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Company and partnership laws of each nation are different especially because of its legal system, as well as its political-economic and social situation. Definitions are the only big difference among business forms around the world. Each country will issue their law defining the type of business, partners liability and names. Some treaties upon each form may be different, but the ideals are basically the same whenever they are put on practice.

In Civil Law States, including Brazil, every form of business organization is a company and it is treated as being juridical entities. However, juridical entities may be either an institution or a company. By comparison, a juridical entity is a legal person created by law and it is treated different from the real person who owns or manages it.

A company or partnerships are an association of persons or of capital organized for the purpose of carrying a commercial, industrial, or similar enterprise. Both, company and partnership, are the same in Brazil and therefore, a partnership will be treated as a company.

To do business internationally, companies must establish a foreign presence. Particularly, in Brazil, this requires the following situations where the parent company will:

a) do business in Brazil without opening any subordinate entity;

b) open subordinate entities such as representative offices, agents, branches;

c) open or purchase Brazilian enterprise subsidiaries, joint ventures and holding companies;

d) open or purchase a binational enterprise; or either

e) move its headquarters to Brazil (barely chosen).

 
 
NON SUBORDINATE ENTITIES

Companies shall function in Brazil by using a foreign agent, who may be a private individual or an independent firm. Their relationships are governed by an contract and the laws of the home Country and Brazil. This situation is commonly know as sale representation; however, Brazil’s law provides several forms to create this relationship with several legal consequences.
 
 

Specifically, subordinate entities are a representative office, an agent or a branch. Representative office is a point where interested parties can obtain information about the company, but does not conduct business. An agent is an independent person or company with authority to act on behalf of the parent company, and a Branch is a non separately unit of the parent company (incorporated into it).

In any case, the approval of the constitutional contract or statute of the parent company at the Brazilian government is mandatory.

Advantages to open subordinate entities are that the headquarters will control directly the foreign operation. By contrast, these structures are not treated as a separately legal entity and many disadvantages may come from it. A foreign structure usually does not cover the parent from unlimited liability and its taxation might be different from local firms. For instance, the contract of a foreign loan between a branch and another party is a contract between its headquarters and this other party.

Brazil has recently changed its Constitution eliminating the business enterprise, national and international capital definitions in order to allow an equal treatment of foreign enterprises by law. However, the law may still settled different treatment in some situations.
 
 

Foreign enterprises shall set up in Brazil subsidiary, joint venture,  and/or holding companies. These structures are independently organized and incorporated companies. Usually, cut down the transaction costs and may insulate the parent company from unlimited liability. Because of these advantages many multinationals set up this system, where many enterprises, each one considered a separated legal entity and treated as local firms in its host Country, are managed and controlled by capital participation.

Subsidiary is a company organized under the law of the host Country and, therefore, its treatment is the same as national companies. Holding is a company owned by a parent to supervise and coordinate the operations of subsidiaries. Usually, the parent company (headquarters) is a holding in its home Country and may open another holding at host Countries to manage whenever there are more than one subsidiaries.

Joint-venture is basically an association of companies or either individuals who are engaged in a joint undertaking commercial enterprise, collaborating in a business venture. Joint ventures are not specifically defined by Brazilian legislation, however, the laws of S.A. (Corporations) settled some rules about it. It can be set up as a corporate or contractual joint-venture. In the corporate form the joint venture will set up a separated company, whose treatment depends on the Brazilian business form chosen. The contractual joint-venture does not entail a continuing relationship among the parties, it is not set up to open a separated legal entity (companies) and will be treaty different, by our Commercial and Civil Code.
 
 

A binational enterprise between Brazil and Argentina is now possible, because of MERCOSUL and another subsidiary agreement.

This company will be treated different from a international enterprise; however it is mandatory to have:

- 80% of its capital and vote controlled by national investors from both Countries;

- a minimum of 30% of its capital controlled by national investors of each Country;

- the right to elect at least one representative officer in each management bodies. Indeed, Brazilian investors must have their representatives, as well as, Argentineans.

National investors are natural persons which domicile is in Brazil or Argentina, governmental entities or companies, which capital are controlled by the above investors.
 
 

There are several forms of company organizations. The most widely adopted are the limited liability companies: SOCIEDADE POR QUOTAS E RESPONSABILIDADE LIMITADA (limited liability Company - LTDA) and the SOCIEDADE ANÔNIMA (corporation - SA). It is also possible to open civil societies, associations, foundations and cooperatives. These are different from commercial organizations and, accordingly, receive different legal treatment.

Herein are some of the more important details of business formation in Brazil:

• it is an agreement between 2 persons or more (It is NOT possible to open a one person company);

• the company will only be treated as a new entity  after its registration at the Commercial Register Dept. (Juntas Comerciais) if its objective is commercial, or at Civil Dept of Registration;

• it has a different treaty from its partners - different entity, different income, different liabilities;

• it has rights, duties and may own property or sue or to be sued in its own name;

• it is legal represented by whom its constitutional contract (bylaws) defines;

• the commercial acts are done by the company and not by the partners;

• partner liability varies from each partnership settled by the bylaws.   

• the name of the company, used as a "fantasy" name, can be different from the juridical entity.

The Sociedade Anonima is a corporate form, closely to a joint-stock company or corporation and it is governed by Law No. 6404/1976 and No. 9457/97 (the Corporation Law). It is fundamentally a commercial legal entity, with its capital represented by shares subscribed by at least two persons/companies.

There are three kinds of S/A: public, private and the small S.A.. The first one has public capital  and is called  as an open capital S/A. The privates style, called as closed capital S/A, and the small S.A., shall obtain their resources without any offer to the public.  The small SA must have up to 20 shareholders and its capital must be under a certain limit.

Some corporations, such as financial institutions, trading companies or companies with capital from the government our Law requires different structures.
 
 

It is mandatory to file its acts of incorporation at the Commercial Registry and to deposit in cash the payment of the capital (at least 10%) at the Bank of Brazil S/A or other establishment authorized by the Brazilian Securities and Exchange Commission.

Formation by private form will only require a general meeting where the subscription will take place. Subscription may also be done by a public deed of incorporation disclosure simultaneous by the subscription period. Another general meeting must be done if any share is paid up by other than cash.

The Public form requires: 1) registration of the issued shares at the Securities Commission (CVM); 2) financial institution intermediation, 3) approval of the incorporation by the general meeting, 4) after the subscription period, an appraisal of any assets paid for the shares; etc.
 

Capital

Subscribed or Authorized

The capital may be either subscribed or authorized. In a subscribed capital company, the constitutional capital will be the same as the determined capital by its statute. The company, however, may function with a capital level lower than that, and such level may then be gradually achieved, by the issue of shares. This is an authorized capital corporation. In this case, a minimum of 10% of the capital must be paid up and deposited at a commercial bank until all formalities for its formation have been completed.

Even in an authorized capital form, the capital may be increased or decreased. The Law provides some ways to do that, usually by the general meeting.

Stocks/ Shares

The asset capital is divided into three different shares called common, preferred and fruition. According to the Law, bearer shares are not anymore allowed. On the other hand, shares doesn't need to be issued by pare.

Common shares settled common or essential rights, such as right to vote and distribution of net profits, and may be convertible to preferred shares. Common shares in a closely-held company may belong to different classes. The rules must be written in the certificate of each share.

Preferred shares will entitle the shareholder some certain rights and restriction like a priority over common shares as to dividends/profits ( minimum of 10% over common) and/or liquidation and generally no voting rights.

Fruition shares result from amortization of the common or preferred shares. Once the corporation decides to amortize some shares, it can allow the shareholders to by these fruition shares.

Debt Financing

Debentures, subscription bonds and participation certificates are the securities that do not represent the corporation capital and may only be issued by a public corporation.

Subscription bonds, or "options", allow the holder to purchase shares in a capital raising. Only an authorized capital corporation may issue these securities. Debentures represent a credit with the issuing corporation; however, it only can be issued to the limit of the asset capital. Participation certificates allow the owner to participate on annual profits up to 10%, without the rights of the shareholders, except for the review of corporate officers.

All conditions (rights, warranties, date of payment, etc.) are set in the certificate
 
 

MEETINGS

Among the type of meetings settled in a corporation are:

a) general à Despite the constitutions general meeting, this will be set once a year to verify the office manager’s account as well as the corporation police. A quorum of one-quarter of shareholders, with the right to vote, is required to set this meeting, even though, in a second call may be done without the requirement quorum. Generally it is called by the administrative council with/or the board of directors and its notice must be disclosure. In case of director’s omission calling the meeting, 5% of capital investors may call it.

Annual Meetings are settled for examining, discussing and voting on financial statements, verifying the office manager's account, electing officers and members of the Audit Committee, resolving on the allocation of the net profits for each fiscal year, as well as on the distribution of dividends. All other cases require an Extraordinary General Meeting.
 
b) extraordinary à shall be called whenever it is necessary to discuss any other issue not included in the general meeting, or as settled by the bylaws.

c) special à It is only called by preferred shareholders, by participation certificates or debenture's owners. Each meeting will discuss subjects strictly related to one class of these investors.
 
 

MANAGEMENT BODIES

The management of a corporation shall be done by the administrative council and/or by the board of directors. Both the council and the board are mandatory for a public form, bank and authorized corporation.

a) Administrative Council à is composed of, at least three shareholders, who must be Brazilian resident and elected by the general meeting. Among their duties, all related to any business company's acts, are: to establish the general business policy of the company; supervise the directors conduct of the business; to elect and dismiss the directors; to establish their attributions subject always to the statutes; and to examine, at any time, the books and papers of the company.

b) The Board Of Directors à it is composed by at least two persons (shareholders or not). Elected by the administrative council, or by the general meeting, their term of duties will not exceed three years, except by reelection. Its responsibility is to represent the company and to practice all such acts of its function (settled by the bylaws). Whenever the company decides not to have the administrative council, the board of directors will perform its functions.

c) The Audit Committee à The audit committee is mandatory in the statute, but its function may be either permanent or occasionally. Its installation is related to the need of the corporation. Composed by three to five members and equal number of substitutes, the audit committee will police the company’s operations. On the other hand, financial statement must be also audited by other auditors registered at Brazilian Securities and Exchange Commission (CVM).
 
 

RIGHTS AND DUTIES

Shareholders: Essential rights are guaranteed but there are also special rights. Essential rights could be listed as: to share in profits; to oversee the management of the companies business; to have priority in the subscription of shares, warrants convertible in shares, convertible debentures (bonds) and subscription warrants; to participate in the distribution of the company's assets if the company is wound up and to withdrawal from the company in the circumstances stipulated by law.

Directors and Officers: The members of the Administrative Council, Board of Directors and Audit Committee will be liable only for an omission, negligently or maliciously acts or those acts that exceed the given powers or violate the law. They will not be held liable for unlawful acts carried out by other members. In addition, directors will not be liable for any obligations assumed on behalf of the company as routine acts necessary for the company's management
 
 

In Brazil, the limited liability company is known as "Sociedade Por Quotas De Responsabilidade Limitada" or "Limitada (Ltda)". The Decree-Law nº 3708 of January 10, 1949, regulates this type of business form. Created under statute or bylaws by agreement of at least two partners, it can be organized as a civil or commercial enterprise. The purpose of it will define its civil or commercial nature.
 
 

CAPITAL

The capital is divided into quotas that are similar to shares, but not represented by certificates. The quotas represent the amount of money, assets, credits or rights.

STATUTE OR CONTRACT

The statute, organized by articles, will define:

    - company name (recommended the denomination name form, which must include "Ltda")
    - address of the company;
    - capital and number of quotas;
    - list of company members ("quota holders") and their amount of quotas;
    - rights and duties of the members;
    - date or event upon which the company will be dissolved (may have perpetual existence);
    - who may manage the enterprise; and
    - allowed and prohibited acts. etc

LIABILITY

Each member is liable for the totality of the capital until it is fully paid up. After the fully payment, each member will be liable only for his/her amount of quotas.

Managers are not liable themselves unless they exceed the given powers or violate the law.  The disregard doctrine may apply here in Brazil in case the company is engaged to fraud against consumers, employees, and some other cases. 
 

SIMPLICITY

The "Limitada" doesn't need to publish its accounts as a public S.A. (corporation) does. However, the statute may adopt some rules of the Corporation Law, such as creation of the administrative council or audit committee.
 
 

A Trading Company in Brazil must be under the corporation form and requires a minimum approximately capital of  US$ 756.000,00. Nevertheless, it must be registered at the International Trade Department (SECEX), Federal Income Department ( SRF), International Trade System (SISCOMEX) and State Special Tax Treaty ( Regime Especial ICMS).

A Small Trading is organized under a corporation form. A consortium is also possible. Its minimum capital is approximately US$ 73.000,00.

Both Trading Company and Small T. C. have a different tax treaty.
 
 

Companies and Partnerships may constitute a consortium, which is an agreement of association to develop a certain project. The consortium does not create another legal entity since it is created by a contract where each company or partnership will be liable for its obligation. Even though in its essence the consortium is basically a contractual joint-venture, the Law details and rules it differently.

The contract must be registered at the Commercial Register and the certificate will be disclosure. Certain requirements are mandatory in its contract such as companies liabilities and obligation. The Enterprises liability will not be limited to its rights and duties under the contract, except under labor relations.
 

Commercial and investment banks, securities dealerships, brokerage , financing and investment companies, in Brazil are governed by Laws Nos. 4131, 4595/64 ( Banking Law) and 4728/65 (Capital Market Law).

Subject to certain restrictions, such as mandatory incorporation, the incorporation of private financial institutions must comply with the provisions of the Corporation Laws and the above said Laws. Nevertheless, its corporate acts and bylaws must be approved by the Central Bank of Brazil, in order to obtain a license to operate a financial institution

In addition, the Brazilian Monetary Council will establish the minimum startup capital for each type of company, but a minimum of 50% of the amount subscribed for must be paid up in cash, and deposited with the Central Bank within five days of receipt by the financial institution.

Copyright © 1999 -Revised 10/10/2000

Zulian Advogados Associados

zulianadvogados@zulianadvogados.adv.br

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