Craig DempseyLatin America is on the world radar as a region of fast growth and rapid development. As the Asian continent’s growth slows, Latin American markets are offering arguably better growth opportunities for investors.
Regional GDP is set to continue on an upwards trend in 2020, thanks to the region’s ‘big four’ economies: Brazil, Mexico, Colombia and Argentina. Continuous improvement backed by governments to open these markets is great news for foreign investors, who are flocking to the region.
Here, we outline some commonalities shared by Latin American markets in forming or incorporating a company.
Choose your Business Type Carefully
When starting a business in Latin America, it is essential to choose the legal structure that best suits your commercial needs. There are several common business structures offered in the region. Though requirements may differ slightly from country to country, key options for foreign business owners (and their corresponding Spanish names) include:
- Limited Liability Company (Sociedad de Responsabilidad Limitada, or SRL)
- Foreign Branch Office (Sucursal de Sociedad Extranjera)
- Corporation (Sociedad Anónima, or SA)
- Simplified Shares Company (Sociedad por Acciones Simplificadas, or SAS).
Business Structure Benefits
Each entity offers different benefits to the business owner.
Consider the needs for your operations and choose your structure based on the type of business and activity, number of partners you need, and any opportunities to receive tax benefits. This legal structure will define your requirements and the overall dynamics of your business.
A Limited Liability Company will protect a shareholder’s personal assets from company liability. A Foreign Branch Office can be overseen by the parent company in their home destination or headquarters.
For businesses with several partners, large and diverse economic structures, strict operational controls, the Corporation may be the most suitable business type. The S.A and other companies can, in some places, enjoy preferential tax treatments and streamlined incorporation times.
The Simplified Shares companies offer flexible management arrangements and processing requirements, making it the most opted-for business structure in many countries.
In the event that the partners are few and well known amongst each other, no prompt structure changes are planned, and management is decentralized, it would be advisable to use a Limited Liability Company, since it allows a more dynamic administration. Any change in its configuration must be registered, with the costs and delays applied by various authorities responsible for processing them.
Trending Business Reforms
Lately, there has been a trend towards the establishment of SAS entities in several countries in the region, who seek to simplify and facilitate formation procedures and requirements in order to promote business activity.
In addition to that, others are reaching out to support the small and medium enterprises (SMEs) that represent a large part of their economies – especially those reliant on agricultural products grown and produced by family farms.
Consider how these developments can benefit your company; tried and true business offerings may not necessarily fit the mould of what you’re trying to achieve.
Understanding the Legal Requirements
Once you’ve chosen the most suitable type of company for your business, the next step is to understand and comply with the basic requirements for its incorporation, which are similar across many Latin American countries.
Establish a Legal Domicile
Your business must establish an address in order to determine its jurisdiction of origin and the tax and legal regulations applicable to it. The address is important for all official communications between the business and local authorities.
Legal Representative
It’s helpful – and often mandatory – to appoint a person to act as the legal representation of the company. This person can make decisions on behalf of the business, based on its best interests. A legal representative can sign documents for the company, and makes sure all legal requirements are met in the eyes of local authorities. In case of a dispute the legal representative will be the voice of the company.
It’s important to note that legal representative position usually coincides with that of the Director, Manager or Administrator of the company. However, in some cases they can be separated, and be exercised by different individuals. You can outsource your legal representation, which can be beneficial in that local experts have a greater understanding of the country’s legal compliance requirements.
Registering Shareholders
All Latin American countries allow shareholders who are natural or legal persons, local or foreign of the country where the company will be incorporated. They do require that they’re registered before establishing your company. That is, they must previously obtain a tax identification number in order to be considered a shareholder of the local company.
The process of registration of shareholders varies widely, both in terms of duration and requirements between the different countries in the region, and the type of person (physical or legal). It’s highly recommended you seek local advice on the specific process for your chosen country.
Social Capital
Having already determined your business activity, and it legal and human composition, you must then determine the social capital. Essentially, this is the capital that will be invested in your commercial intentions or project. This capital legally serves as a guarantee to third parties of how far the company will be able to respond in case of debts or liabilities.
A small social capital will not facilitate a large investment and may not be attractive to third parties looking at partnering with the company, based on confidence in the business’ financial security. However, all legal systems allow the reform of social capital agreements after the company’s formation, to adapt it to what is available.
In general, most countries require that, at the time of the incorporation of the company, 25% of the share capital be integrated (deposited), the remaining being integrated within the next two years. With this, it will not be necessary to have all the capital to invest at the time of the formation.
Open a Bank Account
You’ll most likely need to open a corporate bank account, no matter where in Latin America you’re choosing to set up. This enables customers to pay for goods and services, and for you to pay suppliers, staff and government authorities as required. Keeping your personal and business funds separate avoids confusion and maintains professionalism. On top of that, accounting and invoicing processes will be much easier for your company.
In many cases, you’ll need to meet a minimum opening balance, and identify a guarantor responsible for the account.
Seek Guidance As You Go
Thankfully, many countries in Latin America share commercial similarities in how they facilitate business incorporation. However, vastly different economic and political climates do mean that countries’ incorporation ecosystems also possess particularities that are crucial to pay attention to.
More often than not, seeking local legal guidance is a surefire way to safeguard your company from compliance failure, financial penalties, or even delayed registration and incorporation times. Latin American countries foster comprehensive local expertise that you can lean on to ensure your business starts off on the right foot.
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