Breaking into the Brazilian marketplace is no easy task, and that’s putting it lightly. It’s a bit like landing a date with that gorgeous businessman you run into at Starbucks twice a week – you know he’s a great catch, but the months of Pilates classes, salads and skipped happy hours you’d spend in preparation to even give it a shot, at this point, seem unfathomable.
We’ve come across a number of businesses that have maneuvered the barricades to Brazil, such as Baby.com.br , MercadoLibre and HUNT Mobile Ads. And while both have experienced success, they also went through months of a daunting bureaucratic process to do so. Even big companies like Netflix have referred to the Brazilian market as challenging.
After hearing so much about the legal complexities of getting a business set up in Brazil, we decided to find out more. Jeff Levinsohn, General Partner at 21212, and Natalie Witte, 21212 lawyer, gave us some important insights on the ins and outs of setting up technology companies and startups in Brazil. When asking even the most basic questions, we came across very complex answers.
Going it alone isn’t an option
Establishing a presence in Brazil, especially as a foreign entity, requires patience and prudence, and both Witte and Levinsohn cautioned strongly against going it alone.
Local law requires that foreign entities have a legal representative who resides in Brazil and is vested by a power of attorney (POA) to act on the company’s behalf. Sounds easy enough, right? Not so fast. As a United States entity, for example, the process of validating a POA is exhaustive. The document must be drafted and signed, presented to a U.S. notary for authentication, produced in Portuguese by a certified translator and registered at the Central Bank. Only then can monetary transfers be registered, required bank accounts be opened and stocks legally owned by the foreign parent company.
The high cost of labor
Beyond a legal representative based in Brazil, in the case of opening a corporation (sociedade anónima in Portuguese), it is necessary to have at least two directors who are Brazilian residents – this is where the issues of employment requirements and costs come in.
The hiring process in Brazil requires knowledge of benefits, social security, unemployment (FTGS), salaries and more. As those at 21212 told us, “It’s important to know how much to pay and where to pay it, and services to figure this out are not readily available.” And although labor costs in Brazil are lower than in the United States, it is important to note that the cost of each employee in Brazil is generally twice each individual’s base salary.
Those considering bringing in foreign employees to work at their offices in Brazil should also be aware of visa requirements and other immigrations issues implied. It is not legal to work under student or tourist visas, and obtaining an employee visa for a potential worker requires proof that hiring a foreigner is a necessary action as opposed to taking in a local professional. And when a foreign employee is contracted, law requires companies hire a minimum number of locals to compensate.
Nickles, dimes and timelines
The 21212 team indicated that the timeline for a foreign entity to establish a Brazilian company runs around four months (for local companies with no foreign involvement, that number falls to two months).
In terms of economics, the out-of-pocket total for the fees of the entire process resides around R$2,500 (US$1,200). However, when including the payment of lawyers, accountants and other auxiliary professionals, this number can easily reach R$10,000 (US$5,000). Operational costs vary depending on business type, salaries, inventory, rent and other expenses.
Limited liability brings relief?
We asked Witte and Levinsohn whether the implementation a new category for limited liability companies, Empresa Individual de Responsabilidade (EIRELI), has had an impact on technology companies and startups in Brazil. The two explained that although the law has been effective in several European systems, its ramifications in Brazil have gone largely unnoticed. Lawyers are still struggling to understand the benefits of the option, pointing to the confusing nature of the way the laws surrounding it are written.
The 21212 team elaborated, “The defenders of the EIRELI talk about how the law protects the founder’s personal assets from being used to pay any debts of the company. The funny part is that this protection was already standard for most kinds of Brazilian companies (S/A, Ltda.), so this is not a new benefit. In general, creditors can only go after the founders’ personal assets to pay a company’s debts after a court investigation has determined that fraud or abusive activities were committed by the founders. The huge exception, of course, is the Brazilian labor courts. With the EIRELI, nobody is so sure about the extent of these new protective provisions. Brazilian labor courts don’t normally care about such protections and normally freeze the founders’ personal assets to protect an employee’s rights. This is true even if the company is an S/A or Ltda. Will this be true for EIRELI as well? Brazilian lawyers are still waiting to find out.”
Accelerators lend a helping hand
In closing, Witte and Levinsohn stressed the importance of seeking assistance when setting up a company in Brazil, placing special emphasis on the utility of accelerators such as 21212 for startups, where getting a good start is key. They explained, “The objective of the 21212 program is to help digital startups succeed in the Brazilian market at one of the company’s hardest moments: the beginning. We have a staff of proven entrepreneurs, designers, developers…and…yes…a full-time lawyer. We know how tricky these problems are, and — just as importantly — we know how important it is to get them all solved right so there won’t be any problems down the road. When our companies go on to raise capital, their investors will know the companies have been formed in a clean manner and in accordance with best legal practices.”
There are a number of resources available to help businesses maneuver the Brazilian bureaucratic jungle, and soon, 21212 will be launching an online service to help corporations and entrepreneurs do just that.