1. Introduction

This article analyzes the advantages of converting from a Sociedad de Responsabilidad Limitada (SRL, or Limited Liability Company) to a Sociedad Anónima (SA, or Corporation) or a Sociedad por Acciones Simplificada (SAS, or Simplified Stock Company) — a process known in legal terms as a “transformation.”

Below, we examine the main legal and tax aspects of each type of entity, in order to identify the advantages of converting to an SA or SAS.

2. Transfer of Ownership Interest

In a limited liability company (SRL), the transfer of quotas among partners is unrestricted, subject to any limitations set out in the company agreement. Transfer to third parties requires approval from partners representing 75% of the capital when the SRL has more than five partners, or by unanimous consent when it has five or fewer partners.

In the event of a partner’s death, bankruptcy, or incapacity, a special regime governs the transfer of the affected partner’s quota, granting the remaining partners a right of first refusal, unless a continuation agreement with the spouse or heirs has been stipulated.

Any change in the ownership of quotas requires an amendment to the company agreement.

In an SA or SAS, a shareholder may transfer their shares without requiring the consent of the other shareholders, and no amendment to the bylaws is necessary, unless a shareholders’ agreement exists.

In SRLs, which require at least two partners, the common arrangement involves a “real” partner holding 99% and a “nominal” partner holding 1% or more. We have encountered cases where the 1% stake belonged to the spouse and a divorce occurred, generating a corporate dispute on top of the personal one. In other cases, the 1% was held by a sibling, creating equally problematic conflicts. Since the SAS allows for a single shareholder, an SRL can be converted into an SAS and the 1% (or more) stake can subsequently be transferred to the “real” partner, who then holds 100% — thereby eliminating any future disputes.

3. Tax Considerations

From a tax perspective, the SRL and SAS are subject to essentially the same taxes and social security contributions.

There are some relevant differences between the SRL and the SA. The SRL does not pay ICOSA (the annual corporation control tax), while the SA does. The SAS must mandatorily make monthly social security contributions for at least one administrator. Regarding income tax, for companies whose billing does not exceed certain thresholds, the SAS offers a more favorable regime, allowing taxation under a presumptive regime at 12%, with no 7% tax on dividend distributions.

4. Partner Liability

In an SRL, partners’ liability is limited to the quota they have contributed, in accordance with Article 223 of the Companies Law (LSC). This means that SRL partners are not personally liable for the company’s debts.

There are two exceptions to this principle: labor-related debts and income tax liabilities.

With respect to labor-related debts, SRL partners are subsidiarily, personally, and jointly liable for all salary-related obligations, regardless of their cause. Partners are not liable for severance pay owed to employees. This means that a creditor must first pursue the company’s assets and, if those are insufficient, may then pursue the partners personally. All partners who held that status from the time the obligation became enforceable until its extinguishment are jointly liable.

In a corporation (SA) or SAS, shareholder liability is limited to the shares they have subscribed; shareholders are not liable for the company’s debts, and there is no exception comparable to that which exists for SRLs.

It is important to note that in all three types — SRL, SA, and SAS — legal or voluntary representatives (administrators, directors) who fail to exercise due diligence in their duties are jointly and severally liable for all tax obligations corresponding to their principals (Article 21 of the Tax Code).

5. Flexibility to Customize Partner Relationships

The SRL is subject to certain mandatory rules regarding the death of a partner and the transfer of quotas that cannot be contractually waived, making it very difficult to reasonably regulate the situations that arise upon a partner’s death or transfer of quotas. Furthermore, there is no express provision allowing for shareholders’ agreements enforceable against the company, which would enable a customized regulatory framework tailored to the partners’ needs.

In the SA and SAS, there is greater flexibility to regulate through shareholders’ agreements — which can be made enforceable against the company — the aspects related to a shareholder’s death and the transfer of shares, as well as other matters.

For example, regarding the death of a shareholder, it is possible to establish buy options in favor of the surviving shareholders or sell options for the heirs of the deceased shareholder.

With respect to the transfer of shares, the ability to establish drag-along obligations to ensure the sale of the company to a third party is fundamental. Tag-along rights to limit the entry of third parties are also very important.

Given that many SRLs are family businesses, the ability to regulate the matters described above and to implement appropriate succession planning is key to keeping the company running without conflicts that would erode its value and harm its partners.

The purpose of this publication is to provide general information and not specific legal advice to be used without first conducting a consultation to evaluate your particular situation. We are at your disposal should you wish to seek our assistance.