Key legal structures for Latin American startups

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Launching a startup in Latin America is challenging enough without adding the the chosen legal structure becomes a hindranceHowever, this is exactly what happens to many founders: they get carried away by trends, copy what they see in other companies, and end up with corporate structures that skyrocket taxes, complicate investment, or make a future sale on good terms almost impossible.

To fully understand the Legal structures for Latin American startups It's not a luxury for when the company is big; it's a strategic decision that must be made from the outset, with a cool head, considering the type of investors you want to attract, the countries where you'll operate, and the tax implications in each jurisdiction. The most common options, the mistakes that are repeated time and again in the region, and the alternatives that startups raising international capital are using today are explained in detail.

Why is choosing the right legal structure so critical?

In the context of Latin Americawhere the political, social, and fiscal environment changes frequently, having a solid, flexible and well-thought-out legal structure It makes the difference between being able to scale and being stuck in red tape, facing unexpected taxes, and dealing with disgruntled partners. Making a poor decision during incorporation can block investment rounds, complicate M&A processes, or even jeopardize the business's continuity.

The problem is not just theoretical: many companies in the region have ended up paying millions of dollars in taxes in the United StatesDespite not having clients there, they have either spent fortunes on lawyers and accountants trying to undo poorly designed C Corp or holding company structures. All because initially they were content to "do what everyone else does" without examining how the situation affected them. double taxation between the US and their country of origin.

Corporate structure also directly influences access to capital: funds from venture capital They tend to prefer models they know and are familiar with, such as the Delaware C Corp or “Cayman sandwich” type schemes, while other vehicles, such as the Delaware LLCThis raises concerns for certain institutional investors. Choosing a structure that is exotic for your jurisdiction or unfriendly to VCs can simply lead to problems. decide not to invest.

Furthermore, a poorly designed structure becomes especially painful when it comes time to exit. A typical example is that of startups that, after years of operating in Latin America, discover that selling generates double or triple tax burdens because the parent company is in the wrong jurisdiction, forcing the holding company, the subsidiary, and then the individual partners to pay taxes in their countries of tax residence.

Therefore, rather than mandatory paperwork, the choice of legal structure should be seen as a key piece of the growth strategyIt conditions future rounds, the entry of new partners, expansion into other markets and the ability to close cross-border operations without the Treasury taking a disproportionate part of the value created.

International models most used by Latin American startups

In recent years a small group has consolidated recurring international legal structures in Latin American startups that aspire to raise global capital or be sold to foreign companies. Not all of them serve the same purpose, nor do they have the same tax impact, so it is important to clearly differentiate what each one contributes.

Delaware C Corp: The Standard for VCs, with the Fine Print

La Delaware C Corp It has become the preferred structure for many venture capital funds, especially those based in the United States. In the eyes of VCs, it offers regulatory clarity, flexibility to issue shares, stock options and successive rounds, as well as a well-proven corporate legal framework for M&A transactions and initial public offerings.

For a Latin American founder, setting up a C Corp in Delaware can be very attractive if the goal is that, in the medium or long term, the acquire a US company or if you want to operate significantly in the US market. In addition, many US accelerators and funds are comfortable only investing in these types of entities and directly require it as a condition for entering the cap table.

The problem is that everything it gives, it also charges for. Since it is a company subject to corporate income tax in the United StatesTypically around 21%, if the startup's main activity is in Latin America, or if in an M&A the buyer only wants to acquire the local subsidiaries, the C Corp faces a heavy tax burden on capital gains. This is in addition to the taxation that subsequently falls on the partners (founders, business angels, etc.) in their countries of residence.

Furthermore, the C Corp is not a flexible figureOnce created, it cannot be easily converted into an LLC, and restructuring it afterward involves significant legal costs, renegotiating investment contracts, reviewing asset option plans (ESOPs), transferring the cap table, and reissuing safes or convertible notes. Many founders underestimate these costs until it's too late.

Delaware LLC: flexibility and tax efficiency, but less favor with VCs

La Delaware LLC It is a limited liability company with a "pass-through" tax structure, meaning the company itself does not pay taxes on its profits; instead, the tax burden is passed directly on to the partners. This can be very efficient in exit scenariosespecially if the buyer decides to keep the Latin American subsidiaries and not the US holding company.

In this type of structure, the money received from the sale may not generate taxation within the LLC itself and is only taxed at the level of partners or holding companyFurthermore, if the owner of the LLC is an entity in a jurisdiction like the Cayman Islands, which may be exempt from certain taxes, the outcome for the founders and investors is much more favorable than with a conventional C Corp.

Another relevant advantage is that the LLC allows subsequent conversion to C CorpIf in the future a US company wants to buy the startup and requires that the holding company be a C Corp, it is possible to transform the LLC into a C Corp, giving the founder leeway to avoid committing from day one to the least tax-efficient option.

However, the downside is that many institutional investors don't love LLCs. Because they are a vehicle in which profits and losses are passed on to the partners' financial statements, Some funds prefer not to be exposed to that structure, or they simply have internal processes designed to invest only in C Corps. Furthermore, if you plan to operate intensively in the US, an LLC may not be the optimal option from an operational and tax perspective.

Holdings in the Cayman Islands and “Cayman sandwich” combinations

In the startup ecosystem that raises large rounds with global investors, the use of the Cayman Exempted Company as an international holding company. It is a Cayman Islands company that, if well designed, can offer a very competitive tax environment and be more neutral in the eyes of investors from multiple countries.

A paradigmatic case in the region is the so-called “Cayman Sandwich”An Exempted Company is structured in the Cayman Islands as the parent company, below it an LLC in Delaware, and finally, the Latin American operating subsidiariesThis architecture emerged, in part, as a reaction to negative experiences with direct C Corps, where exits generated huge tax bills for founders and early investors.

The logic behind the Cayman sandwich is multifaceted: on the one hand, reassures regulators and local counterparties In countries where it is viewed with suspicion that the parent company of an operating company is directly based in the Cayman Islands; on the other hand, it concentrates the purchase operations in a single entity (the LLC or the holding company), facilitating due diligence and reducing legal complexity when several subsidiaries are sold at once.

However, it's not all advantages. In some Latin American countries, the Cayman Islands are considered non-cooperative jurisdiction or tax havenThis triggers certain formal obligations, withholdings, or additional controls. Furthermore, there may be a slight reputational risk This is especially important when dealing with banks, suppliers, or auditors who are unfamiliar with these types of structures, making it essential to have advisors who can explain and document them properly.

Societies in the United Kingdom as a less frequent alternative

Another option that is seen, although less frequently, are the companies incorporated in the United KingdomThese types of entities can serve as international holding companies, but they have particularities that do not always fit with the expectations of VCs and with the operational reality of Latin American startups.

In the United Kingdom, the Shareholder records are publicThis is something that doesn't appeal to certain investors and founders, especially if they want to maintain privacy regarding their holdings. Furthermore, there are recurring costs such as annual accounting fees (which can be around $2.000) and income tax. share transfer, usually around 0,5%, which can reduce the attractiveness of transactions with a lot of equity movement.

For these reasons, and because of the relative complexity of their regulation compared to other alternatives, holding companies in the United Kingdom are usually less common than structures in Delaware or the Cayman Islands when it comes to Latin American startups seeking international venture capital.

Local structures in the main countries of Latin America

Beyond the international holding company, any startup operating in the region must know and take advantage of the local business structures designed for entrepreneursIn many cases, these structures facilitate rapid incorporation, protect the partners' assets, and integrate well with subsequent investment schemes.

Argentina: Simplified Stock Company (SAS)

In Argentina, the Simplified Share Company (SAS) It has positioned itself as the preferred corporate structure for innovative projects. It allows the company to be formed with a single partner, significantly streamlining the first steps for those starting out as individual founders or with a minimal team.

The SAS stands out for its Relatively quick and flexible proceduresThis is ideal for startups that need to begin with little capital but have the ambition to grow quickly. A well-known example in the Argentinian ecosystem is Ualá, a fintech company that relied on this type of structure in its early stages to be able to move forward without a cumbersome infrastructure.

Chile: Public Limited Company (SpA)

In Chile, the SpA (Sociedad por Acciones) It has become the preferred model for startups like Global 66 or NotCo in their early stages. This structure allows them to a single person is a shareholderIt provides considerable freedom to regulate relationships between partners and facilitates the entry of new investors through capital increases.

The flexibility of the SpA, especially in relation to transfer of shares and shareholding structureThis makes it very interesting for founding teams that don't yet want a large number of partners, but also don't want to be locked in when it comes time for a seed or pre-seed round.

Colombia: Simplified Stock Company (SAS)

In Colombia, the SAS It's practically the standard in the entrepreneurial ecosystem. High-growth startups like Rappi have relied on this figure, which combines asset protection for partners with flexible regulations to incorporate external investment and adjust the cap table as the company grows.

One of its great virtues is that facilitates the entry of new partners without having to rebuild the company from scratch, by allowing shareholder agreements, issuance of different classes of shares and a relatively modern governance compared to more rigid structures.

Mexico: SA and S. de RL depending on the type of project

In Mexico, startups typically face two main options: the Public Limited Company (SA) and the Sociedad de Responsabilidad Limitada (S. de RL)The choice depends largely on the size of the project and whether institutional investment is expected.

SA is especially useful when you want issue shares and attract investment fundsas leading companies like Kavak have done. It's a structure more aligned with the venture capital world, which values ​​the clarity of shareholdings and the ease of raising capital.

On the other hand, the S. de RL fits better with smaller or family-oriented projectswhere the goal is not so much to raise large rounds as to maintain a small and stable group of partners. While it may not be as attractive to VCs, it offers simplicity and good limited liability protection.

Peru: Closed Corporation (SAC)

In Peru, the Closed Corporation (SAC) It's a formula widely used by growth-stage startups that aim to bring in key investors without losing control of the company. A prime example is the fintech company Culqi, which opted for this structure to manage the entry of strategic shareholders in an orderly fashion.

The SAC allows integrate new partners while maintaining a limited number by establishing clear rules for the transfer of shares and by regulating shareholders. This makes it suitable for projects that need capital but do not want excessive shareholding dispersion or the public exposure of publicly traded companies.

True story: the cost of a bad structure in an exit

A particularly illustrative case in the Latin American ecosystem is that of a Argentine startup in the fintech sector which ended up paying dearly for having accepted without question the structure requested by an accelerator. This company had been selected for a program in which it would receive $15.000 in fundingbut in return they were required to form a Delaware C Corp as the parent company, above its Argentine company and another subsidiary in Mexico.

The founders met the requirement, created the C Corp, received the funding, and completed the program. Some time later, a European company became interested in acquiring the startup. During the due diligenceThat buyer discovered that the parent company was in the United States and decided that he preferred to acquire directly the subsidiaries in Argentina and Mexicoso the payment for the transaction was made in favor of C Corp.

When the transaction takes place between the European company and the C CorpThe profits generated were subject to income and dividend taxes in the US, and subsequently to the personal taxation of the partners (founders and angel investors) in their countries of tax residence. The total tax impact exceeded $600.000, a huge amount for an M&A transaction of around $2 million.

This case became a frequently cited example by renowned lawyers specializing in startups and venture capital, who used it to to convince funds like Kaszek Ventures to adopt alternative structures when investing in Mexican companies and those from other countries in the region, avoiding replicating that "fatal destiny" for new projects.

When the investor requires a foreign company

In practice, if the investor is foreign, the usual answer to whether a [company name/investment plan] should be created is [to create a company name/investment plan]. society abroad That's right. Many international VCs are uncomfortable investing in unfamiliar local jurisdictions, especially in Latin America, where they perceive high risks associated with... Political, social and economic instability.

The first thing is to choose well. the jurisdiction and the type of company which will act as the parent company. The most common and widely accepted options for venture capital funds are Delaware and Wyoming in the United States, in addition to Cayman structures depending on the type of funding round and investor. Let's assume the investor is American, one of the most frequent cases: in this scenario, C Corp and LLC structures primarily come into play.

If you choose the model C Corp (Delaware) + Latin companyThis results in a structure highly aligned with the US ecosystem. It's ideal for those aspiring to operate in the US or be acquired by another C Corp, and it offers a comfortable framework for VCs. However, in return, it carries the risk of a considerable tax burden and... double taxation in an exit eventbecause the C Corp pays taxes on profits and then the partners pay taxes on dividends and capital gains in their countries of residence.

In contrast, the model LLC (Delaware) + Latino Society It works well if the holding company will primarily serve as a vehicle for receiving capital from investors and then channeling it to the operating subsidiary in Latin America. It's flexible (allowing for conversion to a C Corp later on) and its pass-through structure prevents the LLC itself from paying income tax on the sale of subsidiaries, which can be very beneficial for future M&A activities.

A third alternative that many funds have adopted after negative experiences is the combination Exempted Company (Cayman) + LLC (Delaware) + Latin companyThis structure is designed for investors who aren't comfortable investing directly in an LLC but want to avoid the tax issues of a C Corp if the startup won't operate in the United States. It's also a good option if you're in a large seed round or Series A and beyond, with enough budget to cover the costs of properly setting up the international holding company from the outset.

Maintain subsidiaries in Latin America or operate only from abroad?

For startups whose main market is in the region, the usual answer is yes. It is advisable to have operating companies or subsidiaries in Latin AmericaIf you have employees, suppliers, service contracts, and users in these countries, it is essential to have local entities that sign contracts, manage payroll, and comply with the tax, exchange, and labor obligations of each jurisdiction.

Even so, there are technology-based business models—like some SaaS or Web3 projects– who prefer to operate centrally from a foreign company (for example, in the US or the Cayman Islands), while serving users in Latin America. In these cases, the key is a sound fiscal and regulatory design so that payments for the use of technology and relationships with collaborators respect the legislation of each country, avoiding contingencies with the tax or labor authorities.

In general, the recommended structure is to have a well-thought-out international holding company (Delaware, Cayman, etc.) and below it the local companies that actually operate on a day-to-day basis. In this way, the holding company serves as a vehicle for capital inflows and future sale, while the subsidiaries manage local operations, contracts, and obligations.

Typical founder mistakes and how to avoid them

Among the most frequent failures in the region, the following stand out, to begin with: not to analyze in detail the fiscal impact of each country involved in the structure. Many founders focus only on the ease of incorporation or what the investor asks of them, and neglect issues such as withholding taxes, treaties to avoid double taxation, or the real cost of repatriating profits.

Another recurring stumbling block is that of copying structures from other startups Without considering the partners' citizenship, where the target market actually is, what type of exit strategy is being pursued, or whether the plan is to operate physically in the US or simply use a holding company as an investment vehicle. What works for a Mexican fintech company may not work for a Peruvian healthtech company or a Colombian proptech company.

Added to that is the tendency to do without Tax lawyers with experience in venture capital and cross-border transactionsTrying to save on advice at the beginning can be very expensive later on, when you have to do a complex corporate flip, rewrite investment contracts, or renegotiate with funds that are already on the cap table.

Finally, many founders underestimate the cost of migrating from a bad structure when the startup has already raised capital. It's not just a matter of changing jurisdictions: it involves replicating SAFEs, convertible notes, vesting plans, ESOPs, shareholder agreements, and the entire cap table, with the associated fees, in multiple jurisdictions simultaneously.

Practical recommendations for founders in the region

Before choosing a structure, it is essential to sit down and calmly assess the target market, the composition of the founding team, and international projectionA project that aims to grow in only one or two countries is not the same as one that aims from day one to operate across the entire continent or to be sold to a US technology giant.

It is also key to rely on law firms and advisors who are familiar with the Latin American reality and that are accustomed to working with VCs. Specialized firms such as Gunderson Dettmer, Accelerate Legal, Phylo Legal, Algorítmica MX and other boutique studios in the region have developed methodologies adapted to the pace of startups, combining tax forecasting, corporate structure and support in funding rounds.

It should be borne in mind that Not all startups need to be a Delaware C CorpMany can work well with hybrid models, Cayman structures, US holdings via LLCs, or combinations with local simplified companies, provided that future rounds, double taxation agreements, and the possibility of a liquidity event have been considered.

Furthermore, it is advisable to document from the beginning the agreements between partners, intellectual property and investor entry mechanisms (SAFEs, convertible notes, etc.), and prepare the legal data room well in advance for when due diligence processes are required. This thoroughness not only saves time later, but can also increase the valuation perceived by funds, which tend to pay more for companies with low legal risk.

Ultimately, the legal structure should be viewed as a engine of growth and not as an obstacleWell designed, it allows for agile adaptation to new rounds, the entry of strategic partners, and expansion into other countries; poorly planned, it becomes a dead weight that forces money and energy to be spent on redoing what could have been done well from the start.

Taking the design of legal structures for Latin American startups seriously from the earliest stages not only avoids tax surprises and disputes between partners, but also multiplies the options for accessing international capital, closing advantageous exits, and surviving in an ecosystem as competitive as the region's; in the end, those who get ahead and build a smart legal architecture are the ones who can concentrate on what really matters: growing the business without the legal aspects becoming an unexpected trap.