Offshore company formation: what's the next best step for your Brazilian startup?

We have to tell you some sad yet beautiful news: if you're trying to get that first check, your startup's not a baby anymore. (Omg, they grow so fast. No, you're the one crying 😭)

You want it to succeed in its fundraising tests with flying colors? Then you better help your startup out by mastering this stepping stone: setting up a company overseas, a.k.a. an offshore company formation.

Yes. Even if your startup only operates in Brazil.
And yes. It looks (and is) hella complex. Trigonometry-style.
But that's why we're here. To make it easy as learning the ABCs. 🎓

Why should you even? Because having the right offshore company formation is a natural step for venture-backed businesses in the region if they wanna attract the best VCs in town and in the world 🌎, and grow faster with that money and knowledge. And all that while keeping you away from paying unnecessary taxes. We're talking millions and millions here.

Sold on it already? 😎

When you do get down to your research, you'll find two offshore corporate structures that are currently the most efficient for the majority of Brazilian startups: the Delaware Tostada and the Cayman Sandwich. (Yes, we love food just as much as we love helping founders.)

We'll talk about everything you need to know to decide which offshore corporate structure makes more sense for your startup right now, between the Delaware Tostada and the Cayman Sandwich:

• To start things off, what even is an offshore company formation and an offshore corporate structure?
• Why your Brazilian startup may need an offshore corporate structure, in full detail;
• The Delaware Tostada corporate structure: what it is and when should your startup consider it.
• The Cayman Sandwich corporate structure: what it is and when should your startup consider it.
• The final showdown: Delaware Tostada x Cayman Sandwich!
• You've made a mistake? No worries, we all have. See how you can change your offshore corporate structure.

What's an offshore company formation and corporate structure?

An offshore corporate structure is an international business setup for companies that need one (or more!) legal entities overseas. That means this company is registered, incorporated, and established abroad. Offshore company formation is the act of incorporating the business.

An important reminder here: having an offshore corporate structure doesn't exempt you from following the law. We're talking about tax optimization and not tax avoidance. You have to respect all the accounting and compliance principles of the countries you incorporate your startup. Only then can you reap the benefits. Deal? 👮

It's common that the offshore company does not have business activities in the country where it's at. Generally, the company actually operates in its home country.

So why even set up an international corporate structure? That's what we'll get into.

Why your LatAm startup may need an offshore corporate structure

You're not Tony Stark or Miles Morales. But do you wanna know what Iron Man and the new Spiderman have in common with startup founders? Both realized that sticking to where they started wasn't gonna cut it.

You don't need to build an Avengers tower or explore multiverses (invite us if you do though) but, when raising funds and optimizing for exits down the line, your startup can and should have that same ambitious approach and not restrict itself to one region.

‍And why do world-class investors appreciate an offshore company formation, when all your startup's costs and revenues are in Brazil?

1. Easier talks with top venture capital investors

When reaching out to top venture capital investors in and outside Latin America during your fundraising, there are a few boxes you’ll need to tick to succeed. And we're not only talking about their thesis and preferred signals.

Factors such as unknown legal models, unpredictable regulatory changes, and a general lack of trust, stability, and transparency in Latin America’s institutions may scare off investors.

So instead they can ask for an offshore corporate structure, with clear and stable regulations, as a requisite to invest in startups. That's especially true when the checks get bigger and the VC firm gets more international.

Imagine you're an American venture capital investor and you put your money into a Brazilian startup. In the case of a labor suit, would you know with 100% certainty if you could be held liable? Are you also really sure some local authority will not knock on your door demanding a full audit of your and your firm's financials?

For a global VC, putting his money in a company incorporated only in Brazil is an extra risk. And startups are risky enough already.

It's not just us saying this: we chatted with the top venture capital firm Andreessen Horowitz (a16z) on the offshore company formation topic, and also talked with Latin American founders about what changed after they incorporated abroad.

2. Easier tax obligations

In Brazil, taxes are the main obstacle for entrepreneurs on their road to increased competitiveness and bigger profits.

If you're Brazilian, no surprises there. What can surprise you is that going offshore could mean being in a legal jurisdiction with more favorable taxation.

In the Cayman Islands, for example, you're met with the prospect of no income, capital gains, payroll, or withholding tax.

3. Easier expansion to other markets

Expanding internationally is a goal of many entrepreneurs. And going offshore streamlines this process. How, you ask?

The offshore works as a central point for your legal matters, and that makes creating new legal entities and reaching other markets easier. All your current and new subsidiaries would be under the same holding in the US or in the Cayman Islands, for example.

4. Easier M&As and IPOs

In case you have your eyes set on mergers, acquisitions, or initial public offerings, the offshore approach can offer the best corporate structure with the objective of legal and tax optimization. A.k.a. you won’t spend unnecessary time and money.

You can access these easier M&As and IPOs with a specific offshore corporate structure, called a Cayman Sandwich. Here's exactly how:

• A merger in the Cayman Islands can be done through a single inexpensive filing, and your certificate can be issued in 5 working days after approval;
• You can efficiently exit your startup to both local and international acquirers with a Cayman Sandwich structure. You're exempt from corporate capital gains taxes, not subject to double taxation, and can access disclosure advantages with LatAm and US regulators;‍
• Finally, with a Cayman Sandwich structure, you're eligible for Foreign Private Issuer rules with the SEC when IPOing. This leads to a more relaxed reporting schedule.

It's about time we tell you what exactly are the offshore company formations Delaware Tostada and a Cayman Sandwich, and why the United States and the Cayman Islands are the top destinations on our rec list. (I’d advise you to get a snack before reading further.)

The Delaware Tostada offshore corporate structure

Half of the world’s biggest VC firms are based in the United States. They are the ones that set the rules and procedures that most LatAm angels and VC firms follow. The odds of your startup needing to follow requirements seen in the US are huge.

Having a corporate structure called Delaware LLC, based in the US, can be a good selling point to these investors. As we've said before, legal and financial obligations are more predictable, meaning that risks and liabilities can be easily anticipated by investors.

When you connect that Delaware LLC with your original company formation, you have a Delaware Tostada.

What is a Delaware Tostada?

The Delaware Tostada is a two-layer company formation:

• Delaware LLC holding: a simplified company formation, with the goal of optimizing the startup's tax structure even if they don't have operations in the United States;
• Local operating company: located in the startup’s home turf 💖, where your company operates. It allows you to hire employees and protect your intellectual property, for example.

What do we mean by "tax-optimized structure"? The Delaware Tostada is appealing because establishing a C-Corp in Delaware, another common suggestion for startup founders, means double taxation for LatAm founders. Not only on the owners’ income and dividends but also on the company's.

Our suggested snack allows instead for your startup not to pay corporate taxes. Its members will pay their individual income taxes in their respective countries.

Still, a C-Corp can have its pros when you only think about liquidation preferences, stock option plans, and IPOs. See the full differences between a C-Corp and an LLC.

When should my startup consider a Delaware Tostada?

The Delaware Tostada is a great option when talking about offshore company formation for early-stage Brazilian startups.

Before setting up an LLC, you should always talk to your investors and make sure they'd be willing to invest in the structure.

Once that's settled, you should consider a Tostada when your business starts raising angel investment or Pre-Seed and Seed rounds, with checks ranging from US$ 100k to US$ 300k 一 doesn’t matter whether the investment is local or international.

As we've mentioned when comparing LLCs to C-Corps, in the earliest stages you should have tax optimization as a priority rather than ESOPs or exits.

Bear in mind that the corporate structure is directly related to your startup’s stage, and VC funds may want the next plate on your menu. That's the Cayman Sandwich.

The Cayman Sandwich offshore company formation

As you can imagine, the Cayman Sandwich offshore corporate structure adds one more layer of complexity to your startup's setup.

This fuller meal will attract bigger checks and also optimize corporate procedures, while still keeping the Delaware Tostada's tax efficiency.

What is a Cayman Sandwich?

More ingredients, more flavor. The Cayman Sandwich is the next step of offshore company formation for Brazilian startups. Here's the recipe:

• Cayman Islands holding: the legal entity where investors and founders are shareholders, but are exempt from the obligation to pay income taxes. Focused on tax optimization and widely accepted by international VCs;
• Delaware LLC: an intermediary legal entity that provides disclosure advantages and adds flexibility for exits down the line;
• Local operating company: where your company operates, manages payroll, and receives payment from customers.

When should my startup consider a Cayman Sandwich?

Startups that go offshore and choose the Cayman Islands aren’t exactly in their earliest days.

It’s a more challenging structure to build, and it indeed is more expensive. It will take one or two extra weeks to be completed, as well as an extra cost of up to US$ 5k to set this offshore corporate structure up.

Still, the Cayman Sandwich is the best offshore corporate structure when you're aiming for bigger and better checks.

Remember the investment rounds and check sizes we mentioned when considering a Delaware Tostada? For the Cayman Sandwich, checks should be higher than US$ 300k.

As we've also mentioned, if the investor requires liquidation preferences (preferred shares) or you're already thinking about M&As and IPOs, you should also consider the Cayman path.

Delaware Tostada or Cayman Sandwich?

Okay, Masterchef. Now it's the recipe showdown: what's the difference between the Delaware Tostada and the Cayman Sandwich? Here's a chart comparing both so you can decide which one is better for your startup:

Can I change my offshore corporate structure later?

Remember how your startup is no longer a baby? Startups are always growing and changing. And yes, you can also shift your offshore corporate structure as it grows. Whew!

The Cayman Sandwich is a natural evolution of the Delaware Tostada. The most cost-effective way is to start at the Delaware Tostada and add the Cayman layer later on. After you've checked all the pros and cons of each offshore corporate structure and gotten a green light from both your lawyers and potential investors, that is.

The process of changing your corporate structure is called a flip. Generally speaking, there are four circumstances when this flip in your offshore company formation is recommended:

1. The company is expanding globally, and you'd like to centralize all of its legal entities under the same structure.
2. A potential investor requires a more robust structure;
3. The company is negotiating a merger or acquisition;
4. The company is entering foreign stock exchange markets (IPOing abroad);

A flip is a relatively quick process, lasting up to 6 weeks. But it can be longer, depending on how many investors your startup has in its cap table and how many rounds were raised so far.