Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

Brazil has adopted civil law as its legal system, based primarily on statutory law, although judicial precedents have enjoyed increasing importance, mainly owing to the enactment of a new Civil Procedure Code (in force as of 2016). The Brazilian Federal Constitution states that the Federal Union has the exclusive competence to legislate on civil and company law, both of which govern partnerships and companies.

The law applicable to a partnership depends on its structure. The Brazilian Civil Code (Law 10.406/02) governs some types of companies and establishes rules on contracts (the latter being applicable to partnerships, owing to their contractual nature). Further, Law 6.404/76 governs corporations and certain partnership structures.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

Brazilian law provides for several forms of business association, including entities with separate legal personality, such as corporations, limited liability companies, limited partnerships, general partnerships and simple partnerships; and also contractual structures without legal personality, such as unincorporated partnerships, corporate groups, consortia and contractual joint ventures. In Brazil, a joint venture may be structured as a legal entity (frequently, a corporation or a limited liability company) or through a contractual arrangement (contractual joint ventures).

The most frequently used corporate structures with separate legal personality are corporations and limited liability companies, mainly because all their members enjoy limited liability. Consequently, limited partnerships and general partnerships are rarely used.

Simple partnerships may or may not provide for members’ limited liability, and they are mainly used for professional services firms – for example, for law firms, owing to a determination by the Brazilian Civil Code and the Brazilian Lawyer’s Statute (Law 8.906/04). Law firms must file their by-laws before the Brazilian Bar Association and must only have lawyers as partners; other lawyers and suppliers may be hired as employees. Partners bear subsidiary liability for any damage caused to clients or otherwise arising from malpractice.

For the purpose of this chapter, we will focus on contractual arrangements, mainly on unincorporated partnerships, consortia and contractual joint ventures, given that these are some of the preferred contractual partnership structures for businesses in Brazil.

Partnerships, in general, can be used for any sort of business, but some are more commonly used for specific areas or projects. For instance, unincorporated partnerships are frequently used for real estate projects and angel investments; consortia for participation in public bids, construction projects, insurance operations and public transportation; and joint ventures for infrastructure projects, such as mining, electricity, oil and gas, as well as for structuring investments with strategic partners or new ventures.

Corporate groups are rarely used in Brazil. For instance, while there are approximately 5,000 consortia registered with the Commercial Registry of the state of São Paulo, there are fewer than 30 corporate groups. The purpose of structuring these groups is to expressly establish, through a contract, rights and obligations between a controlling company and its subsidiaries. However, normally, this interaction basically occurs through stock ownership, not through a contractual arrangement.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

Partnerships are distinguished from corporations and limited liability companies mainly to the extent that the latter exist as separate legal entities and their shareholders and members enjoy limited liability.

Partnerships are, in general, contractual arrangements between individuals or legal entities to carry out a shared business venture.

An unincorporated partnership constitutes an association, without separate legal personality, of two or more persons to carry on a business with a view of profit, and it can be used for one or more specific transactions – sometimes for a single act, for example, the purchase of real estate for resale. The main characteristic of the unincorporated partnership is that there is one partner (the ostensible partner) who manages and carries out all the operational activities and is personally and unlimitedly liable for all obligations undertaken by the partnership. The other partner (the silent or participant partner) does not transact with third parties (usually does not even reveal his or her identity) and his or her contribution is only pecuniary (although some scholars consider that they can also contribute through services). Making a parallel with the common law limited partnership, the ostensible partner would be the general partner, and the participant partner would be the limited partner.

Corporate groups are formed by an association of corporate entities that combine efforts and resources towards the performance of a common business. One of their distinctive features is that they can only be formed by a parent or controlling company and its subsidiaries. Each member is a separate legal entity with legal personality, but the corporate group does not have a legal personality of its own. Consequently, the assets and obligations of each group member remain separate from the others. The corporate group itself does not have assets or obligations. The agreement must regulate the partners’ rights and obligations and the group’s interactions with third parties, including rules regarding each member’s liability for damages.

The consortium, in turn, is an association without legal personality, formed by corporations or companies, aimed at a shared goal. It may be used in situations that require cooperative efforts. Under this structure, all partners perform certain activities and the agreement must regulate the obligations and responsibilities of each partner (towards each other and third parties). As rule, the members of a consortium do not have joint and several liability, being liable only for the obligations undertaken by each of them under the consortium agreement.

In Brazil, there are corporate and contractual joint ventures. In this last case, similarly to other partnerships, they embody a mutual integration of resources or efforts, with the intention of carrying on a joint activity, and do not have legal personality. The major difference from other partnerships is that the joint venture agreement is atypical: there is no statutory law providing for its definition or regime. It is governed by the agreement between partners, which must comply with contract law. Other main difference between the types of partnerships is their tax implications.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

A normal reason for choosing a partnership is that in certain situations it might not be possible to reach a certain goal by acting alone: aggregation of resources and skills are required.

Partnerships also have similar advantages to those obtained with corporate structures, such as rationalisation of production and access to a wider market. Further, costs might be reduced, for instance, owing to fewer obligations on registration and publications.

Moreover, corporate structures are subject to a specific legal regime, which is generally more restrictive and detailed than the rules that can be agreed by partners under a contractual framework. Consequently, partnership members generally have more autonomy to determine rules for each other and their relations with third parties.

Further, compared with corporate structures, partnerships provide more agility in the association between its members, given that, except for certain requirements, partnerships do not demand complex registration or bureaucracy for their constitution or dissolution.

However, the adoption of partnerships may be discouraged by the lack of legal personality, as this might increase the risks of members being held liable for partnerships’ obligations. The absence of specific legal rules, indicated above as an advantage for providing greater flexibility for the negotiation of applicable rules, may also give rise to greater legal uncertainty, transferring to courts the power to resolve doubts and conflicts not regulated by law.

From a tax perspective, in a context where two companies sell goods or provide services on behalf of the same client, a partnership structure may be more efficient than a structure where one of the companies is individually hired by the client and then outsources part of the services to a second company. Indeed, partnership structures may avoid double taxation that could arise from cumulative taxation sometimes applicable under the Brazilian tax system.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

In general, partnerships are formed by contractual arrangements between partners and do not demand substantial formalities.

Unincorporated partnerships and contractual joint ventures constitute an agreement enforceable against the contracting parties from its execution, irrespective of any registration before the Commercial Registry. Unincorporated partnerships are only required to be enrolled before the Federal Taxpayer’s Registry, owing to a determination by the Federal Revenue Office, in force since 2014 (Ordinance 1.470/14, replaced by Ordinance 1.863/18).

Consortia and corporate groups require a written agreement. Internal approvals by the members are also necessary. Additionally, they must be enrolled before the Federal Taxpayer’s Registry and file their agreements before the Commercial Registry.

For a corporate group, it is also necessary to register the minutes of meetings whereby the group’s constitution was approved (or the corresponding adjustments to the members’ by-laws) before the Commercial Registry, and documents evidencing the control of the parent company over the other members. To be enforceable against third parties, the certificate of all these required registrations must be published in the competent states’ Official Gazette and in widely circulated newspapers.

Law stated date

Correct on:

Give the date on which the above information is correct.

17 June 2020.