By Victoria Goldenfum and Layon Lopes*
The conversion of a Limited Liability Company (“LLC”), into a Brazilian Corporation, also called Anonymous Society (literal translation), is a necessary and a particularly important milestone in company development. When the time comes to carry out the company’s category conversion, and opt for a robust business model, it usually demonstrates an excellent indicator of scalability and maturity, once Brazilian Corporations usually require a consolidated business model and robust annual revenue, which justifies the choice of this corporation type.
Regarding that, this article was written to help foreign entrepreneurs understand how to convert an LLC into a Corporation in Brazil, its main reasons, considering the legal, tax and strategic aspects of this procedure in the country.
First of all, it is important to clarify that both LLCs and Brazilian Corporations are classified as limited liability companies. In other words, they are institutions with their own legal personalities and, as a rule, are endowed with capital autonomy, under which the partners or shareholders have limited responsibilities on the social obligations acquired.
In a nutshell, LLCs are informally classified as a “people’s partnership”, as the intersubjective bond between the partners is greater and necessary for the business. Moreover, it is important to mention that the responsibility between the partners is solidary and may overcome the percentage of shares that each partner has. Brazilian Corporations, on the other hand, are informally classified as “capital partnership” once the main bond existing is the shares acquisitions and the amount of capital invested by each shareholder.
Another big difference between LLC and Brazilian Corporation is the fact that the former is constituted by a contract, called “social contract”, reinforcing the idea of an interpersonal, affective and close bond between the partners, relationship that is ruled by the Brazilian Civil Code (Law nº 10.406/2002). Corporations, in contrast, are governed by a “by-law”, as it is an institutional corporation and less personally related, that follows a specific law, the Anonymous Society Law (Law nº 6.404/76).
Usually, Brazilian startups initiate their business activities through the LLC company type, as it is a company model with lower maintenance costs, especially in accounting, tax and legal aspects. However, at a certain moment of the business activity, it is necessary, strategically speaking, to carry out the conversion of the corporate type, such as the conversion of an LLC into a Brazilian Corporation. This measure is usually taken to please potential investors interested in investing in the company and enables the scalability of the business to new stages.
This happens because the Brazilian Corporations provide an improved and safer investment environment as it tends to protect the shareholder’s assets, once the liability is strictly limited only to the percentage of shares that this stakeholder owns, and not to the hole obligation that the corporation is responsible for, factor that may be different from the regular LLC.
In fact, the Brazilian Corporations allow the existence of an “investor shareholder” category, which usually does not have a direct interest in the Corporation’s management, but is interested mainly in its productive capacity, on the distribution of dividends, as well as the promotion of an economic environment with mitigated risks.
In addition to that, the Brazilian Corporations may use legal provisions established by the Anonymous Society Law that enables a higher capitalization capacity, either by capital opening (IPO) on the Stock Exchange market, or by issuing credit titles, e.g. debenture loans. In this sense, every entrepreneur shall consider that, by converting an LLC into a Brazilian Corporation, it is possible to generate capitalization for the business through new investments and other fundraising mechanisms.
Confirming this perspective, the vast majority of Convertible Notes Agreements in Brazil, known as the most popular instrument for startups safe investments, usually work with clauses that require the company to carry out the conversion of its company type, LLC into Corporation, in order to ensure this safe investment environment.
In addition, every entrepreneur must also understand that the conversion of an LLC into Brazilian Corporation comes with vast administrative, legal, compliance and tax/accounting procedures. Thus, it is clear to say that maintaining a corporation’s administration will demand the expenditure of new costs, especially with regards to legal and accounting advice, once the corporation requirement is to become more complex than it was before. Not forgetting about the change in the tax framework that shall come with new expenditures as well. For this reason, it is essential that, when converting into a corporation, the entrepreneur is accompanied by qualified professionals, to avoid any mistakes in the process and the following steps.
The converting process of an LLC into Brazilian Corporation follows the same requisition of a corporation constitution. However, in the case of conversion, the Brazilian company registration number (CNPJ) will remain the same, changing only the declared corporate type. Thus, it will not be necessary to terminate any of the company contracts or to assign any assets that were registered or declared under the company’s CNPJ, because the registry number will be the same.
To make the conversion happen, the entrepreneur, together with a qualified professional team, must first draw up the Corporation By-laws which will have to contain the rules of this company, establishing, for example: the corporate purpose and commercial activity, its name, headquarters location, whether it is an Open or Close Corporation, the board members election (at least two members) and their respective terms, governance practices, among other essential factors.
After constructing the Bylaws and having the approval of all shareholders involved, it will be necessary to file the conversion act by the State Commercial Registry, called as “Junta Comercial” in Brazil. Afterwards, it will be necessary to open the Corporate Books, documents required by law that record all corporate registrations, regarding equity movements, shareholders’ personal information etc.
The LLC into a Brazilian Corporation conversion act is certainly an important milestone in the company’s history and should be seen as a necessary step to reach even greater levels of growth and scalability. If you are interested in any information regarding this diligence, get in touch with our legal advice team. We will be happy to help you.
* Layon Lopes is the CEO of Silva | Lopes and Victoria Goldenfum is a member of the Silva | Lopes team.