By Gustavo Chaves Barcellos and Layon Lopes*
In Brazil, the most common type of Company is the limited liability company – which represents over 90% of the Brazilian companies, and can be established by one more persons, aiming at entrepreneurship objectives. The success of the Limited Liability Companies can be explained by two factors:
(i) For the partners limitation of liability itself: Entrepreneurs and investors can limit losses in the event of the company’s failure; and,
(ii) The “contractuality”: The relations between the partners of a Limited Liability Company can be guided by the dispositions of will without the rigors or guidelines of the Brazilian Anonymous Companies (such as the American concept of a CORP).
The Brazilian Limited Liability Companies are regulated by the Brazilian Civil Code, in articles 1.052 to 1.087. Also, the rules of the Brazilian Simple Societies (non-business societies) are applicable every time the Civil Code does not specify a certain rule for the Limited Liability Companies.
In addition, it is also possible that the Limited Liability Companies be ruled by the Law of The Anonymous Companies. For this, it is necessary that the partners of the company stipulate such indication when they write the constitutive act of the Company. In this case, it will not be possible to apply the rules of the Brazilian Non-Business Societies.
Well, analyzing the partners liability, it is possible to conclude that if the assets of the Company patrimony are insufficient to answer for the total value of the debts, the creditors can only hold the Companies’ Partners accountable, by executing their individual assets, up to a certain amount.
The limit of the liability of the partners, in the Brazilian Limited Liability Companies, is the total subscribed and paid-in share capital. Subscribed capital is the amount of resources that the partners undertake to deliver the formation of the Company. Paid-in capital is the part of the social capital that the Partners effectively deliver.
The partners can pay up the share capital in cash, or in installments. Although, the partners, in the limited liability company, have joint liability for the full payment of the share capital. In other words, if one of the partners chooses to pay up its equity interest in installments, the creditors will be able to charge what is missing from the share capital of any of the other partners.
If the constitutive act establishes that the share capital is fully paid up, the partners have no responsibility for Company obligations. If the company goes bankrupt, and if it does not have enough assets to pay for its debts, the loss will be borne by the creditors.
The rule of limiting the liability of the partners of a Brazilian Limited Liability Company has exceptions:
(i) The partners who adopt a resolution contrary to the law or the Company´s constitutive act shall be unlimitedly responsible for the social obligations related to the unlawful deliberation.
(ii) The Limited Liability Company composed exclusively of husband and wife, sometimes, has been understood to be null, because it would imply, according to certain precedents, in fraud against the Brazilian Family Law.
(iii) The Brazilian Labor Justice has protected the employee failing to apply the rules of limitation of liability of the partners in certain cases.
(iv) If the partner defaults creditors by taking advantage of the patrimonial separation, the partner can be held unlimitedly responsible due to the company’s obligation.
Regarding the deliberations of the partners, there are some matters that, due to their importance, must observe some formalities. These matters are:
(i) appointment and dismissal of Directors;
(ii) management remuneration;
(iii) voting on annual management balance sheets;
(iv) modification of the constitutive act;
(v) corporate transactions, dissolution and liquidation of the Company;
(vi) exclusion of minority partners.
If the partners deal with any of these matters, they must settle an assembly and comply with a requirement on the deliberative quorum legally provided for validity of the decision they make.
It is mandatory to hold an assembly each year, to analyze the management’s accounts, vote the balance sheet equity and results and elect administrators. If the company has a fiscal council, its members will be elected on that occasion as well. The assembly or meeting of the partners can always be replaced by a document that explains the adopted resolution, provided it is signed by all the partners.
In general, the partners deliberate by majority of votes of the members present at the assembly or meeting, computed proportionally by the value of the shares that each partner has. Whoever subscribed most of the share capital, therefore, has greater power of interference in decisions of interest of the Company.
Regarding the management of the Limited Liability Companies, it will be a responsibility of one or more persons, partners or not, designated in the articles of the constitutive act. For the case in which the Company is managed by a non-partner, it is necessary to have expressed authorization in the Company´s constitutive act.
The remuneration of each partner, as well as the responsibilities within the company, varies according to the percentage of investment that each partner made in the company’s share capital. Since authorized in the Company´s constitutive act, it is the responsibility of the partners to replenish the profits and amounts withdrawn from the company’s capital.
Finally, in order to constitute a Limited Liability Company in Brazil, it is necessary to carry out the registration request with the Commercial Registry and the application for registration with the following bodies: Federal Revenue Service (for issuing CNPJ), Finance Secretariat (for ICMS registration) and City Hall, for granting a business license.
*Layon Lopes is the CEO of Silva | Lopes and Gustavo Chaves Barcellos is a member of the Silva | Lopes team.