May legal entities own the new limited liability sole proprietorships (“EIRELI”)?

  • Fernando Di Sabatindo and Débora Azevedo Reis - 05 July, 2012 - Articles

Federal Law No. 12.441/11, recently issued, included the article 980-A in the Brazilian Civil Code to create the Empresa Individual de Responsabilidade Limitada (“EIRELI”). The EIRELI consists of a sole proprietorship or a “one-man company”, characterized by the presence of a single owner, who will hold the totality of the corporate capital. As opposed to the empresário individual, a sole proprietor already formerly provided for by our Civil Code, the liability of the EIRELI’s owner will be limited to the paid-up corporate capital. Despite the discussions regarding the technical precision of its terms, the aforementioned amending means a significant practical innovation to Brazilian corporate law, notably to offer companies the opportunity to become legal.

According to said law, the EIRELI may be incorporated by any single person, provided that its corporate capital amounts to at least one hundred (100) Brazilian minimum wages. This amount would currently consist of R$62,200 (sixty two thousand and two hundread Reais).

The Brazilian law now also allows the conversion of pre-existent limited liability companies into EIRELIs, what has been regulated by the National Commercial Registry Department (DNRC).

Pursuant to article 6 of Federal Law No. 8,934/1994, the Commercial Registries of each Brazilian state are subject to and bound by DNRC, which is an administrative body that integrates the Ministry of Industry, Commerce and Tourism.

According to article 4 of the same Law No. 8,934/1994, DNRC’s duties include, amongst others:

  1. a) issuing normative rulings to solve questions or doubts related to the construction of laws, regulations and other rules related to registration of companies;
  2. b) providing the State Commercial Registries with support;
  3. c) issuing procedural rulings related to the recordation of corporate acts;
  4. d) performing studies on issues related to the Public Register of Companies.

By performing its legal duties, DNRC has recently issued the Normative Ruling No. 117 of 2011, which regulates the incorporation of the EIRELI. Such regulation expressly forbids legal entities to own and incorporate EIRELIs, despite the fact that new article 980-A of the Civil Code does not set forth any restriction thereto. Said understanding can then only be regarded as illegal, given that it goes beyond DNRC’s authority by bringing innovations to the legal system whereas it was only supposed to regulate said issues.

A recent court decision has been issued by the State Court of Rio de Janeiro/RJ and shares the same understanding exposed hereby. It approves an injunction to allow a Company from the USA to convert a limited liability company (“Sociedade limitada”) in which the former held interest into an EIRELI.

We believe it is plausible to challenge before the courts eventual decisions issued by the Commercial Registries that deny the registration of an EIRELI owned by a legal entity (including foreign ones). The pitches to such lawsuit would be the same as those who grounded the recent decision of the State Court of Rio de Janeiro.

It is known that the noblest purpose of the creating such new corporate structure would be to avoid or to decrease the incorporation of companies with shareholders owning a considerably low share therein, for the only sake of complying with legal formalities. Such situation is likely to put the corporate law principle affection societatis at risk. According to such principle, there must be unity of efforts and goals between the partners. in this sense, DNRC’s mistaken understanding would directly harm the remarkable contribution that the EIRELI could bring to the legal and practical scenario regarding the corporations.

In the light of the aforesaid, we conclude that the creation of the corporate structure named as EIRELI would consist of an important step towards the modernization of Brazilian Corporate Law. It is however worrying that regulation bodies, notably DNRC, may somewhat limit the effectiveness of the changes to the legislation and even evade its main purposes. We hope that DNRC may soon revisit such position stated through the Normative Ruling No. 117 of 2011 and may issue a new regulation that do not diverge from the new legal aims.

Fernando Di Sabatindo and Débora Azevedo Reis (Lawyer and Intern of Corporate Team)

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