I had four readiness calls in the last two weeks. Four out of five asked some version of the same thing. "I can't work in Costa Rica, but I can hire employees, right?" One was looking at buying a gym. Another wanted a booth at festivals. A third wanted to flip his US house equity into a small Costa Rica rental business. The fourth wanted to do online teaching.
They all had the rule half-right. The rule is real. You can't take a job in Costa Rica until you have permanent residency. But you can own a business. The piece nobody talks about is what that ownership actually triggers on the US side, and which entity you pick changes your tax life in a way most prospects don't see coming.
This post walks through the four pieces that actually matter: the work rule, the entity choice (S.R.L. vs S.A.), the IRS form people miss, and what happens to the money when it flows back to you.
The work rule, the way it actually reads
Costa Rica's immigration law is pretty plain on this. Until you hold permanent residency, you can't be paid a salary by a Costa Rican employer. That applies whether you're on a tourist stamp, temporary residency under pensionado, rentista, or inversionista, or no status at all.
What you CAN do, even on day one: own a Costa Rican corporation, sit on its board, be the sole shareholder, and earn income through ownership rather than employment. You can hire Costa Ricans. You can hire other expats who hold their own work rights. You can collect rent from a property you own. You can take distributions from a business you own. None of that is "work" in the legal sense.
Where people trip up: showing up to teach the classes yourself at the gym you just bought, or being the one selling at the booth you set up. That crosses from owner to worker. The fix is structural, not creative. If your business model requires YOU in the room generating the value, the cleanest path is to start the residency application now and build the timeline around when permanent status lands. Temporary residency requires three years of continuous status before you can apply for permanent in most categories, per the DGME.
The S.R.L. vs S.A. decision (this one matters more than you think)
Costa Rica gives you two practical entity choices for a small business:
S.A. (Sociedad Anónima), the equivalent of a US C-corp. Requires a board, a president, secretary, treasurer, and a fiscal agent. More formal, more compliance.
S.R.L. (Sociedad de Responsabilidad Limitada), closer to a US LLC. Simpler governance, just a manager and shareholders. Less paperwork year to year.
On the Costa Rica side, the choice is mostly a paperwork question. Most expat-owned small businesses end up as S.R.L. because the annual compliance is lighter.
On the US side, the choice is much bigger. The US reruns the classification of your company under its own rules, and that result decides how the business income reaches your personal return and what you report each year. The two entity types land differently, the classification can be changed after formation only with effort, and tax laws change. This is the decision to make with a cross-border professional in the room before the formation paperwork is signed.
The US reporting that starts the day you sign
Own a Costa Rican company and there's US reporting attached to it every year. Which reporting depends on how the company is classified on the US side and who owns it, and the penalties for missing it are real. If you own or are about to form a Costa Rican corporation, talk to a cross-border professional, me or someone else, about how you should file before you file. If you'd rather research it yourself first, that's fine too. The penalty for a missed foreign-entity filing starts at $10,000 per year, before anyone asks whether you owed any tax.
Separately from any of the above, if your Costa Rican business holds a bank account whose balance exceeds $10,000 at any point during the year, you also owe FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, due April 15 with an automatic extension to October 15. Penalties for non-willful violations are $16,536 per the 2026 inflation-adjusted figures from FinCEN, applied per unfiled annual report rather than per account under the Supreme Court's 2023 Bittner decision. Willful violations are $165,353 or 50% of the account balance, whichever is greater.
I write these numbers down because most of the people I've spoken with assume "I'll figure out the tax stuff once I move." The reporting requirements start the day you sign the formation paperwork. They don't wait for you to land.
How the income actually flows back to you
A small example, generalized from a pattern I see often: someone with a multi-six-figure portfolio, low four-figure monthly spending, buys a small operating business in Costa Rica for around $100,000.
Say the business earns $30,000 in profit for the year. Costa Rica taxes that profit at its corporate rates (5% to 30% depending on the company's gross revenue bracket, per Costa Rica's DGT; the thresholds adjust annually), and Costa Rica being territorial generally doesn't touch your US-source income.
On the US side, one of two things happens, and the classification of your company decides which. Either the profit shows up on your personal return the same year, or it stays inside the company until you take it out, and each path has its own US treatment. Under either path the foreign tax credit generally lets the Costa Rican tax you paid offset US tax on the same income, so the usual result is paying the higher of the two rates instead of both.
Which path you're on is set by the entity choice and by who owns it, and the wrong one can mean US tax on money you never took out of the company. That's why the entity decision matters more than people think, and why it belongs with a cross-border professional before formation.
Who this works for, who it doesn't
This works for someone who has the cash to fund the business without selling appreciated US assets at a loss or pulling early from retirement accounts. Pulling $100,000 from a pre-tax 401k to fund a Costa Rica business adds that $100,000 to your US ordinary income for the year, and if you're under 59 and a half, there's an additional 10% early withdrawal penalty, per IRC Section 72(t). I've seen people take that hit, not realize until tax season, and end up with a five-figure surprise bill from the IRS.
This works for someone whose business model genuinely makes sense. "I'll buy a small business so I have something to do" is rarely a good reason to write a six-figure check. A business that was barely breaking even because the previous owner wasn't paying himself becomes unprofitable the moment you have to pay someone (yourself or an employee) to do the work.
This doesn't work for someone who needs to BE the worker. If the value proposition is your skill being applied to customers, and you can't legally apply it until you have permanent residency, you're looking at three years of paying others to deliver what you wanted to deliver. That math rarely works for solo-operator service businesses.
Common mistakes I see
- Forming an S.A. by default because the attorney's template uses S.A., without anyone asking the US tax question.
- Buying the business in your personal name and then trying to retroactively wrap it in a corporation. Costa Rica's transfer taxes apply each time the entity changes.
- Skipping the FinCEN 114 filing because "it's just the business account, not a personal account." If you're an owner, you're a signatory, and the threshold applies.
- Underestimating the cash burn. A small Costa Rica business often takes 18-24 months to stabilize, and the previous owner's profit-and-loss reflects their habits, not yours.
- Not getting the seller's financials reviewed by someone neutral. The spreadsheet your realtor prints out is not an audit.
What to do next
If you're seriously considering this, the order of operations I'd suggest:
- Verify the business is actually profitable, not just "the owner doesn't pay himself."
- Decide what residency path you're on (pensionado at $1,000/month lifetime pension, rentista at $2,500/month documented income for two years or a $60,000 deposit, or inversionista at $150,000 invested, per current DGME requirements). Your business purchase can often satisfy inversionista.
- Pick the entity with a cross-border professional in the room, before the formation paperwork. The right structure depends on ownership details, any existing US entities, and the type of business.
- Build the US reporting calendar into your first year: the foreign-entity reporting, FinCEN Form 114, and the foreign tax credit. Map every filing to a date.
- Keep enough US cash on the side to cover 24 months of personal expenses without leaning on the business. The number one reason expat-owned businesses fail is the owner draining the buffer.
If you want to talk through whether your situation fits this path, that's what I do: the entity decision, the tax flow, the reporting calendar, and whether the business actually pencils, alongside the rest of your money. You can reach me at /contact or get a faster snapshot from the quiz.
This post is educational and does not constitute personalized investment, tax, or legal advice. Vitality Wealth Planning, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Tax laws change; verify current rules with a qualified professional.