Judicial structure of startups – Benefits of formalization (part II)

In a series of three texts per week, we will present here the legal benefits of formalization of startups in Brazil: individual micro-entrepreneurs (part I); microentrepreneurs (individual entrepreneurs or EIRELI) and EPP (Part II); and companies (Part III)

Private entrepreneurs and EIRELI

The structure of a company is the result of three variables: its legal form, its corporate form, and the tax regime. As to its form, a company in Brazil may be a Microenterprise or a Small Business, but it can also have a different framework from that. As to its tax regime, it can be ‘Simples Nacional’,  ‘Lucro Presumido’ or ‘Lucro Real’. As to its legal form, finally, the company can assume the form of Individual Microentrepreneur, Private Entrepreneur, EIRELI, Limited Partnership or Corporation. This second part of the series of three texts will present the benefits of formalization of startups through a Private Entrepreneur and EIRELI. The third – and final – part will deal with the Limited and Anonymous Societies.

Benefits of formalization

As written in the first article of the series, currently, the government, along with SEBRAE encourages and provides satisfactory benefits for many entrepreneurs to grow and to formalize its business. However, there is still a lack of information by several entrepreneurs who end their activities prematurely. The biggest cause of premature closures of companies is the lack of proper business planning. This happens because a large number of professionals who work in several branches of the market do so informally, directly supporting all the risks of the business activity. Almost all informal entrepreneurs do not contribute to social security, which prevents them from obtaining social security benefits. Thus, the entrepreneur needs to have a business plan and choose the legal form that best benefits its interests.

Private entrepreneur

The individual entrepreneur exercises on his own the business activity. But he is not considered a legal entity. As stated by Fabio Ulhoa Coelho, an “entrepreneur is defined by law as the professional who exercises ‘economic activity organized for the production or circulation of goods or services’ (CC, art. 966). Noteworthy is the definition of professionalism notions of organized economic activity and production or circulation of goods or services. (…) The entrepreneur can be a physical or legal person. In the first case, it is called individual entrepreneur; the second company businessman. “The commercial entrepreneur can exercise business activity individually when he will be an individual commercial entrepreneur. The sole proprietorship, the individual entrepreneur also draws up individual company. The individual entrepreneur is the very physical or natural person, responding with their property by the obligations it has undertaken, whether civilians or commercial. The individual firm’s transformation into a legal entity is a fiction of tax law, only for the purpose of income tax.

Differences between Private Entrepreneur and EIRELI

The individual entrepreneur is different from the legal institution of individual limited liability company (EIRELI), created by the Civil Code (Law no. 12,441 of 11 July 2011). The EIRELI is expressly considered a legal person under art. 44, VI, of Law n. 10.406 / 2002, with its own rules, for example, the payment of a mandatory social capital minimum of 100 (one hundred) times the highest minimum wage in force in the country. As the individual entrepreneur is not considered a legal person, his personal wealth is confused with his venture. Individual Entrepreneur, on the other hand, is the physical or natural person who answers with its own property by the obligations it has undertaken, both civil and commercial. Therefore, its liability is unlimited and may its personal assets be affected by any act of the individual firm. This unlimited liability of the individual entrepreneur was the foundation of creation by the legislature of the individual entrepreneur limited liability (EIRELI), thus preventing the individual entrepreneur’s assets from being affected in the event of legal conflict.

Company with limited liability

Law 12.441, of July 12, 2011, created the Institute of Individual Company with Limited Liability (EIRELI). It is a legal entity of private law, formed by a single natural person, whose liability is limited to the amount of paid-in capital. That is, the individual assets of its owner are unmistakable with its assets. For the creation of an individual company with limited liability, the fulfillment of three requirements is necessary: the first concerns the social capital; the second refers to defining this graphic business mode; and the third regulates the participation of the holder in other companies. The capital cannot be less than 100 (one hundred) times the highest minimum wage in effect at the time of incorporation of the company. The holder can only be a natural person who is obliged to pay up the capital in full. In addition, the holder of an individual limited liability company may only appear in one company of this type (art. 980-A, § 2, CC). This doesn’t prevent its participation in another type of society, such as corporations, limited, simple, cooperatives, etc.

Final remarks

For individual entrepreneurs who did not fit the new law, there is a confusion of the assets of the legal and the natural person. In cases of administrative proceedings and court proceedings, in the event of potential liability, the case may reach its personal patrimony. The individual entrepreneur is responsible for the acts of its commercial establishment, so this responsibility makes their own personal assets liable in administrative and judicial proceedings. However, when the individual entrepreneur has limited liability (EIRELI), it’s not possible to reach personal assets. Thus, it is more beneficial to the entrepreneur who is exploring an economic activity individually, but incorporated as a EIRELI, provided that it can comply with the rules for this new form of a legal person under the Civil Code.

About the author:

Anna Flávia Moreira is a researcher at the Institute for Research on Internet & Society. Undergraduate Law Student at the Federal University of Minas Gerais (UFMG). Member of the Study Group on Internet, Innovation and Intellectual Property (GNet) and of the Study Group on Tax Procedure Law (GEPT) at UFMG. Interested and works in areas such as Finance and Tax Law, International Private Law and Internet Law.