Sole Proprietorship is a feasible Business Alternative

Sole Proprietorship is a feasible Business Alternative

Within the BRIC countries, known also as the Big 4, Russia, China and India have yet granted importance to this type of company quite a long time ago in their respective local corporate regulations. Also known as a Limited Liability Company with its capital stock owned by a single quotaholder  whereby an individual holds the whole equity stake of that legal entity, such kind of business alternative  is about to take off  also in Brazil. By the way, Mexico by its turn, does not adopt an investment option like that.

In our country reigns nowadays, under a lean enterprise concept, the limited liability company but obligatorily held by two quotaholders (**). Whenever invested by national capital only, the damand is frequently overcome by the existence of a “stoppel” quotaholder, where the controlling quotaholder owns more than 90% of the capital stock and the so called figurative quotaholder owns at least 1 (one) quota of the entire investment.

However, when the enterprise is a foreign invested organization (controlled or affiliate), the Brazilian legal entity imposes yet bigger difficulty   (mainly when there isn’t a group of companies where two of those controlled organizations may hold a FDI locally), because in that case it would be mandatory the investing quotaholder to hire down here (individual or legal entity) to serve as a figurative quotaholder. The tax and foreign exchange consequences therefore, i.e. due to the fact that such person or legal entity holds proprietorship of quotas in a company that in reality was not formed by an authentic “affectio societatis” (corporate affection) between/among their quotaholders, is certainly a complicating issue which can contribute to push back potential interested investors, who might fear such environment up front.

Good news is, there is a pending House Bill under consideration introduced by Representative Eduardo Sciarra (Democrats’ Party ) holding number PL-4953/2009 that would alter the wording of the Civil Code by the consent towards the incorporation of a Limited Liability Company individually held (ERLI), nevertheless under a limited premise: just individuals (foreigners and/or nationals) may take advantage of that new business alternative. In other words, Brazilian and non-nationals (not necessarily together) who would individually be willing to incorporate an ERLI in Brazil could undertake such venture proceedings based upon regular operation consented therefore.

Consequently, any individual enjoying full capacity for civil conduct and he/she not being legally impeded from exercising, professionally, the business activity might incorporate an ERLI, but one time only. Besides, the possibility to chose activities which characterize the existence of a so called non-business company (focusing an intellectual activity normally and personally carried out by a professional who does not delegate his/her competences or functions, despite the fact that there are supporters and/or employees), is excluded.

The equity belongs to the owner, but distinguished from the properties under his/her entitlement. ERLI’s Articles of Association filing shall be made with Companies’ Registry – Santa Catarina Circuit before the starting-up of its operation, as well as all subsequent alterations and/or amendments.

Capital stock can be paid by the contribution of money (R$ – reais), assets convertible into money evaluation or rights (credits held by the sole quotaholder against ERLI) and the whole amount shall be kept available at company’s banking account by the time the Articles of Association are under filing proceedings with Companies’ Registry.

With capital stock payment completion, the owner of the venture shall be unlimited liable, during a 5 (five) year timeline counted from that date on, responding with all his/her properties: (a) for the contribution of  non-accurate evaluated assets; and (b) for the solvency of the rights (credits) contributed thereto. It is not allowed to incorporate an ERLI with its capital stock to be paid in the future, that is afterwards its registration with Companies’ Registry.

Management shall be accountable to the sole quotaholder, exclusively. Under exceptional circumstances, however, the sole quotaholder may appoint special attorneys for the performance of specific acts related to the ERLI business scope, stating  those which are prohibited, though.

Before third party, just ERLI properties are liable for outstanding debts whenever they are resultant from the business scope implementation. Nevertheless, the sole quotaholder responds with his/her own assets if such indebtedness outcomes from the application of venture’s paid-in properties  in his/her own benefit or in third party’s benefit, holding the obligation to return them to the capital stock by adding related lost profits, or to pay and contribute the equivalent amount in money. By the incurrence of whichever losses, the sole quotaholder is obliged to pay for them as well in favor of  ERLI’s capital stock.

Concurrently with aforesaid  PL–4953/2009 there is PL–4605/2009 introduced by Representative Marcos Montes (Democrats’ Party) and in relation to the aspects mentioned in the former paragraph, it has to be said the latter is more beneficial than PL-4953/2009, because according to PL-4605/2009 just venture’s equity shall be liable for ERLI’s debts once those properties do not encompass, in whichever situation, the personal quotaholder’s properties whenever informed to the Brazilian IRS – Internal Revenue Service.

If you would like to know more about that matter please contact Fischer Law Firm and we will be honored to perform joint efforts pursuing to render the customized support you are looking for.

(*) The Joint Stock Company Act provides for the concept of a wholly owned subsidiary invested by a single legal entity as shareholder – article 251 and next ones.