Equity Financing: The Only Choice for Argentina Small Business

In Argentina the only realistic way to obtain start-up funding for any kind of business venture is through equity financing or through some other vehicle that brings investors into your company. Luckily this type of financing is readily available for small businesses that have professional management with good contacts.

Why Equity Financing is a Realistic Option
The main reason equity financing is available in Argentina is that many individuals here would prefer to invest with friends, family, and business associates than with investment funds, professional money managers, or even banks. It all comes down to trust.

In Argentina, nobody trusts anyone. And if you don't trust anyone else, you certainly won't give them your money. That's why so often you'll see people investing with their brother-in-law, best friend from college, or parents putting money in a son's business. The financial companies here have a horrible reputation (justly or not) of being happy to take your money but not no friendly when it comes to giving it back. The State exercises such complete control over the financial industry that in times of crisis, the banks are converted into mere branches of the Central Bank, taking in deposits and transferring all liquidity to the State.

This type of scenario means that the average man on the street puts a lot more trust in people he knows than in some banker who needs to respond to the orders of the Government of the day.

Business Plans
Entrepreneurs should put some effort into building a realistic and well-thought out business plan, with realistic financial estimates. Just doing this will put them head and shoulders above the thousands of other wanna-be entrepreneurs who are making the rounds looking for funds. It sounds crazy, but in the years I've been here, I've met with all the following entrepreneurs seeking funding for their venture:

1. A mining outfit in Neuquén seeking $500,000 USD to restart a closed operation.
2. An entrepreneur looking to make consumer loans to police / military officers.
3. A landowner raising funds for a boutique hotel.
4. An entrepreneur raising funds for an ice cream factory.
5. A real estate agent looking for funds to convert a failing hotel into a timeshare.

I'm certainly not the biggest angel investor in Argentina, not by a long shot. I don't have a finance degree and I am by no means a professional financial analyst. However, not one of these people who presented their idea to me came prepared with any kind of figures or estimates. Not one had a business plan written down on paper. The mining group even suggested that I send my own geologist and team of analysts to evaluate their project, but that they were not going to pay anyone to put together any kind of estimates. I have no doubt that they still haven't found any funding with that kind of attitude.

In almost all cases that an entrepreneur arrived with clearly thought out figures, a solid plan, and recommendations from advisers I trust, I've invested. Sometimes it was a good investment, other times it didn't go as planned, but I've always believed in the entrepreneur who was running the business and confident that they were prepared to lead with a clear vision of where they wanted to go.

Equity Financing: The Only Choice for Argentina Small Business

Sole Proprietorships

How does one do business in Argentina? If you read any of the 200 guides out there written by lawyers, they’ll begin to explain the difference between the different types of legal entities in Argentina -- SRL or SA -- but since all the guides are designed for Fortune 500 companies, there’s a key option missing -- a sole proprietorship.

In the US, when you are going to start doing business as a consultant or sole proprietor, you don’t need to do anything special, you just get started. At the most you’ll get a business license from your municipality and register for sales taxes. But the IRS doesn’t require anything from you. At the end of the year you just attach an extra schedule to your 1040 and you’re off and running.

In Argentina, as you’ll see with many things, the system is different. Anyone in Argentina who is engaged in a trade or business needs to register with AFIP (the Argentina tax agency) and the province where the business is based.

Sole Proprietorship Are For Residents Only
It is important to note at this point that if you are not a legal resident in Argentina (i.e. you don't have a DNI), you may not do business as a sole proprietorship, since you have no authorization to work within Argentina’s territory. You will need to form a corporation in order to do business.

Unlimited Liability
Just like in the United States and elsewhere, if you are operating your business as a sole proprietor, you have unlimited liability and no personal protection against creditors. You will need to determine whether the limited liability offered by a corporation is worth the added expense and hassle (and believe me it is much more expensive and a lot more hassle) of maintaining a company.

As a practical matter, an expatriate who has recently arrived to Argentina and maintains their assets abroad is pretty much judgement proof. Lawsuits in Argentina take forever, there is no debtors prison, and the worst that happens to debtors here is that they have their reputation ruined with their suppliers and they are put into the Veraz (the local credit bureau).

On the other hand, if you have properties in your name, significant assets, or you expect to be running a large company with many employees, you should be looking at forming a company.

Federal Registration: Two Different Regimes
If you decide to go forward as a sole proprietor, there are two basic options to choose from when it comes to your taxes. You can either choose to enroll in VAT, or if you are a small business with limited revenues, you can choose to enroll in a parallel regime called “monotributo” (or single tax). It’s actually a misnomer because you’ll pay more than one tax as an entrepreneur, but the tax is certainly simpler and easier to calculate.

I highly recommend the monotributo regime for entrepreneurs who are just starting out and have limited sales. I especially recommend it for entrepreneurs from the United States who do not have experience with VAT. Not only will it allow you to get your feet wet and see whether your business idea works, you’ll be subject to less administrative headaches as you try to get your business off the ground.

If you don’t qualify for monotributo, you will need to register for income taxes, self employment taxes, and VAT.

Provincial Registration
Until now, we’ve been talking about federal taxes. However, provincial taxes also apply for most non-manufacturing activities. If your business is located in the City of Buenos Aires, you’ll need to register with Rentas. If you’re in one of Argentina’s provinces, you will need to register with the province’s tax authority.

Printing Invoices
This article is not meant to discuss taxes, but all the previous steps are required to obtain the different inscription papers which will allow you to finally go to an official print shop and have your invoices printed up. Once you have your invoices (“facturas” as they are known in Spanish) you can finally begin to sell legally. Selling without a factura or official ticket emitted from a Controlador Fiscal (a special receipt printer) is illegal.

There are more steps to be followed if you are going to sell to the general public rather than businesses (such as the need to emit tickets via the Controlador Fiscal) and that is beyond the scope of this particular article. However, every entrepreneur should be aware that running a business as a sole proprietorship is a viable possibility in Argentina and I recommend it for new businesses.

As always, please feel free to contact me should you require assistance with your particular situation or need more information. I’m happy to assist when possible.

Sole Proprietorships