What Is a Social Contract? Learn Why It Is Important and How to Prepare Yours!

Among all the documentation required to formalize the opening of your company, it is essential that you keep in mind what a valid articles of association are and how important they are.

This document basically functions as a “birth certificate” for companies, containing data on the line of business, names of partners and other information aimed at protecting the rights of the entrepreneur.

In this article, you will understand what a social contract is, how to prepare this company documentation, and also how it works for your security as an individual.

Let’s go?

What is the importance of the social contract?

The articles of association are the document in which you, the entrepreneur, list the main information about your company: names, who the partners are, their duties and their shareholdings, headquarters address, line of business, etc.

Once registered, the articles of association are valid to define the rights and duties of the partners, delimit their responsibilities and any rules for resolving conflicts, for example.

In short, the articles of association are the first thing that must be created in the company’s documentation list, because without them, the enterprise will not have legal validity and, therefore, will not be able to formalize negotiations, define possible legal responsibilities or hire consortiums .

And, for the document to be valid, it is not enough to know what a social contract is. The golden tip is to understand its structure and how it protects the future of your company.

What does a social contract look like? 3 examples

Although there are several types of articles of association, they all require some basic information about the people behind the company. The variations depend on the type of business, investment quotas, responsibilities, etc.

There are currently several types of social contracts, however, the best known – and with the highest number of registrations at the Commercial Board and at the Individuals Registration Offices – are three. See below.

Limited Liability Company (LTDA)

In a Limited Liability Company, the articles of association must contain the shareholders’ shares, since each of them is responsible for the amount invested. In general terms, the model allows changes to the clauses so that new companies can organize themselves regarding their obligations and rights.

Individual Limited Liability Company (EIRELI)

This type of company, usually created and managed by just one person, requires a type of social contract called a Memorandum of Association. In other words, although it serves the same purposes as other contracts, in this modality, it is possible to change, include or exclude clauses, depending on the company’s needs.

Individual Company (EI)

Also formed by only one partner, this is a company that exceeds the tax ceiling established by the MEI (Individual Microenterprise). Here, the articles of association are called Entrepreneur Applications, issued by the Federal Government, and cannot be changed.

Let’s assume, for example, that you want to set up a fleet for cargo transportation . In addition to the specificities inherent to the type of business you have, it is important to remember that all articles of association must include:

• name and address of all company directors, if there is more than one;
• what are the economic activities carried out;
• who are the partners and their respective heirs, if any;
• what procedure will be adopted in the event of the departure of one or more partners;
• what is the procedure for selling shares of partners who leave the company;
• what is the investment quota of each partner and their share in the company’s profits.

With this information, the articles of association will be legal and you, as an entrepreneur, will be able to access legal accounts, bidding notices, loan agreements, etc.

How to make a social contract?

The preparation of the articles of association must include, as a rule, three essential parts: general clauses, management clauses and final and transitional provisions. It is worth understanding each of these parts to know how to draw up a valid and legal articles of association.

General clauses

This section must contain basic information about the company’s constitution: purpose, share capital, duration of the organization (if applicable), address of the headquarters, economic activity carried out, legal framework and registration data of the partners.

Administration clauses

Here, the obligations of each of the partners involved in the business and the method of electing the directors will be defined.

Final and transitional provisions

To finalize your articles of association, you must present any additional information: the liability of each partner in the event of bankruptcy, what the exclusion process will be like in the event of the death of a partner, how the sale of participation shares will work, etc.

Now that you know what a social contract is, it is worth mentioning that within each of these parts, you, as an entrepreneur, can include clauses that address other topics relevant to the company. The more information you include in the document, the greater your guarantees will be in the future.

How is a social contract issued and registered?

Knowing what a social contract is does not guarantee its legal validity. In order for it to be duly recognized, the company’s documentation must be registered with the respective competent bodies.

To draft the contract, you can use ready-made templates available on the internet, for example, replacing the information with that which corresponds to your company, or you can also choose to hire a lawyer to instruct you.

Once you have a document that meets your needs, simply register it with the Commercial Board or the Individual Registration Office, depending on the type of company created and what the law says.

Once the request has been made to the competent authority, your company will be registered with the Municipal, State and Federal Revenue Service and will subsequently receive the so-called Commercial Registration. This is a numerical document that will allow your company to hire employees, open legal bank accounts, etc.

Understand why you NEED a social contract

In general terms, the articles of association are what validate the existence of your company. Without them, legally speaking, the company does not exist.

This means that, no matter how much the company carries out its activities, it will not be able to have several benefits that only the recognition of the articles of association offers: opening a legal account , carrying out transactions or loans, issuing invoices for services provided, and the like.

In practice, the consequences of not providing the documentation directly affect you, the entrepreneur. On the other hand, in scenarios where the articles of association exist, the responsibility lies with the company.

Ultimately, understanding what a social contract is and its importance means that you are able to carry out your activity within the law, without taking unnecessary risks and with the possibility of receiving benefits.