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What's in a name?

By Clayton J. Joffrion

The American Name Game

In Florida a professional is not allowed to use the word "corporation" in the business name. The law requires that the term "Professional Association" be used. In Louisiana the appropriate term is "Professional Law Corporation" often abbreviated as "PLC". Throughout the U.S. there has been an increase in the types of legal entities allowed. Now consumers face confusion since terms like "Limited" sound impressive while the entity of general partnership offers more protection for creditors.

When dealing with a foreign legal entity one must be careful to determine just what type of entity is involved and what are its limitations of authority and liability. The purpose of this article is to briefly introduce some of the differences between legal entities in Latin America and those of the United States.

Even If Looks Like English It's Spanish

Just as in the United States there are several options for business entities in Latin America. In fact the type of organizations can easily be compared to those in the U.S. But, one must not be confused with names which are easily translated. Even though the concepts may sound similar, the Latin American business entities operate under different legal traditions, labor relations, tax systems, and currency exchange systems. The United States has long had the luxury of one currency throughout the entire country. This has allowed companies to move freely about doing business where they pleased. The Latin American experience has been effected by its own unique history.

There are a few common traits which Latin American corporations have in common. Not the least of which is common names even though each country may impose different rules. Below are some examples of common types of Latin American business entities and some differences with U.S. entities.

Sociedad Anonima

The most common corporate form in Latin America is the sociedad anonima which is similar to the business or joint-stock corporation found elsewhere. The sociedad anonima is abbreviated "S.A." and it is usually mandatory that this be included in its company name. It is a legal entity separate and apart from its shareholders. Two types of S.A.s are generally allowed: the privately held and the publicly held corporation called the sociedad anonima abierta or the sociedad de accionariado difundido.

Capital Requirements and Director Liability

The articles of incorporation of the Sociedad Anonima must contain most of the same information as a U.S. corporation. Some additional requirements relate to the amount of capital (expressed in the host country's currency), a more precise indication of the corporation's purpose, and provisions regarding dissolution and liquidation. The requirement of stating the amount of capital can become important later, because if the capital of a company decreases by 50% the directors are required to report that fact to a government authority. Where 75% of the capital has been lost, the corporation is deemed to be insolvent and directors are made liable in solido to third parties for all obligations which they have contracted since the existence of the deficit came or should have come to their knowledge.

Business Purposes

In the United States it seems to be common practice for a business corporation to state as its purposes to be to engage in anything that is legal. The only limitation to that ability is with regulated industries such as banks and insurance companies. There may also be antitrust regulations which prohibit certain activities, but as a general rule an "everything legal" provision in the articles of incorporation is acceptable.

In most Latin American countries this is not allowed and if the corporation is going to do something it must be stated. For this reason a Latin American corporation will often have long lists of activities in which it may engage, although this varies by country. During due diligence investigations those anticipating a contract with a Latin corporation should confirm that the activity is legal. Since most corporations in the U.S. can do anything we take this for granted. So what harm can come from this? If the corporation does not have the authority to do something it is illegal to do it. The U.S. company could discover that the Latin corporation is not bound by a contract and not liable for damages. The shareholders then are protected. In Mexico, obligations incurred on behalf of managers exceeding their authority only bind the company to the extent that it has benefits it has received.

The Council of Overseers

A very different concept is that of the consejo de vigilancia (council of overseers) composed of from three to fifteen stockholders. The duties of these consejos are to supervise the conduct of the board of directors, make cash audits, examine accusations by stockholders, and report to stockholders. In the U.S. it is the board of directors in which the power of the corporation is vested. In the Latin corporation the Council of Overseers can be a very strong opposition to the board. In addition, if the company's capital is over a certain amount, if its stock is offered publicly, if it is a mixture of state and private interests, if it operates a public service or concession, or engages in public transactions of cash or securities, it becomes subject to state supervision.

Sociedad Comercial de Responsabilidad Limitada

The limited liability company is a combination of an S.A and a partnership. The liability of the partners are limited, but the interests are not freely transferrable. In some countries there is no stock certificate representing shares of stock, but participacions which represent quotas of equal value. A committee of overseers is mandatory in Argentina when the company's capital exceeds 100,000 Argentinean pesos. A company must use the abbreviation "S.R.Ltda." or something similar in its name.

Sociedad Civil

The professional corporation is a type of partnership commonly used by law firms, accounting firms, and other professional service companies. Other business entities included the sociedad colectiva (general partnership), sociedad en comandita simple, which is abbreviated "S en C", or sociedad por acciones (limited partnership) , and the asociacion en participation (joint venture).

Modification of Latin Corporations

In the U.S. amendments to article and by-laws as often done by a predetermined majority. Sometimes the majority, or at least the minimum majority is set by statute. In Mexico, Civil Code Article 2698 states that "[a] civil company association agreement cannot be modified except by unanimous consent of the members". This could become important if a contract with a Latin corporation could offend its purposes clause. Insist that it be changed instead of hoping there will be no standouts among shareholders.

Conclusion

Doing business with Latin corporations should not be any more of a concern than doing business with an American company. However, Latin American business entities are not exactly the same as their U.S. cousins. The time to research the legal requirements and obligations of foreign entities is in the very earliest stages of negotiation. By all means ask them about their limitations, however, since they may not think of themselves as having limitations (after all they have the same rights as any other company in their country) it is important to look into these matters independently before closing the deal.

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