Top 7 Legal Mistakes Foreign Entrepreneurs Make When Starting a Business in Brazil
Brazil is an exciting market with enormous potential for growth, especially for foreign entrepreneurs looking to establish a presence in South America. But as many discover too late, the legal landscape can be complex and, if misunderstood, costly.
Over the years, we’ve helped dozens of foreign clients avoid costly errors when setting up businesses in Brazil. In this article, we’ll highlight the top 7 legal mistakes foreign entrepreneurs often make — and how you can avoid them.
1. Choosing the Wrong Legal Structure
Brazil offers different types of business structures, each with unique implications. The most common ones are the limited liability company (sociedade limitada) and the corporation (sociedade anônima).
Especially when a business is structured with multiple investors and/or equityholders, it important to fully understand which legal structure is more adequate and compatible with the entrepreneur’s goals, funding and future plans for expansion.
Choosing the right structure allows the use of the right tools to address the peculiarities of each business and investment.
The main features of the sociedade limitada and the sociedade anônima are available in an article prepared by MMR – Mastrocola Marcondes Rocha Advogados and available at https://mmrlaw.com.br/?p=340&lang=en.
2. Not Understanding the Tax System in Brazil
Brazil has a complex tax system. There are federal, state, and municipal taxes, and the taxation model depends on your business type, size, and sector.
Understanding the local tax system is crucial to prepare a business plan and determine the cost of operating in Brazil.
The tax reform recently approved in 2023, which mainly affects taxes on services and taxes on sales of goods, will result in a hybrid tax system in which old rules and new rules will coexist until 2033. Therefore, knowing the rules of the game before playing it is key to maximizing the chances of success of your business in Brazil.
3. Skipping the Local Legal Representative Requirement
If the equityholders or directors/officers of the local company are not Brazilian residents, it is mandatory that they appoint a legal representative (attorney-in-fact) who is based in Brazil.
Many foreign clients don’t realize this until they’re already deep into the process. This oversight can delay the company formation in Brazil.
It is not uncommon for foreign entrepreneurs to retain local firms to act (through their partners) as their legal representatives in Brazil and as directors/officers of the Brazilian entity. It is important that foreign investors retain firms that are reputable, trustworthy and competent.
MMR – Mastrocola Marcondes Rocha Advogados is ready to assist its clients in finding the right firm to render such fiduciary services.
4. Using Foreign Contracts
Contracts from other countries may not align with Brazilian law. Relying on templates adopted in other jurisdictions can lead to unenforceable agreements.
It is recommended that template contracts be revised and customized by a specialized Brazilian lawyer.
5. Misunderstanding Brazilian Labor and Employment Laws
Labor and employment laws in Brazil are employee-friendly and non-compliance can result in significant financial liability.
Depending on the characteristics of the relationship between the company and its workforce (for example, subordination and exclusivity), an employment contract may be in force even if it is formalized as a service contract. Contingencies usually arise under such circumstances, because employment relationships are subject to stricter employee rights and higher costs (labor charges) than service relationships.
Therefore, it is important to understand the different forms of contracts under which a company may retain its workforce, including employment contracts and service contracts.
6. Failing to Comply with Requirements Applicable to Regulated Industries
Certain industries are regulated and require companies to comply with specific norms and obtain specific authorizations or permits to operate.
Examples of such industries include financial institutions, insurance companies, gambling companies, aviation, telecommunications, among others.
Complying with regulations may be costly and, therefore, such costs should be considered by foreign entrepreneurs when structuring their activities in regulated markets in Brazil.
7. Failing to Seek Specialized Legal Assistance
Finding the right legal assistance is key to ensuring a smooth and safe process of incorporating and operating a business in Brazil.
Assisting foreign entrepreneurs requires not only expertise in the relevant legal fields (corporate law, tax law, labor law, contracts, etc.), but also knowledge of foreign structures and jurisdictions.
At MMR – Mastrocola Marcondes Rocha Advogados, our lawyers have vast experience with foreign clients and jurisdictions. Our firm is familiar with the needs of foreign entrepreneurs, which allows us to provide them with customized legal solutions.
Final Thoughts
Brazil is full of opportunities, but setting up a business here without proper legal guidance can be challenging. By avoiding these seven common legal mistakes, the incorporation and operation of your business in Brazil will certainly be smoother.
At MMR – Mastrocola Marcondes Rocha Advogados, we render tailored incorporation services and specialize in helping foreign entrepreneurs legally establish and grow their businesses in Brazil. Whether you need help with legal structures, contracts, tax planning or any other legal matter, we’re here to support you every step of the way.