Sole proprietorship limited liability company is approved in Brazil

Sole proprietorship limited liability company is approved in Brazil

Recent law reform in Brazil aimed at advances in the corporate legislation and breaks with traditional Brazilian corporate system upon approval of the possibility of setting up an Individual Limited Liability Company in Brazil.

On July 11, 2011, Brazilian government issued the Federal Law n. 12.441/11, amending the Brazilian Civil Code to allow the creation of Individual Limited Liability Company (“EIRELI”).

Within 180 days from the date of publication of the Law, which means, from 09.01.2012, a single person can form a company, hold all the quotas, and maintain their limited liability to the value of the capital stock.

Brazilian law foresaw the possibility of sole proprietorship, but only in the case of a joint stock corporation, incorporated and governed by Law n. 6404/76, which shall hold all the shares of another corporation incorporated in Brazil (the so-called “full subsidiary”). The corporate form of individual entrepreneur also exists in Brazilian law. However, in such case, the law does not allow the separation of the assets of the individual company from his/her personal assets and, moreover, all the personal assets from the holder are subject and liable for obligations arising from their professional activity (unlimited liability).

The Individual Limited Liability Company, on this point, represents an improvement, since it allows the separation of assets (assets of the company versus personal assets). It also ends with the need for partners with formal tiny equity interest merely to meet the legal requirements of minimum 2 partners. In addition, the EIRELI’s holder liability is limited to payment of the quotas, in other words, once the capital stock is fully paid in, the personal assets of the holder of EIRELI can not be claimed for obligations arising from the EIRELI, except for the possibility of disregard of the legal entity in cases when the law and the justice determine.

Law n. 12.441/11 requires for the formation of the Individual Limited Liability Company that: (i) the expression “EIRELI” be included after the corporate name; and (ii) that the capital stock is equal to or higher than the value of 100 (one hundred) minimum wages, which should be properly paid in. Moreover, the law states that an individual may participate in only one EIRELI, with a clear restriction on the freedom of economic organization of the business activity of the people.

The formation of the EIRELI can also be done through a derivative form, which means, as a result from the merger of quotas of another type of company, regardless of such concentration occurs by transfer of quotas, death or other reasons, upon request to the Public Registry of Companies.

Furthermore, whenever applicable, the rules for limited liability companies shall be applied to individual limited liability companies.

The new legislation is recent, and there are some issues that were not explicitly addressed in the law, which may generate different interpretations and therefore some controversy in the upcoming months. Among the issues subject to interpretation, stands the possibility of a legal entity be the holder of all the quotas of EIRELI, with significant consequences on the organization of corporate groups or family businesses.

Furthermore, different interpretations can arise concerning if the mandatory participation in a single EIRELI should only apply to individuals or to companies as well.

The Corporate Advisory team of Azevedo Sette Advogados is available for any clarification.