Differences between Sociedad Anónima and Sociedad Limitada
A Sociedad or Business Association is a contract between a minimum of two individuals or legal entities in which the parties define the terms and conditions that will regulate a particular and independent business venture. A minimum of two individuals or legal entities are required to set up a Sociedad and, after the entity is formed, the totality of the stock may be transferred to a single person. When the Sociedad obtains legally independent status it is generally referred to as “Personalidad Jurídica” or “Persona Jurídica,” which means that a Legal Person has been created according to the law and has acquired the status of an independent person able to act and contract in the legal world.
The articles that create and regulate the relationship between the parties in the Sociedad must be recorded in an Official Notary Book and filed at the Mercantile Registry, housed within the Public Registry. These articles are referred to as “Pacto Social” or “Pacto Constitutivo” and are equivalent to Articles of Incorporation and Operating Agreements used in the US. In order for the Operating Agreement to be binding, the provisions must be properly recorded in the Public Registry in order to notify the world of their existence. Once the Sociedad has been registered, the entity acquires independent status from its constituents and is able to legally act and contract with individuals and/or other legal entities.
There are different forms of “Sociedades” and the ones most frequently established limit legal liability to the assets and capital contributions of the entity, excluding the constituents or stockholders. The parties that form the entity are later known as stockholders. The legally established entity is governed by a board of directors or by managers, depending on the business association, that are initially appointed in the original agreement and may later be modified through a stockholder general assembly.
The powers given to the representatives of the entities may be as broad or as narrow as the stockholders deem appropriate. These powers and appointments must be recorded in the Public Registry in order for the changes to be valid and effective. The two forms of Sociedades that are most frequently set up are the Sociedad Anónima and the Sociedad de Responsabilidad Limitada. Both of these entities are completely anonymous meaning that there is no public record showing who the stockholders are. Proof of ownership and stockholders are recorded in the legal books which are usually held by the Secretary of the Board, its Manager or the Resident Agent as well as in the stock certificates that are issued and authorized by the board of directors.
Sociedades have five or six legal books, sealed and authorized by the tax administration. Three are accounting books and two or three, depending on the kind of business association, are for administrative purposes. The S.R.L. does not have a board of directors only a manager or several managers and only requires two administrative books: one to record the transfers of ownership of the stock of a particular company and a second one to record the stockholder meetings that must take place at least once a year. In the Sociedad Anónima or S.A., there is a third administrative book for the board of directors’ meetings since the administrative entity for an S.A. is a board of directors and not a manager.
One of the main differences between one legal entity and the other is that stock in a S.A. is considered commercial paper and subject to Commercial Paper Law, meaning that it may be transferred to third parties through mere endorsement. By contrast, stock in an S.R.L. is not considered commercial paper and, therefore, not subject to Commercial Paper Law. This small but important difference makes it so that each legal entity is suitable for different businesses. The S.A. is used when there are several stockholders that do not necessarily know each other or do not see each other regularly, while the S.R.L. is designed to maintain a more direct link between the administration and the stockholders while keeping the potential liability of the company limited to its assets only and not its stockholders, making it more appealing for businesses with a small number of stockholders.
