Brazil: Differences Between Limited Liability Companies In Argentina And Brazil

December 1997

The article below is intended to compare limited liability companies in Argentina and in Brazil and clarify the main differences between such form of association in both countries.

ARGENTINA

Regulations: In Argentina, limited liability companies (Sociedades de Responsabilidad Limitada) are governed by the Business Companies Law No. 19,550 (as amended by Law No. 22,903).

Quotaholders: The company is private and may be formed by two to fifty quotaholders. Since it is considered a company of persons, it cannot have a corporation (legal entity) as a quotaholder.

Capital: The capital of a limited liability company is divided into quotas of same value. The capital of the company shall be sufficient for the conduct of its business.

The capital shall be fully subscribed when the company is incorporated and on that occasion, at least twenty five percent of the subscribed quotas shall be paid up. The remaining seventy-five percent must be paid up within two years counted as from the company's incorporation. Title to quotas is reflected in the articles of association and there is no certificate therefore.

Transfer of Quotas: The transfer of quotas is not subject to conditions unless otherwise stipulated in the company's by-laws. The by-laws may limit the transfer of quotas but shall not forbid it.

Liability: The liability of a quotaholder is limited to the amount of his respective capital contribution. Once all the quotas are paid up, the quotaholders are released from all further liability and normally have no obligation either to the company or to its creditors. If the capital is not fully paid up, the quotaholders are jointly and severally liable before third parties for the amount of such quotas that have been subscribed for but not paid up.

Management: The company may be managed by one or more managers having the same rights and duties as the directors of a corporation. Such managers may be appointed for a definite or indefinite term. The members of the management board need not be quotaholders.

Quotaholders' Decisions: Each quota gives its holder the right to one vote. The by-laws must regulate the quotaholders' resolutions, otherwise, any decision approved by the majority of the quotaholders and communicated to the managers will be binding.

The by-laws shall provide for the number of votes needed to approve an amendment which shall require at least the affirmative vote of the majority of the quotaholders. In case the by-laws do not provide for such a number of votes, amendments shall be approved by quotaholders representing at least three-quarters of the company's capital. Other resolutions not involving an amendment to the by-laws, the appointment of managers or the revocation of management powers may be taken by the majority of the quotaholders present at the meeting, unless the by-laws require a greater number of votes.

Board of Supervision: The company may form a supervision board or a controllers' committee which will be governed by the same provisions established for corporations. The controllers' committee is compulsory if the company's capital exceeds an amount equivalent to approximately US$ 2,100,000.00 in Argentine currency.

Financial Statements: Companies with capital exceeding an amount equivalent to approximately US$ 2,100,000.00 in Argentine currency must prepare annual financial statements which shall be approved by a quotaholders' meeting held within four months of the company's fiscal year.

Taxation: Limited liability companies are taxed at a flat 33% rate.

Conclusion: In Argentina, limited liability companies are generally small companies and do not have substantial profits. Such companies are generally formed by only a few quotaholders and the capital amount is not very significant. Therefore, large multinational entities investing in Argentina generally choose to establish their subsidiaries as corporations instead of limited liability companies.

BRAZIL

Regulations: In Brazil, limited liability companies(sociedades por quotas de responsabilidade limitada) are governed by Decree No. 3,708 of January 10, and supplemented by the Brazilian Commercial Code and by Law No. 6,404, of December 15, 1974 (the 'Corporation Law').

Quotaholders: The company is incorporated through a private instrument or public deed, but its capital may not be open to public subscription. The company must have at least two quotaholders in order to be incorporated and such quotaholders may be either Brazilian or foreign individuals or legal entities.

Capital: The company's capital is divided into quotas of same value. There is no minimum capital requirement to incorporate such type of company in Brazil.

The capital shall be fully subscribed when the company is incorporated. There is no minimum term for payment of the subscribed quotas; such term may be established by the quotaholders in the articles of association. Title to quotas is reflected in the articles of association and there is no certificate therefore.

Transfer of Quotas: When forming the company, the quotaholders shall specify in the articles of association whether the transfer of quotas is unrestricted or needs the consent of the other quotaholders, as well as any other requirement, such as presumptive rights and rights of the first refusal. Any transfer of quotas is formalized through an amendment to the articles of association.

Liability: Once all the quotas are paid up, the quotaholders are released from all further liability and normally have no obligation either to the company or to its creditors. In case of bankruptcy, if the capital is not fully paid up, the quotaholders are jointly and severally liable for the amount of such quotas that have been subscribed for but not paid up. If all the quotas have been paid up the quotaholders have no additional liability, except in certain cases foreseen in the law, such as (a) in case of misuse of the company's commercial name by a certain quotaholder, the other quotaholders are entitled to claim for damages against the faulty quotaholder, without prejudice of his criminal liability, and (b) the quotaholders resolving in violation to the provisions of the articles of association or the law may be deemed fully liable for such resolution.

Management: The company shall be managed by at least one individual resident in the country who may or may not be a quotaholder, as stated in the articles of association. Should the articles of association appoint, as manager, a quotaholder that is a legal entity or an individual resident abroad, then the administration and management powers must be delegated to one or more delegate managers, who must be resident in Brazil. The quotaholders may, however, establish conditions for the validity of certain corporate decisions (ie the express consent of the quotaholders), as expressly stated in the articles of association.

Quotaholders' Decisions: Like for Argentine companies, each quota entitles its holder to one vote. The number of votes required for the validity of a certain quotaholders' decision shall be indicated in the company's articles of association. If such a provision is not included, the unanimous agreement of all the quotaholders will be necessary.

Board, Councils or Committees: The company is not required to have a board of directors, a consultative council nor an audit committee if they wish, provided that such a council or committee have no management powers.

Financial Statements: In general, companies are not required to publish accounts and financial statements or minutes of annual meetings of quotaholders, even if they hold them. However, the company must submit accounts and financial statements to the tax authorities.

The profits of the company can be distributed in accordance with certain criteria established by the quotaholders or in the manner provided for in the articles of association.

Taxation: Generally, the following taxes apply for limited liability companies in Brazil: (A) Corporate Taxes on Profit: (i) income tax: 25% (ii) social contribution tax: 8% (B) Corporate Taxes on Revenues: (i) PIS: 0.65%; (ii) COFINS: 2.00%. The total overall corporate tax burden is generally 38% and may vary on a case by case basis.

Conclusion: Limited liability companies in Brazil are the most commonly used form of association due to its various advantages: (i) the company's structure is simple and flexible; (ii) the law does not require neither prevents that such companies have a board of directors, a consultative council or an audit committees; (iii) companies are not required to publish accounts and financial statements or minutes of annual meetings of quotaholders; and (iv) consequently, the operationalization of Brazilian limited liability companies is less costly than, for instance, corporations.

Either large and small legal entities may be incorporated as limited liability companies, except in certain cases in which the form of association is determined by law, such as in case of certain financial institutions (banks and leasing companies) and transport companies which must be corporations. As a result, many large multinational entities have established their Brazilian subsidiaries as limited liability companies ie, Ford do Brasil, General Motors, Philips Brasil, Johnson & Johnson and several others.

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

For more information please contact us.

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