By Robert Eugene Di Paolo
My previous article provided you with a basic understanding of Brazil’s legal system and discussed some of the obstacles you may encounter doing business there. At this point, we are ready to consider the various types of companies through which you can conduct your business in Brazil. But, before we jump into our discussion of the different types of Brazilian legal entities, I should note that it’s possible to speed up the process of starting a business in Brazil by greasing the palms of the federal employees responsible for processing your paper work.
While this practice would appear to be fairly common in Brazil, as it no doubt is in other developing countries, and while you certainly get the impression that the hands of the federal employees processing your various applications are out and waiting to be filed, bribing a federal employee is a violation of Brazilian law, as well as the U.S. Foreign Corrupt Practices Act, or the FCPA. The FCPA strictly prohibits the payment or offer of money, or any other item of value, to an official of a foreign government, either directly or indirectly.
So, while waiting for things to happen in Brazil can often feel like waiting for paint to dry, or worse waiting for Godot, attempting to speed up the process by bribing a federal employee is not recommended. Not only is it against the law, but the way of the bribe is a one way street. Once you head down this path, there is no return. You will be expected to continue to grease the same palms over and over again.
Similar to the U.S., there is more than one type of company you can establish in Brazil. While Brazilian law provides for several types of companies, the most common types are the Sociedade Anônima, or S.A. and the Limitada, or Ltda. The Sociedade Anônima is similar to a U.S. corporation. Its capital is divided into one or more classes of shares, which can be offered to the general public or closely held by only a few shareholders. A Limitada on the other hand, which is similar to a U.S. limited liability company, or LLC, can only be a private or closely-held company. Like an LLC it is a hybrid between a partnership and corporation, with its capital being divided into equity units referred to as quotas, which are registered rather than represented by a “share” certificate.
While both Sociedade Anônimas and Limitadas provide limited liability to their shareholders or quotaholders, the notion of limited liability in Brazil does not necessarily carry the same significance as it does in the U.S. While a discussion about piercing the corporate veil or corporate form is beyond the scope of our current discussion, keep in mind that except for very unusual circumstances, in the U.S. the liability of the shareholders of a corporation and that of members of an LLC is limited to their capital contribution, while in Brazil it is possible for the creditors of a company to pursue not just the shareholders or quotaholders, whose liability can exceed their capital contributions, but the managers and directors as well.
In terms of taxation, both the S.A. and the Limitada, like a U.S. corporation are taxed at the entity level; however, unlike a U.S. corporation the distributions or dividends paid to shareholders and quotaholders are not taxed. This is different than in the U.S. where corporations are subject to double taxation and LLCs are by default treated like partnerships, which are not taxed at the entity level, but which distributions are taxed in the hands of the recipient thereof. As you might imagine this taxation scheme leads to all sorts of creative tax planning. Both thee Sociedade Anônima, and the Limitada require at least two shareholders, or quotaholders in the case of an Ltda. If all the shareholders or quotaholders are non- Brazilians, then the management powers of the company must be delegated to a permanent Brazilian resident. However, if you are investing US$50,000 or more in Brazil, you will be able to obtain a permanent residency visa for you or the person who will mange your business through the so called Brazilian Investor Program for Foreigners.
Another important distinction between the U.S. and Brazil is that while in the U.S. state law governs the formation and operation of corporations, LLC’s and other legal entities, in Brazil, such entities are governed by federal law. But don’t get ahead of yourself thinking that finally there is something about Brazil’s legal system that seems more straight forward than that in the U.S., where deciding which state in which to incorporate can be an important consideration. While the laws governing legal entities in Brazil are uniform through out the country, the registration process, as well as the length of time required to process the registration of a new company, can differ, and substantially so from state to state.
According to the World Bank, the states of Minas Gerais and Rio Grande do Sul are the easiest states in which to register a new company, while the states of São Paulo, Ceará and Maranhão are the most difficult. Fortunately, certain states have begun to take measures to streamline the registration process, which is spread out among several different governmental agencies, in order to reduce the number of steps necessary to start a new business in Brazil. For instance, the state of Minas Gerais has introduced a one-stop shop to reduce the number of procedures from 17 to ten.
However, as was cautioned in our pervious discussion, its better not to get into the mindset of thinking in terms of the number of steps or procedures required to open a new company in Brazil. Each procedure can require multiple documents and completing long forms, all of which tends to further complicate the process with the result that applications are often rejected, and for reasons which can seem utterly mind boggling to someone used to organizing a corporation in the state of Delaware in less than 24 hours. So, if you begin thinking in terms of steps, you will be checking them off one by one, only to have to reconfigure your checklist when one or more of your applications are rejected and must be resubmitted. Remember, the operative mindset you need to commence a new business, buy a company or invest in Brazil, is patience, a virtue which tends to be lacking in those of us who are more accustom to dealing with the legal systems in the U.S. or U.K.
* Robert Eugene Di Paolo is the co-founding managing director of the Fidelis Grupo Legal de Consultoria Ltda., a legal business consulting group specializing in assisting non- Brazilians who want to do business or invest in Brazil.