Judicial structure of startups in Brazil – Benefits of formalization (part I)

In a series of three texts per week, we will present here the legal benefits of formalization of startups in Brazil: individual micro-entrepreneurs (part I); microentrepreneurs (individual, company or EIRELI) and EPP (Part II); and companies (Part III).

Individual micro-entrepreneurs

Informality is still a big problem in Brazilian economy and it has developed intensively over the past three decades. This is a set of production and commercialization of products that generate income source, but happen without registration in government agencies responsible for oversight. In Brazil, the loss of tax collection, beacause of informality, reaches 200 billion reais per year. The informal economy, present in low-income, developing or emerging countries, is the main factor that raises structural unemployment, high taxes and a highly bureaucratic government management system.

Why formalize?

Currently, the government, along with SEBRAE, encourages and provides satisfactory benefits for many entrepreneurs grow and formalize its business. However, even with the SEBRAE program and the opportunity to be legally formalized, there is still a lot of lack of information by several entrepreneurs who end their activities too soon. The biggest cause of premature closures of companies is mainly the lack of a proper business planning. This is because the vast majority of professionals working in any field are informal people, directly supporting all risks of the activity. Moreover, almost all informal businesses do not contribute to social security, a reason that prevents them from obtaining social security benefits, such as sick leave and retirement.

A business plan is the best tool for the entrepreneur express their ideas and to show viability and probability of success in your market. Many businesses close for lack of planning. One of the factors contributing to the successive closure of companies is the lack of management resources as accurate inventory control, purchasing, finance and accounting.

Who is the individual entrepreneur?

When evaluating the Brazilian economy informality, we can see the benefits of an attempt to reduce the impact of the informal economy to the individual entrepreneur system. This initiative is a great opportunity for small businesses to grow to the formality and, thus, have a place in the economy that previously only large companies had. It is for this reason that individual micro-entrepreneurs, for example, have opened the door for millions of people to act in their own business, fully legalized. It was the Complementary Law No. 128 of 2008 that created special conditions for the informal worker to become an Individual Entrepreneur legalized.

To be in the categorie of individual entrepreneur, the maximum annual turnover is 60,000 reais per year, they are not allowed to participate in another company as a partner or owner, and it’s possible to hire only one employee, who receives the minimum wage, or the minimum wage of the category. The Individual Micro-entrepreneur (MEI) will be placed on the National Simple legal regime and shall be exempt from a range of federal taxes, such as income tax, PIS, COFINS, IPI and social contribution. This way, the entrepreuner will have access to benefits such as maternity aid, sick leave, retirement, registration in the National Register of Legal Entities (CNPJ) and facilitation programs to open bank account, the application for loans and the issuance of invoices , among others.

Benefits of formalization

Social Security

The main benefit of formalization is social security, which provides pension coverage for microenterprise and his family with benefits such as sickness, old age pension, maternity wage after the grace period, pension and assistance imprisonment, with reduced monthly contribution – 5 % of the minimum wage, now R $ 31.10 resulting protection for micro-entrepreneurs in cases of sickness and accidents, and removal in case of maternity for women and retirement age after 15 years of contribution. The entrepreneur’s family will also have the right to pension for death and aid-seclusion.

Exemption from taxes, less bureaucracy and simplification of procedures

The individual micro-entrepreneur is entitled to register 1 employee with a low cost of 3% for pension and 8% of FGTS minimum wage per month, advanced a total contribution of R $ 68.42 and the employee contributes 8% of their salary to Social Security, which enables the microenterprise to better develop its business and grow. The tax exemption for company registration and license concession for operation indicates that all the formalization process is free. Also, entrepreneurs can formalize their business without spending a single penny. Noteworthy is the absence of bureaucracy to keep formalized incurring that it is the small entrepreneur making a single annual statement on their revenues that should be controlled in a spreadsheet every month to the end of the year to be properly organized.

Courses and training

SEBRAE guides and advises entrepreneurs who so wish, and conducts courses and business planning in order to empower entrepreneurs, making them better and able to maintain and develop their skills. With all this support, and the fact of being legally inserted in the market, chances to grow, prosper and increase. What today is just a small business, tomorrow may lead to an average and even a large company. However, it is noteworthy that the responsibility of Microentrepreneur Individual reaches its personal assets, thus not being limited to the assets of a legal person, which is the reason why we will present other legal regimes that have limited liability.