Types of Entities

The most common Brazilian legal entities are structured as:

LIMITADA (LTDA) - LIMITED LIABILITY COMPANY

Limited Liability Companies (“Limitadas” or “Ltda.”) are regulated by the new Brazilian Civil Code (Law 10.406/02), and this is the most common type of legal entity incorporated under the Brazilian Corporate law. Such, is the form that most closely resembles US LLCs.

The main characteristics of the “Ltda.” are in respect to the limitation of the responsibility of each quotaholder. As per article 1.052 of the Brazilian Civil code, the responsibility of each quotaholder is limited to the amount of his quota; however, all quotaholders are liable in solidarity for the payment of the corporate capital. Also, as a rule, Brazilian Legislation does not impose a minimum or a maximum amount to the corporate capital (unless the Brazilian entity has trading activities or hires a foreign individual to become a manager/director of the Brazilian entity).

A “Limitada” is incorporated through Articles of Association, which must be duly registered before the Board of Trade. These, must contain at least two quotaholders, resident or nonresident, with no minimum or maximum percentage of interest ownership, (i.e., one quotaholder can hold 1 (one) quota equivalent to 0.1% and the remainder of the quotas (99.99%) may be held by the second quotaholder). Nonresident quotaholders must be represented by an individual residing in Brazil.

In general, a “Limitada” has less legal formalities than a corporation and no financial statements must be published in official gazettes or major private newspapers. Also, “Limitadas” rarely reveal basic financial information, such as operating expenses or year-end profits.

Notwithstanding the above mentioned, there is no mandatory independent statutory-audit in a “Ltda”, unless the legal entity qualifies under the "Super Limitada" threshold. Under such concept, local financial statements of the Brazilian entity may be subject to a statutory accounting audit if book value assets are higher than R$240 million, or gross revenue in exceeds R$300 million annually. Such thresholds are based on the Brazilian entity's previous year's financial statements applicable to a group of companies under the same controlling parent and whose combined assets or revenues reach the prescribed threshold.

It is necessary to note that, as per Brazilian legislation, only Public Trade Corporations can be registered in the stock exchange or have their quotas publicly traded. In this sense, “Ltda.” cannot be registered or sell its quotas in the stock exchange. Finally, it is important to mention that the effective control of the “Ltda.” is exercised by the quotaholder representing 75% (or more) of the quotas and as a rule a member may not sell its quota without the consent of the other quotaholders.

SOCIEDADE ANÔNIMA (S.A.) - CORPORATIONS

Limited Liability Corporations (S/A) are regulated by Federal Law No. 6,404/76 ("Lei das SAs"). The Brazilian corporation is the form that most closely resembles US subchapter C corps. Corporations are allowed to issue different classes of shares, such as voting and non-voting shares. The shareholders liability is limited to the payment of the shares to which the shareholders have subscribed. Foreign shareholders must have legal representatives in Brazil.

This type of entity is usually suited for large businesses seeking to obtain funds from the general public. Like the Limitada, the S.A must have at least two shareholders which may be individuals and/or legal entities (resident or nonresident).

A corporation may be either a publicly-traded corporation ("Sociedade por Ações Aberta"), or a closed corporation ("Sociedade por Ações Fechada"), whose shares and securities are not available to the general public.

The Corporate Capital of the Corporation must be totally subscribed, and at least 10% of the subscribed capital must be deposited in a bank, in order to incorporate this type of entity. Such can be paid in cash or in kind (the latter must be appraised by shareholders after appraisal by three experts or by a specialized firm appointed by the shareholders). Also, at least 5% of annual net income must be set aside in a legal reserve until it reaches 20% of capital.

The control is exercised by the majority, which means the minority shareholder can be the controller in case the other shareholders do not attend the General Meetings (and don't vote), so long as the minority is part of the Shareholders Agreement.

Publicly-traded corporations are subject to specific regulations of the Brazilian Securities Commission ("Comissão de Valores Mobiliários – CVM") in addition to the provisions of the Corporation Law, now IFRS, as well as independent statutory audit.

Corporations are required to file their financial statements with the local commercial registry and publish them in the Official Gazette, as well as in a major private newspaper. In addition, the Securities Commission may require publication in the localities where open corporations trade their securities.

Finally, it is important to highlight that the Corporations must adopt at least the following administrative bodies: (i) Board of Directors and (ii) Administrative Council. The members of the Board of Directors must be fiscal residents in Brazil or have a permanent visa. Members of the Administrative Council can be foreigners and not necessarily resident in Brazil.

EIRELLI - SINGLE HOLDER LIMITED LIABILITY

The EIRELLI (Empresa Individual de Responsabilidade Limitada) is a single-holder limited liability entity introduced by Law 12.441/12, amending the Brazilian Civil Code and introducing this entity, which is mostly used by individual entrepreneurs.

An IRELI can be incorporated by an individual shareholder that holds 100% of the paid-in capital (with a minimum of 100 times the current minimum wage); however, it cannot be incorporated by a legal entity.

The EIRELI follows the same rules as the Limitada in terms of responsibility of the shareholder.

Additionally, each individual is allowed to have only one EIRELLI.