup Founders Should Know.