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Disproportionate distribution of profits in limited liability companies

by Luciana Goncalves Bassani

July 29, 2013

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Among the essential rights of partners in limited liability companies are the right to vote on company matters and the right to earn profits from the company’s business activities.

In this regard, Article 1,008 of the 2002 Civil Code states that "any contractual provision that excludes a partner from sharing in the company’s profits and losses is null and void". Therefore, in limited liability companies, any contractual clause that effectively excludes one of the partners from the main objective of holding an interest in a company (ie, that of obtaining a return on one’s investment by sharing in company profits) is unconscionable and abusive.

Article 1,007 of the code in turn acknowledges that the partners have the autonomy and freedom to establish the proportion to which each partner will be entitled in the distribution of company profits, as follows: "unless stipulated otherwise, each partner is entitled to part of the company’s profits and losses, according to the proportion of their respective Quotas."

As such, the code permits the distribution of profits other than in proportion to each partner’s share of a company’s capital, provided that:

  •     all partners receive some portion of the profits; and
  •     the company’s articles of association expressly provide for such distribution of profits.

In addition, the articles of association may stipulate that such disproportionate distribution must be approved by the general partners’ meeting, and may even establish the quorum required for such approval. Although the code does not stipulate a specific quorum for this purpose, it is recommended that unanimous approval be required, in order to avoid potential claims or challenges by any partners who may feel wronged, or claims by third parties (eg, the tax authorities).

If the partners do not wish to require unanimous approval for disproportionate distribution, it is recommended that the consent of the directly affected partners be recorded, to prevent them from challenging the company or the other partners on those grounds.

In practical terms, the recently defunct National Commercial Registry Department also allowed partners to provide freely for the distribution of profits in limited liability companies, as demonstrated by the guidelines contained in its website for drafting articles of association:

"Distribution of the profits or losses among the partners: Indication of distribution of profits among the partners in proportion with each partner’s share of the company’s capital, unless agreed otherwise (art. 997, Vll, CC/2002)."

The distribution of profits to partners has been exempt from income tax since 1996, provided that the rules pertaining to the form of taxation of legal entities are observed. The Federal Revenue Service, in Consultation Ruling 46/2010, acknowledged that profits distributed to partners in disproportion to their respective shares of the company’s capital also qualify for this exemption, provided that such distribution is duly stipulated in the company’s articles of association.

Therefore, a limited liability company may distribute profits to its partners in disproportion to each partner’s respective share of its capital, provided that:

  •     such distribution is expressly provided for in the articles of association; and
  •     no partner is excluded from the distribution of profits.

The disproportionate distribution of profits affords companies more organisational freedom, enabling them to distribute profits in accordance with the effective contribution of each partner thereto.

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Luciana Goncalves Bassani

Advogada

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