You’ve probably heard that after reaching a certain stage, startups need to set up a holding company abroad to raise investment outside their home country.
This practice has become the standard in the Latin American venture capital industry. In this article, you’ll learn about the advantages of creating a holding company, either domestically or abroad, as well as the most common types of international legal structures for LATAM startups.
Specifically, we’ll cover the following topics:
- What is a holding company?
- What is a subsidiary?
- Why create a holding company?
- Functions of the subsidiary
- Popular jurisdictions for holding companies
- The jurisdiction of Delaware
- The jurisdiction of the Cayman Islands
- International legal structures for LATAM startups
- Cayman sandwich
- Delaware LLC and C-Corp
What is a holding company?
A holding company, also known as a parent company, can be domestic or foreign and holds a majority stake in a group of subsidiary companies or corporations.
What is a subsidiary?
A subsidiary is a company controlled by a parent company or holding company. It carries out the business operations of the corporate group.
Why create a holding company?
You’ve probably wondered: Why do startups in Latin America need to set up a holding company? There are several reasons, but here are the most important ones:
- Foreign investors will ask you to set one up to provide them with legal certainty about the jurisdiction governing their investment.
- The holding company holds the investment raised by the company, protecting it from operational risks.
- If necessary, the investment can be distributed to the subsidiaries.
- Depending on the jurisdiction where the holding company is located, it may offer tax benefits.
Functions of the subsidiary
In short, the subsidiary company or companies are responsible for operations. These operations can include the following activities:
- Hiring employees
- Working with suppliers and partners
- Providing service to end customers
- Generating sales
Standard jurisdictions for holding companies
In the Latin American venture capital world, we find 2 of the most popular jurisdictions for international legal structuring: Delaware and the Cayman Islands.
The jurisdiction of Delaware
For several years, the state of Delaware in the United States has become a popular choice for companies being formed by founders from Latin American countries. This is mainly due to the following factors:
- A preferential tax rate compared with other jurisdictions.
- The law allows tax exemptions for limited liability companies (LLCs) owned by nonresident foreign nationals, provided they do not operate within the state.
The jurisdiction of the Cayman Islands
The 2 most popular jurisdiction for startups is the Cayman Islands.
This jurisdiction can also be a viable option for the following reasons, which make it “venture capital-friendly”:
- There is no 2 taxation.
- It adopts the United States legal system.
- Ideal for tax-efficient exits.
International legal structures for LATAM startups
In the Latin American venture capital world, we find 3 common international legal structures for startups in the region: the Delaware C-Corp, the Delaware LLC, and the so-called “Cayman sandwich.”
Cayman sandwich
It gets its name from the 3 types of companies that make it up: a Cayman Islands limited company, a Delaware limited liability company (LLC), and a local operating company in the respective country.
Each company has its own role: the Cayman Islands company is the holding company, the Delaware company acts as a “blocker” between the holding company and the subsidiary, and the local company serves as the operating subsidiary.
Delaware LLC and C-Corp
In this jurisdiction, depending on the startup’s objectives, you can choose an LLC or a C-Corp.
This company will act as the holding company and will be directly connected to the local subsidiary or subsidiaries in each country.
Conclusions
The structures discussed in this article are not the only international structures available to Latin American startups, but they are the most common.
It’s also important to emphasize that these structures are not a method of tax evasion, since each company pays all applicable taxes in the relevant jurisdiction.
Always remember to consult a lawyer to determine the right jurisdiction and legal structure for your startup. If you’d like personalized advice, get in touch with us at SLLM.
See you in the next articles, where we’ll take a closer look at each of the legal structures presented here.