Judicial structure of startups – Part III

In a series of three texts, we are presenting here the legal benefits of formalizing startups through the individual micro-entrepreneurs, the individual entrepreneur, the EIRELI and business societies. In the last text of the series, we will present the benefits of formalization of startups through Entrepreneurs Companies.
It is important to note that the structure of a company is the result of setting three variables: the legal form, the corporate size and the tax regime. In relation to its size, the company can be a Microenterprise and a Small Businesses, but can also have no fixed framework. Regarding the tax system, it can be taxed by National Simples regime, the presumed income or taxable income. Regarding the legal form, finally, the company can take the form of Microentrepreneur Individual, Individual Entrepreneur, EIRELI, Limited Partnership, Society into account participation and corporation.
As demonstrated in the previous texts, the legal structure of a startup is not defined by a pre-established model; i.e. there is not a “one-fit-for-all” recipe for this setting, and each situation has its own peculiarities, among them the responsibilities owned by each partner, the capital that will be paid, the way of running the business, etc. The subjectivity in the choice of interests and the lack of legal advice, therefore, can end up leading to bad choices, which can compromise the success of the business. Therefore, it is important that entrepreneurs anticipate problems and understand that the corporate division is an initial step quite relevant to the startup. Thus, it is necessary to analyze in advance, for example, cases such as the withdrawal of a partner, the contribution of each partner to the business, their responsibilities, the disposal of alternatives. More importantly, all the issues discussed can be formalized by a contractual instrument.
Besides the Microentrepreneur Individual, the Individual Entrepreneur and the EIRELI, it may also be of interest to startups the constitution under the corporate types limited liability company or corporation, and business corporations, which will be outlined below.

Limited Partnership

The Limited Partnership is a simple, flexible and cost-effective option for those starting with other partners in any activity, which is why it is one of the most used by entrepreneurs. It is made by means of a social contract, an instrument that regulates the conditions and responsibility of the partners to each other and to third parties and is governed by the Civil Code, having less bureaucratic and costly structure compared to the corporation. The liability of members is limited to the payment of the capital, so that the responsibilities assumed by the company do not affect the personal assets of a partner, but when one of the partners does not fully pay, all are jointly liable for payment corresponding to third parties. Finally, you can choose the Simples National Taxation System, and is a good framework for cases where there is a high concentration of shares in the hands of a few controllers and there is no need for third-party funds.
Among the disadvantages in the constitution in the form of limited partnership are greater difficulty in obtaining investments, joint and several liability of members for payment of the capital, the inability of members of exclusion (in general), the inability to issue securities, the restriction to different classes of members and the requirement for the change of partners be made by amending the Articles of Association.

Business corporation

The corporation privately held is the legal entity of private law formed by two or more shareholders, business nature, in which the share capital is divided into equal par value and may have its shares traded with unrelated third parties to any of the partners because it does not exist the close relationship and mutual trust between them (societatis affectio). This Company restricts the responsibility of the shareholders to the issue price of the shares acquired, a factor that attracts investors. A corporation privately held cannot trade shares on the stock exchange, just selling shares to third parties directly. This is where we differ closed and open coroporations, because the latter can carry out the sale of shares on the stock exchange, duly authorized by CVM (Securities and Exchange Commission).
The corporation enables the preparation of shareholder agreements, issuance of debentures (form of financing through the issuance of company bonds) and IPO financial market offers a more robust governance structure (the management can be composed of an Executive Board and a Board of Directors). There is a legal provision requiring the distribution of minimum mandatory dividends, among other rules applicable to this type of company. Despite looking like a slightly more complex and costly option for those just starting out, it can be used for any activity. It has several advantages and it can be interesting even for an initial business. But the legal obligations are to the point that it deters many entrepreneurs of this structure for their companies. In addition, there is an inability to fit these companies in the tax regime of the National Simple, being allowed only the choice between the presumed income and the taxable income.
It consists of means of bylaws, an instrument that regulates the conditions and responsibility of the partners to each other and to third parties and is governed by Law no. 6.404 / 76, having a more structured way. The corporation provides various corporate transactions and facilitates the capture of investment by startups. For a startup to adopt this corporate structure, the corporation will begin closed and can get resources by the shareholders and the issuance of securities, such as bonds, for example. In addition, a corporation allows more than one class of shareholders and does not require the change of the company’s incorporation document for modification of the shareholders, i.e. it is not necessarily an amendment to the Bylaws.
Thus, a corporation is interesting for more consolidated and structured companies, or the ones that envisage the entry of investors or funding from third-party resources, for example, startups that already have investors willing to invest resources in the corporation. However, there are disadvantages in the constitution in the form of corporation to be observed, such as the more complex structure, governed by a specific law, the higher operating costs, such as publications required by law, procedures and stricter internal controls, and the need for regulatory care, a structure with rigidl executive positions and at least two directors, among other thins. Also, the payment of capital through property depends on expert assessment.
At the end of this series of three texts, we can safely say that, for the success of a startup, not only is an innovative and profitable idea necessary, but also planning and adaptation to a legal framework compatible with the business development. It is not advisable to entrepreneurs to let the legal aspects in the background, and only later worry about the damage already caused to the startup. It is true that there is still a lack of information by several entrepreneurs who end their activities early, and the biggest cause of premature closures of companies is the lack of proper business planning. This is because a large number of professionals who work in any branch do so informally, directly supporting all the risks of the activity. Thus, the entrepreneur needs to use a business plan – an analysis tool for the likelihood of success on the market – and to choose the legal form that best benefits, with the advice of qualified professionals, or even with tools and courses provided by the government through SEBRAE.