The internet and e-commerce are burgeoning economies worldwide, and nowhere is this more apparent than in Latin America. International law firms are increasing their presence in the region, lured by a lucrative, previously untapped market and the opportunities afforded by government privatisation of heavy industry, telecommunications, utilities and natural resources.

In early 1999, Morrison & Foerster became the first US firm, other than Baker & McKenzie, to establish an office in Buenos Aires. Since then, we have witnessed an unprecedented boom in Latin American e-commerce that has enabled us to build and expand our technology practice. The e-commerce boom began with the success of the New York-based internet company, StarMedia. Twelve months ago, StarMedia went public on Nasdaq as the first US internet IPO with a business plan targeting consumers in Latin America.

The IPO was a tremendous success, registering a significant gain in the first day of trading. In the months since, hundreds of internet companies have sprung up throughout Latin America, taking advantage of the wave of new capital that has flowed into the region. An estimated $2bn (£1.3bn) has been invested in Latin American internet companies in the past year, and the boom is creating a tremendous demand for quality legal consultation. The development of e-commerce in the region is limited by certain factors not present in the US or Europe and as a result, Latin American internet companies face legal issues that can be baffling for young entrepreneurs.

For example, although private equity investment and activity in mergers and acquisitions have been present in the region for some time, the concept of the “internet company” is relatively new. As a result, Latin American e-companies must overcome many hurdles during their start-up phase – from developing a corporate identity to dealing with interstate tax issues, protecting intellectual property and retaining employees. The first hurdle involves setting up an appropriate corporate structure and finding a location for the holding company. For businesses with operating companies in various countries, the holding company aggregates all of the value, and issues shares to investors and stock options to employees. The question is, where should the holding company be located?

Many young entrepreneurs wishing to follow their US counterparts rush to form the holding company in Delaware, but this is not always the best choice. From a tax perspective, in most cases, it is wiser to incorporate the holding in an offshore tax haven, saving the parent company taxes on profits. Even though many of these companies will never be profitable, this is usually the best choice. After all, it is easy to move an offshore entity to a US jurisdiction, but US tax laws harshly penalise companies that move offshore with large intangible assets (i.e. most internet companies).

Protecting intellectual property is another hurdle. This process can be difficult and expensive when dealing with a number of countries, each having its own set of IP laws. Questions such as whether the holding company or the operating company should own the intellectual property, have no simple answer. It depends to a very large extent on the country and the assets in question. Finally, stock option plans (the backbone of the relationship of many employees and their internet employers) for the most part do not exist in the legislation of Latin American countries, and local laws can cause complications. For example, in Argentina, stock options could be considered compensation to the employee. This has two implications. First, an employer could be required to pay taxes and contributions over the amount of the option, second a fired employee could claim stock options as part of their compensation for which they are indemnified. With so many open legal issues, it is no wonder local entrepreneurs are seeking assistance.

Although e-commerce is booming in Latin America, many obstacles remain that impede start-ups and e-company growth. It is key for these issues to be resolved in favour of flexibility and entrepreneurial spirit if the Latin American internet market is to see the growth that the US and Europe have seen.

David Lori is a senior associate with the Buenos Aires office of Morrison & Foerster.