Unincorporated Participation

The society participation, according to Brazilian legislation (SCP – sociedade em conta de Participação), is a particular type of society, provided for in the Brazilian Civil Code, Articles. 991 et seq ..

This type of company, is characterized by the lack of legal personality of the same, as well as exemption from any kind of formal registration. In fact, it does not possess, necessarily, a number of its own register (CNPJ), and need not register in the “junta comercial”. Therefore, it has no legal personality of its own.

This company is formed by a member called “ostensive”, on which rests the whole corporate responsibility. The other shareholders called “participants”, are not involved in the administration of the company, but, simply, participate in the profits thereof. In fact, the participating members, taking responsibility only to the ostensive partner, and never to third parties. Any accounting or bureaucratic fulfillment, remains with the ostensive partner.

The SCP is, however, a company regular, although does not have legal personality. It can include temporarily or indefinitely, but, usually, is used as a temporary tool for the management of a single deal. So, the ostensive partner, acts in its own name, and, in most cases, third parties are not even aware of the existence of the participating members. This prevents the member from having to answer for business management for third parties.

On the merits, are still ongoing discussions on the nature of the SCP; on the one hand the doctrine that believes this type of relationship is comparable to a company itself and, on the other, those who argue that it is not simply a contract between the parties. These discussions are not insignificant, given that, on this classification, we could deduce the consequences of economic and shareholder liability. Clearly, depending on how you wish the type of relationship, they derive different consequences.

Civil Code Analysis
Article. 991 of the Brazilian Civil Code, determines that the constitutive activity of the corporate, is exercised exclusively by the ostensive partner, individually and in his own name, under his sole responsibility, participating others only to corporate profits. In fact, this article makes clear the limits of liability of the participating members, in relation to corporate bonds. It should, in this regard, to pay attention, because, in fact, this means that limits the liability of the partners involved in terms of the contractual relationship between the parties! See, then, to the contract, the possibility for the parties to be bound in their (tax obligations, financial, etc.).

Article. 992 establishes a free form for the establishment of the same, exempting from red tape now. On this point, it is worth remembering that, in the past, the member was called “silent partner”, because it was not public or formally his participation. Returning to the practical content of the above-mentioned, it is sufficient that the “Participating count” is present in the accounts of the company ostensive. That is, this participation is accounted for regularly. Therefore, even in the absence of a contract, you may have tried, by participating member, its economic contribution.

Article. 993 states that the effects of the contract, they produce only between the parties and that, in any case, this type of company will have its own legal personality.
The following art. 994 provides that the contribution paid by the participating member constitutes, together with the participation of the ostensive partner, special assets, the subject of “participation matters” related to the corporate purpose. This article generates different interpretations and accounting issues. Since the fund assets, referring only to the relations between the parties, they shall be administered in accordance with the terms of SCP. To remember that the above article provides that, in case of failure, the ostensive partner, the credit of partner participation, after the liquidation, should be considered unsecured, or unprivileged. The SCP is not subject to failure, because it has no legal personality, but his heritage can be attacked freely in case of failure of the ostensive partner, since the availability of such assets in the company.

Instead, in case of failure of the participating member, now in participation will not be subject to bankruptcy. The effects on society will be the same as for the failure of a part of a bilateral contract. That is, the rights and obligations that were in shareholders participant will pass in the rights of creditors.

Article. 995 conditions the possibility, for the ostensive partner, admission of new members participating, the consent of the other participating members. It would be important to have, in the shareholder agreement, any rules for admission and withdrawal of any or more members.
The art.996 as the rules applicable to the SCP, and, despite the ruling of that article provides, for the remainder, the application of the rules on partnerships, the case law is peaceful in saying that, when establishing a subsidiary application of these rules, the applicable legislation will be that relating to the type of society ostensive saves contractual waiver.

Article 50 of the Civil Code
To observe that in any case, the limitation of liability of the participating member is, in this article, a practical limit. The Code provides that in case of abuse legal personality, characterized by the misuse or confusion of the corporate asset (eg. The assets in their company, or use of corporate assets for personal purposes), the judge may decide, on application or at the request of the PM, that the effects of certain bonds are extended to the assets of the directors or shareholders of the company.

This leads us to be very cautious in case, for example, is to give the participating member (eg. Loan or lease), their assets for the use of VMS. In those circumstances it would be desirable that the member will not have any involvement, even marginal to the management of the business, because in some ways, the well could be seen as confused with the special fund, tying the partner share after natural limit of its liability.

Heritage of the SCP
Having overcome the doctrinal discussions on the ownership of assets of the SCP, it can be concluded, pursuant to the case the majority, that the goods of the SCP, are in communion among members with regard to internal reports and contracts. Instead, this heritage is definitely the ostensive partner, both from third parties and towards social obligations. In fact, it results in the accounts of that and in its availability.
In accordance with the statement made by important Brazilian authors, the assets of SCP can be defined as the special fund, created by the law, for a particular purpose, governed by agreements between the parties, and must be distinguishable within the heritage of its owner (shareholder ostensive).

Tax and Tax Aspects
A delicate point to be analyzed, is, surely, the tax aspect. Since the SCP has no legal personality, the fact remains that the company ostensive some specific requirements about the bookkeeping. Bonds tax “at source” is retained by the company ostensive, while, on the part of participating members, imposes only an obligation to report the existence of the investments, in his accounts could, in turn, deduct or account for tax withheld by the ostensive partner. As for profits, these are accounted for by the ostensive partner who will pay the relevant taxes; therefore the profit distribution will be tax free and will not be bestowed, as already taxed in the company’s accounts ostensive (art. 10 of Law 9,249 / 95).
In any case, the law RIR / 99 obliges the ostensive partner to show separately the profits obtained by the SCP, the profits of real or perceived. Therefore, he must hold a double accounting with regard to the special fund of the SCP and its management. This means that no compensation between gains and losses of the company ostensive can be operated. Although this is the same company, the tax will be calculated separately (ie, compensation can be made only within the accounting of SCP).
In order to avoid from the IRS presumption of tax avoidance, it is good that the ostensive partner uses a book “Diary” and a book “auxiliar”, for their SCP.

A brief mention should be made, with regard to the flexibility of the employees of the ostensive partner who are put in charge of the SCP. In fact, these can be used freely in all activities of the company ostensive. This is to say that, even if the ostensive partner has different VMS, or other business to be in, will employ the employees in all activities, without the effect of transferring the same, since they are employed by the company ostensive (with all the consequences security against it – the ostensive partner shall retain sole responsibility for the employment contract with employees). With the risk, however, that if a participating member, participates in only one of these SCP, may have difficulty in controlling the use of employees and related expenses, which will be on account of their SCP. This means that you could create a kind of “abuse” by the ostensive partner, the use of employees.

It is emphasized that, not having the SCP legal personality, is not amenable to bankruptcy proceedings. In any case, it should be remembered that it can be called the failure of the ostensive partner, legitimized by the parties (creditors). This means, for example, the member may, yes, going bankrupt, but not in his capacity as a shareholder, but in its capacity as lender. It reiterates that, although the investment of the participating member, aimed at obtaining a useful result of the operation, could not achieve that. In any case, you will ask back the payments made on the asset accumulation of the SCP, but will not enjoy any privileges. These loans are unsecured by law.

The Critical
The SCP contract is binding only between the parties but, not with standing the legal limit of liability of the participating member, you can increase this accountability, with specific commitment on some bonds. For example, the contract could constrain the participating member in proportion to its share of the tax obligations that may arise.
In addition to the contract of SCP, would, then, be desirable to a shareholders’ agreement containing the rules between the parties for the execution of the contract, including guarantees relating to the financing, method of enforcement, penalties for non-performance of the financial liability for sanctions, sudden losses, mismanagement of the deal, bankruptcy etc.
Much attention should be paid to the responsibility of the participating member, who must remain a stranger to the relationship between the ostensive partner and third parties. If it is shown that the participating member, participates in company decisions and, above all, the relations of the company ostensive with third parties, the liability exemption would not. That is, if, that fact emerges, the member will respond jointly to the third, regardless of the definition in the contract. The case law, such cases are interpreted as a masking of a company other, and therefore, it reacts thwarting protection participating member, closely linked to its total abstention from corporate decisions.

The participation agreement must be clear prediction of how the special fund created by the company, will be handled. Without underestimating the possible differences that may arise between members, and not to mention that the member in attendance cannot directly participate in company decisions. Instead, such a shareholder, may well claim compensation in case of mismanagement, as well as operate the ostensive partner to its responsibilities. Provision should be made as a result, in case of bankruptcy, the company ostensive, liquidation of shares in the event of early termination, etc.

Article. 996, creates a weak point, in anticipation of the limitation of liability of the participating member, where would apply the law of the partnerships to the remaining cases. This means it would apply Article 1023 of the Brazilian Civil Code, which provides that, if the company’s assets do not cover the debts, meet partners, in proportion to its shareholding, except solidarity clause. Clearly this provision concerns the relations of the society in participation with third parties. Moreover, the case law has set a further limitation, regarding companies ostensive limited or similar. So, these, have unlimited up to the amount of its share capital, excluding the unlimited liability of the shareholders of the company, but enlarging the responsibility of the company, with a significant increase in risk for the same. Always desirable in the contract is the provision on the applicable law.

Despite much discussion on the legal nature of the property fund, created by the dues paid by members and participants ostensive, the case law is unanimous in stating that, the assets of the SCP is managing the ostensive partner, and delivered to him and can be attacked by other creditors in case of insolvency. The specification sheet, covers only the internal relations between shareholders. The participating members, he can not even before the court in case the third, creditor of ostensive partner, assaults the assets of the SCP, since that partner (participant), only entitled to bring an action for recovery against the shareholder ostensive. So, there is an increased need to make careful checks on the economic and financial stability of the ostensive partner before the establishment of the SCP.

It would be advisable, to avoid duplication of expenses, related to activities performed by employees to other companies in attendance, which, all employees of the SCP were taken with tasks related to the corporate purpose of the same. So, it would avoid seeing the rise in personnel costs, in favor of other activities of the ostensive partner. Alternatively, the ostensive partner should keep records of the activities of individual employees, for each SCP, with a precise count of the hours worked on individual projects.

Much attention should be paid with regard to the management of the business. Many courts in relation to the rights of employees, are trying to prove a joint business management of all members, to get involved in economic responsibilities, including by participating members. Clearly this is a chance applicable only in case of insolvency total ostensive partner, but it is a risk, albeit remote, of being seized company goods in favor of employment claims of employees.