Brazil Establishing Your Startup
Establishing Your Startup
- Brazilians only work 228 days a year: According to Brazilian law, no one can work more than 44 hours a week without receiving additional pay. Employees are also entitled to a 13th month salary, health benefits, transportation costs to work, one meal a day and 30 days paid vacation per year. Brazil also has an average of 16 national holidays per year and always be on the lookout for decreased productivity when the country recovers from carnival.
- Taxes are generally very high and mind-boggling. (38% of GDP vs 28% in the U.S.). A good accountant is a commodity, required by law and your best friend.
- Companies are typically taxed on their revenue. There are two types of tax regimes: lucro presumido (or estimated profit) and lucro real (or real profits). As the name implies, in the "lucro presumido" regime, you estimate a given profit based on revenues and pay a flat rate. The only type of business where you can defer tax on revenue is a lucro presumido. Expect to spend a lot of money to set up this type of company and more money on accounting/tax lawyers over time.
- "If the government wants to help entrepreneurs, they shouldn't incentivize them with capital. They should remove obstacles." @ericarcher
Simples. Brazil has the Simples tax model for young companies, that offers lower tax rates for entrepreneurs. Unfortunately foreigners are not allowed to own a company under the simples tax model.
If you're a foreigner, starting a company takes time. Be prepared to fill out lots of forms, get up early to be the first in line at government agencies and to study corporate/labor laws in your free time. The decision for how your company will be taxed can make or break a startup.
It is difficult to recruit top talent in Brazil. The majority of the best and brightest from the local workforce are pursuing stable careers in the government or big corporations. Other key factors that make it difficult to assemble great startup teams are:
Unemployment is almost non existent. Technical talent is so hard to find that developers are not afraid of being fired. It’s easy to find another job.
Startup hires typically choose a high salary and beneﬁts over equity. Most individuals would rather work for the government, banks or big corporations. 24% of economically active population work for the government. These jobs are seen as a high pay/low risk option.
Brazil has the highest executive pay in the world. Executives will not sue when fired. Taking a company to court will ruin their reputation. High paid executives are still inexperienced with technology and international business.
Brazilians technically cost double their salary. Every month, 68% of a businesses' salary cost is charged as a payroll tax.
Brazil does not have a lot of talented product managers or user experience designers.
Few generalists, many specialists. Some guys will do well in a corporate division of labor, but there are very few entrepreneurs that can do wireframing, photoshopping, front end development, etc. You won't find a lot of “full stack” employees in Brazil.
Brazil’s Cost of Hire
Who/Where to Hire
It takes a strong leader to unite a quality team in Brazil. Below are a couple places and strategies for finding the best people.
Brazil has been a location for US companies to outsource software development for a long time. Many individuals are tired of working for these huge companies where they work with archaic technologies and code quality is not valued. Take advantage of this frustration to find a veteran for your startup.
Freelancers that have extensive experience and positive feedback from past employers are also a good option. Consider checking Odesk and Workana for talented freelancers. Just make sure that they are capable of communicating effectively and being a part of a team. This is a common problem with freelancers around the world.
AngelList: Most of the time you can find the best talent on AngelList. These people are technologists that are ahead of the curve and looking to transfer out of the IT roles of the past. The majority of startups in Brazil are not on AngelList so take advantage of this recruiting opportunity while you have the chance.
As An Employer, Beware About:
Competitors are dangerous but employees can hit harder.
Entrepreneurs are not allowed to overwork an employee. Entrepreneurs are better off never even mentioning the total number of hours an entrepreneur can work.
The government will always take the side of the employee in any legal dispute. To hedge risk, companies will have salaried employees punch in and out of a time clock.
Brazilian employees have a hard time being direct and handling criticism. Trying to understand the needs of your employees and being constructive takes longer than expected.
It's hard to find talent that is proficient in English. Although some may be able to read, speak and comprehend, it is rare to find talent that can do all three.
Where to Incorporate
Incorporation is a delicate matter for a Brazilian startup because there are many conflicting viewpoints.
Invest directly into a Brazilian company can become complicated because the due diligence and paperwork can become overwhelming. However, keeping corporate structure as simple as possible is usually the smartest thing for a Startup.
Other startup companies will set up a “parent company” in a foreign country to serve as an “investment vehicle.” The parent company will “hold” a Brazilian entity that handles all the day to day operations.
Why incorporate abroad?
The most common locations that Brazilian entrepreneurs incorporate are the USA or Cayman Islands. There are many reasons for choosing to do so:
“It can be hard to swallow but it is the golden rule...the person who has the gold makes the rules. Losing access to mentors and investors from abroad is not worth the decrease in due diligence from maintaining only one company.” @wheretodrew
Why consider the Cayman Islands - The Cayman Islands serves as a “tax haven” for many global companies. Having a parent company located here can benefit your startup in many ways.
- Startup exits
The founders and investors will not be taxed when the company sells. Expect to retain the capital gains taxes that would normally be removed in the USA.
- Saved Money
It is not uncommon to see top notch local investors to push this structure for new founded companies. Setting up your company in the Cayman from the start can significantly reduce legal costs in the future.
Incorporating in Brazil
Weather a founder chooses to have a foreign entity hold the Brazilian company or he/she incorporates in Brazil from the start, choosing the correct company type and tax regime is crucial. Otherwise a startup will become susceptible to huge legal and tax risks.
The most common company types are a Limitada (similar to US's LLC) and the Sociedade Anônima (S.A) (similar to C Corporation in the US).
The Limitada is the most simple and inexpensive type of company to operate but foreigners should still expect a lot of headaches. Common characteristics include:
- The company must have two shareholders.A shareholder is defined as a Brasilian resident or other corporate entity.
- A foreigner will need a permanent work visa and a Brazilian power of attorney to be considered an owner of the limitada.
- The Limitada is run based on its Articles of Association (or Contrato Social), which must be registered with the local Companies Registry (Junta comercial).
Sociedade Anônima (S.A)
S.A.s are much more expensive to run, however they most closely resemble a US Corporation and are therefore more flexible when organizing the parent-subsidiary relationship.
The S.A. is incorporated by subscription of the company’s shares by at least two individuals or companies, whether or not they are resident in Brazil.
The S.A.’s corporate purposes must be specifically and fully described in its by laws (estatuto social).
The By-Laws must be registered and published, before operation starts.
The S.A. regulation provides enhanced transparency and simpler shareholder relations, but it comes with higher administrative costs.
Once the company has been incorporated, you have to obtain several registrations and permits, based on activity and location. This is usually a time consuming exercise.
In the United States companies find loopholes in a single system of taxation. In Brazil, companies need to choose from a variety of different systems.
Making the wrong choice can result in a startup company being taxed 17% on every invoice that they issue.
There are two types of tax regimes: lucro presumido (or estimated profit) and lucro real (or real profits). As the name implies, in the "lucro presumido" regime, you estimate a given profit based on revenues and pay a flat rate. The only type of business where you can defer tax on revenue is a lucro presumido.
Expect to spend a lot of money to set up this type of company and more money on accounting/tax lawyers over time. Most companies prefer "lucro presumido" for various reasons.
Due to the complexity, accountants are both a necessity and a requirement of company registration.
Brazil requires foreigners to have work visas to get a job at a Brazilian company (Even if it's your company).
In order to obtain your work visa, there's a big list of requirements. Here's the basic stuff you'll need:
In-person submission of paper application forms;
Proof of residency for the last twelve months within the country where the application is submitted;
Non-criminal record from the police department of the applicant’s city of residence;
Payment receipt for an equivalent of a US$100 application fee (US citizens also pay additional US$130 reciprocity fee);
Proof of the applicant’s affiliation with the hiring entity/organization.
Registration with the Brazilian Federal Police upon arrival in the country.
Once all materials have been submitted to the consulate, the application procedure takes an estimated five business days.
You must also have a work contract between you and your company to be able to work from Brazil.
Unfortunately, there is no way to switch between tourist visa and work visas while remaining in Brazil. A local authorized person may request the visa on behalf of the applicant, but he has to return to his home country and then re-enter Brazil on the new visa.
Another way to obtain a work visa is by investing at least $50,000 into your new company.
It is interesting to note that many entrepreneurs sometimes get stuck with bureaucracy and they end up living/ working illegally in Brazil. They will incorporate their business abroad to receive investment and then use friends or other companies to help them operate their business and navigate the bureaucracy overtime instead of it bringing things to a halt.
Penalties for Overstaying a Visa
Penalties for overstaying a visa include:
Fines of R$8.50 per day upon exit. This penalty maxes out at around R$850.00.
As long as the fee has been paid, there is usually no further entry barrier. In fact, you could just stay in Brazil. If a founder decides to leave and come back, another fine will be paid but they will still be able to enter the country.
Lover's Tip: Get married or have a child to be able to change your visa status without having to leave the country.