By Robert Eugene Di Paolo
In previous articles we navigated our way through a basic understanding of Brazil’s legal system, discussed some obstacles to doing business there and surveyed the differences between Brazil’s two most common types of legal entities. In this article we will walk our way through the mechanics of establishing a Brazilian Limitada, which is the most popular type of company used in Brazil and more or less Brazil’s equivalent of a limited liability company.
Before we examine the specifi c requirements for establishing a Limitada, let’s take a moment to put our discussion into perspective. It’s easy to forget that Brazil is not the USA or whatever country we happen to be from. By nature, we tend to expect things to work in Brazil as they do elsewhere. As a result, we end up feeling frustrated a good deal of the time because things do not always work in Brazil as they do in our own country or other countries in which we have worked. However, by taking the time to understand a little bit about Brazilian culture, how things work there, and by being willing to adapt to a different set of rules, we can learn to appreciate the differences and discover the rewards of doing business in Brazil.
Driving may provide a helpful analogy. Driving in Brazil, say São Paulo or Rio de Janeiro, is nothing like driving in most American cities. In fact, driving in Brazil could be described as chaotic by comparison. To the uninitiated, it seems like there are no rules or if there are any rules no one seems to follow them. Rather than an orderly experience with a premium on order and safety, driving in Brazil is more like playing a video game. You’re never exactly sure how all of the features work, where all the dangers lie or from what direction such dangers may come. This makes driving in Brazil an experience which requires one’s constant attention and absolute vigilance with a focus more on traffi c fl ow than an offi cial set of rules, stop signs or traffi c signals. As a result, when driving in Brazil its generally better to approach it as an adventure or perhaps a cultural learning experience, rather than to compare it to what it is not or to treat it as merely something to endure in order to get from one point in the city to another.
Keeping this in mind, it is often helpful to compare how things are done in one country with how they are done in another, to provide perspective and to supply us with a road map by which we can anticipate the turns, twists and other obstacles we may encounter along the way. This is particularly true when it comes to how long it takes to get things done in Brazil as compared with other counties.
With this in mind, let’s focus on some of the steps required to establish a Limitada through which to operate a business, buy a business or invest in Brazil. For comparison sake, let’s say we wanted to form a company in the USA. Our friends at the World Bank, who have determined that the USA ranks third, right behind Singapore and New Zealand in terms of ease of opening a new business, boil this process down to fi ve rather easy steps, each taking one day, some of which can be performed simultaneously, so that you can be up and running in a week or less.
These steps include registering the business name and fi ling the certifi – cate of incorporation or formation with the secretary of state in the state where you are forming your company, and obtaining an employer identifi cation number. If you plan to have employees, you will need to register for sales tax, unemployment insurance and arrange for workers compensation insurance. That’s pretty much it, unless you need to obtain specifi c licenses for your business, or you’ve decided to form a limited liability company, in the state of New York, which absurdly requires you to publish notice of the formation of your company in two newspapers over a period of six weeks within 120 days of formation.
Now let’s say that you’ve decided to form a Limitada in Brazil through which to do business. The World Bank divides this process into 17 steps, which together can take up to 152 days. As discussed in our pervious columns, the steps and length of time required to compete each step may differ from state to state, but the process is essentially the same across Brazil. One reason the process can take so long is that the fi ling requirements are spread out across various governmental agencies. For instance, to fi nd out if the name you want to use for your company is available, you must go to the State Commercial Registry Offi ce. But to form the company, you need to fi le what is know as the Contracto Social, or Social Contact, essentially the equivalent of the articles of incorporation and the articles of association or by-laws with the Commercial Board of Trade or the Register of Civil Companies, depending on whether the company’s activities will be civil or commercial.
To form a Limitada, you must have a least two shareholders, or quotaholders as they are referred to in Brazil. Each quotaholder must sign the Social Contract to register his, hers or its equity interest or participation in the Limitada. However, since you are not a Brazilian, you will not be permitted to sign the Social Contract on your own behalf. Nor will any other quotaholder that is not a Brazilian citizen or legal resident in Brazil. Why is that? Well, your signature cannot be verifi ed in Brazil, since you have no legal status there and Brazil is not a party to the Hague Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents or the Hague Apostille Convention, which greatly simplifi ed the process of authenticating documents among foreign countries.
To work around this problem, you must grant a power of attorney, or POA to a Brazilian citizen or legal resident in Brazil, authorizing such person referred to as your attorneyin-fact to sign on your behalf. Generally, you will grant the POA to the Brazilian lawyer whom you have hired to draft your Social Contact and to form your company. Nonetheless, it’s worth noting that in Brazil an accountant can perform the same tasks for you. However, using an accountant to do legal work is generally not recommended, and for obvious reasons.
Since Brazil is not a signatory to Hague Apostille Convention, the POA must be signed and notarized in your country of origin and then legalized or consularized by the Brazilian Consulate or Embassy which has jurisdiction over the state and/or country in which you reside. Essentially, the legalization or consularization of documents is the process by which your signature is authenticated so that it will be legally recognized in Brazil. To complicate matters further, many Brazilian Consulates, for whatever reason only accept postal money orders to pay for the fees involved. That’s right, no checks (very un-Brazilian), not even bank or certified checks, no credit cards and no cash.
Once you have had your POA legalized at the Brazilian Consulate or Embassy, you will forward it to your Brazilian lawyer. Your lawyer will arrange to have your POA translated into Portuguese by an officially recognized translator known as a “Sworn Translator”. After the POA has been translated, it will be registered before a public notary in Brazil. Now your attorney-infact can sign your company’s Social Contract on your behalf, and file it with the proper governmental agency to form your company.
Once your Limitada has been organized you will need to register with the Office of Federal Revenue of the Finance Ministry to obtain a tax identification number for your newly formed company, known as a CNPJ. You will need to register any employees you hire with the National Institute of Social Security. And you will also need to register with the Tax Authorities of the state in Brazil where you formed your Limitada. In addition, you will also want to hire an accountant to assist you with your fiscal filing obligations, including the payment of various taxes associated with owning a company and doing business in Brazil.
In comparison to other countries, forming a company in Brazil can seem unnecessarily cumbersome. Certainly there is much Brazil could do to streamline the process. However, if we approach the process as an adventure or perhaps a learning experience, rather than simply comparing it to what we are used to or how we think things should be, forming a Limitada need not be a painful process.Needless to say there are several other steps, including getting authorization to print invoices and official receipts known as nota fiscals, obtaining any required operating permits and registering employees with in the unemployment insurance program.
You may even be required to obtain a Fire Brigade license from the state in which you have formed your Limitada. But, for now there is no need to elaborate further on all of the steps or potential steps required to get your company up and running; your lawyer will assist you with this. Besides, I wouldn’t want to lose the few readers who have stuck with us this far. If you would like to review all the steps and the estimated time required to complete them, you can always take a look at the World Bank’s Doing Business Website at www.doingbusiness.org.
With this in mind when doing business in Brazil it’s sometimes helpful to think about being in line at Disneyland. It’s not so much about how long the line is, or even the fact that we have to wait in it. After all, this is what we expected when we decided to participate in one of America’s premier cults of consumerism. What we really want to know is how long we’re going to have to wait in line.
Well, Disneyland, at least the one time I was there cleverly deals with this problem by posting signs along the way that tell you how much longer you will need to wait from that point on, thereby managing your expectations. It’s with this idea in mind that we need to approach doing business in Brazil in general, and establishing a Limitada in particular. Our goal at this point is to manage our expectations, to understand that there is a line in which we will have to wait and to get an idea as to how long we may have to wait there. Generally speaking, the time required to form a Limitada and obtain a CNPJ can range from two to three months.
* 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.