SpA or Limitada: how to choose the company type for your business

The sociedad por acciones (SpA) is a legal entity created by one or more persons, whose participation in the capital is represented by shares (Article 424 of the Código de Comercio, the Commercial Code). Its bylaws set freely the rights and obligations of the shareholders and the management regime, except where Paragraph 8 provides otherwise. What the bylaws do not regulate is decided first by Paragraph 8 itself and, only where the bylaws and that Paragraph are silent, by the rules of the closely held sociedad anónima (corporation), insofar as they do not conflict with the nature of the SpA (Article 424). Its purpose is always deemed commercial (Article 425).

The sociedad de responsabilidad limitada (Limitada) is a partnership, civil or commercial, in which the personal liability of the partners is limited to their contributions or to the higher amount stated in the deed (Article 2 of Law 3.918). It is formed by public deed, admits up to fifty partners and is barred from banking business. In what the law and the deed do not provide, it is governed by the rules of general partnerships (sociedades colectivas) (Article 4 of Law 3.918). From that referral come both its rigidity and several rules that apply even when the deed is silent.

In disputes the difference is one of degree. In the SpA the bylaws cannot exclude arbitration; they only regulate its form (Article 441). In the commercial Limitada the silence of the deed also leads to arbitration (Article 415 of the Commercial Code), and it is the deed that regulates that matter (Article 352 No. 10).

• The partners want a veto over who comes in without having to write it. In the Limitada, unless the deed provides otherwise, no partner may bring in a third party without the consent of the others (Article 2088 of the Civil Code). In the commercial Limitada, moreover, an assignment without the prior authorization of all partners is void (Article 404 No. 3 of the Commercial Code, applicable under Article 4 of Law 3.918). In the SpA the rule is free transferability. A restriction of comparable effect has to be written into the bylaws (Articles 424 and 435 of the Commercial Code). If it appears only in a shareholders agreement, it binds those who sign it and must be deposited with the company and noted in the shareholders register to be enforceable against third parties. Even so, it does not prevent the company from registering the transfers presented to it (Article 14 of Law 18.046, applicable under Article 424).
• The business depends on the partners always being the same: professional firms, family businesses with two or three branches, or partners who contribute their own work and want the closed group to be the default rule, without having to negotiate it as a clause.
• The activity is civil, or the company provides professional services. The Limitada is civil or commercial (Articles 1 and 2 of Law 3.918), while the purpose of the SpA is always deemed commercial (Article 425 No. 2 of the Commercial Code). In addition, under the criterion of the Servicio de Impuestos Internos (the Chilean tax authority), only a partnership of persons can be a professional partnership (sociedad de profesionales) for the purposes of Article 42 No. 2 of the Income Tax Law.

The price of the protection the Limitada gives is the paperwork. Under the traditional route, every entry, exit, change of capital or of management is an amendment of the deed that, unless the deed provides otherwise, requires the agreement of all partners (Article 1545 of the Civil Code), and is executed by public deed with an extract registered and published (Article 350 of the Commercial Code and Article 3 of Law 3.918). A company that expects its ownership to change hands pays that price often.

• There is a single owner, or there may be one later. The SpA is created by one or more persons and, unless the bylaws provide otherwise, survives when all the shares come together in one shareholder (Articles 424 and 444 of the Commercial Code); the Limitada requires at least two partners to be formed (Article 2053 of the Civil Code).
• Investors will come in. Preferred series, series with more than one vote, with limited vote or without vote, paid shares offered at a free price and fixed dividends (Articles 436, 437, 439 and 442) are the tools a venture capital round and a SAFE or convertible note (SAFE: simple agreement for future equity) usually use. The Limitada issues neither shares nor series: any special right is agreed in the deed, and each investor requires amending it.
• Ownership will change hands: partners who leave, key executives who receive shares, a partial sale of the company. Transfers are recorded in the shareholders register (Article 431), and the limits the owners do want, such as a right of first offer or a forced sale, are agreed in the bylaws (Articles 424 and 435) and in the shareholders agreement, without amending the deed at every transfer.

Once the SpA is chosen, the six decisions fixed in its bylaws are in incorporating an SpA in Chile.

That step, from Limitada to SpA, is a conversion (transformación), one of the three routes compared in corporate restructuring.

A conversion is "the change of the species or type of a company, made by amending its bylaws, with its legal personality surviving" (Article 96 of Law 18.046). The company keeps its legal personality and, with it, its assets; only the rules that govern it change, although contracts with clauses on change of company type or of control must be reviewed. In a Limitada the amendment modifies the partnership contract, so, unless the deed provides otherwise, it requires the agreement of all partners (Article 1545 of the Civil Code), executed by public deed, with an extract registered and published (Article 350 of the Commercial Code and Article 3 of Law 3.918). If the company is under Law 20.659, its conversion is made through the electronic form of the Registro de Empresas y Sociedades (Business and Companies Registry) while it remains under that regime, unless it migrates to the general regime (Articles 1, 19 and 20 of that law); the same regime covers mergers, demergers and dissolutions.

The reverse route, from SpA to Limitada, also exists, provided the resulting company has at least two partners. And there is one change that happens by operation of law: an SpA that for twelve consecutive months meets the conditions that oblige a closely held corporation to register its shares in the Securities Registry becomes a sociedad anónima (Article 430 of the Commercial Code). That threshold is far from a new company, and the SpA thus serves as an antechamber to a corporation.