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Home » Services » Business Start » FAQ on Russian Companies registration

FAQ on Russian Companies registration

Frequently asked questions regarding legal status and registration of Russian companies

The Civil Code of the Russian Federation recognizes, among others, the following types of commercial legal entities:

  • Closed joint stock company (Russian abbreviation: ЗАО)
  • Open joint stock company (Russian abbreviation: ОАО)
  • Limited liability company (Russian abbreviation: OOO) 

There are also possible not-for-profit organizations of different types. However, they are not oftenly used as the process of their establishment is quite complicated.

Please note that Corporate Practice Law Firm renders the services on registration of all types of companies (commercial of all types and non-commercial).

Below you can find answers and comments to the most frequent questions regarding establishment of the Russian companies. If you still will have any questions please contact us directly: +7 (495) 989-2215 or moscow@corporate-law.ru and we will provide you with the answers.

Legal Status of Limited Liability Company

Legal Status of Joint Stock Companies

What is better for foreign investor in Russia: Limited Liability Company or Closed Joint Stock Company

Who can apply for the state registration of the new Russian company

Name of a Russian legal entity

What is better for foreign investor in Russia: Limited Liability Company (LLC) or Closed Joint stock company (CJSC)?

Closed joint stock companies and limited liability companies are the most commonly used legal forms in Russia that involve a limited number of participants (up to 50 participants).

Although a closed joint stock company and a limited liability company are similar in many instances, the main differences between them relate to the areas of decision making, protection of shareholders against share dilution, withdrawal or expulsion of a participant, property contributions and administrative issues.

The distinctions between a Limited Liability Company and Closed Joint Stock Company are the following:  

  Limited Liability Company (OOO)

 Closed Joint Stock Company (ZAO)

The charter capital is divided up into participation interests.

The charter capital is divided up into shares.

Participation interests don't constitute securities and are not subject to Russian securities law.
Therefore establishment and operation of an LLC is generally less administratively burdensome than a CJSC.

Is subject to the requirements of the Russian securities law. An issue of new shares will require preparation and registration of various documents formalizing the issue of shares. (Supervision under the Federal Service for Financial Markets).

Most documents recording transactions relating to the transfer of participation interests in an LLC
(including a pledge over participation interests) are required to be certified by a notary.
This can result in delays and difficulties in effecting sales and pledges of LLC participation interests.

No such a requirement.

If permitted by the company's charter, each participant is entitled to withdraw from the LLC at any time
and without cause, irrespective of the consent of the other participants.

 

The JSC Law provides for no such right. For this reason CJSC form is likely to be preferable for a joint venture with a Russian partner, especially if the Russian partner is expected to make a significant charter contribution.

The charter may forbid the sale of participation interests to third parties.

It's not allowed to forbid shares selling to third parties.

The participation interest of a company participant withdrawing from the company is transferred to the company. In such case, the company must pay to the withdrawing participant an amount equal to the actual value of its participation interest in the company's charter capital.

If a shareholder decides to withdraw from a CJSC then he can do so via the sale of his shares either to the other shareholders or to a third party. The value (selling price) of the shares is determined by the parties.

Any participant holding at least 10% of participation interests of the company may apply to a court to seek the exclusion of another participant. An exclusion order will be granted if the applicant prove that the actions (inactions) of participant constitute gross violation of its duties, if as a result of such violation the conduct of the LLC's business becomes impossible or substantially more difficult.

For obvious reasons it is unattractive to a foreign investor considering a joint venture with a Russian partner.

No right to exclude a shareholder.

Many decisions of an LLC may be taken only by unanimous vote of all LLC participants. While this may be favourable for a minority participant, it is unattractive to a majority participant.

Most issues considered at a JSC's general shareholders' meeting are decided by a simple majority vote of attendees at a shareholders' meeting.

The regime governing LLCs appears to provide significantly less protection to minority participants. To ensure that a minority stake is not diluted, the charter of the company must contain express provision giving minority shareholder rights in addition to those stipulated by the LLC Law.

Charter of a CJSC may provide certain additional protection for minority shareholders.

 

In an LLC, the decision can be adopted by no less than two-thirds of votes.

In a CJSC, a few particularly important decisions require a 75 per cent majority vote of attendees.

 50% of charter capital must be paid up on the date documents are filed for registration of the LLC (for this reason, the LLC's founders must open  temporary Russian bank accounts before the LLC is registered).

 The founders must pay up 50 per cent of the charter capital within 3 months of the date of registration of the CJSC .

Independent appraisal is not required if the "in-kind" contribution to the charter capital is less than RUR 20,000.

If the contribution to the charter capital is "in-kind" (property) and not cash, then an independent appraisal is required regardless of the value of such in-kind contributions.

If the charter so permits, participants may make capital contributions to the LLC (either pro rata to, or disproportionate to, their participation interests) without affecting the size of the LLC's charter capital or the size of their participation interests.

The only method of increasing capital without affecting the size of common shareholdings is to issue preference shares.

Internal audit is obligatory only when there are more than 15 participants.

Internal audit is obligatory in any way.

CJSC is likely better suited to investors establishing a joint venture with Russian partners, while an LLC is particularly better suitable for a wholly- owned Russian subsidiary.

While choosing particular form of legal entity the factual background should be considered, and in particular the specific of business, therefore we will be happy to assist you on this matter and advise the best variant ideal for you.

Legal Status of Limited Liability Company

A limited liability company (hereinafter the "LLC") is a business company established by one or more persons, the charter capital of which is divided into participation interests.

Participants of an LLC are not liable for the company's obligations and bear risk of losses associated with the company's activities to the extent of the value of their respective participation interests in the company's charter capital.

If permitted by the company charter, each participant of an LLC has the right, at any time, to withdraw from the company and to receive an amount equal to its pro rata share of the company's net assets. For foreign investors contributing significant amounts of time and money to a joint venture at the start-up phase, this aspect can be a problem.

An LLC can be established by either a person or group of persons, or by Russian or a foreign company.

However, if the number of participants exceeds 50, the entity must be reorganized into an open joint stock company or a production cooperative within one year. Furthermore, an LLC may not have as its sole participant another business entity consisting of a single person.

The charter capital of an LLC consists of contributions made by its participants.

The minimum charter capital of a Limited Liability Company is RUR 10,000 (approximately $330) and at least 50 percents of the capital must be paid by the date of the LLC's registration, and the balance must be paid in full within the first year of its operation.  Contributions can be made in cash or in-kind. The charter capital may be increased only after the original charter capital has been paid in full.

The absence of necessity to issue shares in an LLC makes this form of legal entity more mobile and flexible when it is necessary for participants of the LLC to change (increase or decrease) the charter capital of the company.

The only constitutional document of an LLC is a Charter, which is approved by the founders (participants) of an LLC.

An LLC has a two-tier management structure which consists of:

  • General Participants' Meeting, the highest governing body which has exclusive rights to amend the Charter, approve annual financial reports, etc.
  • Executive body (Sole executive body, i.e. General Director, President, etc. or Collective executive body - the management board, the directorate, etc.). The primary function of the executive body is the daily management of a company.

According to the Federal Law "On the Limited Liability Companies" a Board of Directors can also be formed in the LLC. The main function of the Board of Directors is the supervision over the general company's operations. Formation of a Board of Directors is not obligatory. If a Board of Directors is formed, then some of the rights and liabilities of the General Director are to be transferred to the Board of Directors. 

It is important to mention that nowadays it is possible to sign the participants agreement in relation to the management of the Russian Limited Liability Company DIRECTLY by and between the members of the Russian Limited Liability Company. It is a new rule in the Russian Legislation (in force since July 17, 2009). Before that time participants agreements in relation to the management of the Russian legal entity were usually being concluded on the offshore levels - by and between the owners of  participation interests in the offshore companies who, in turn, were the owners of participation interests in the Russian LLC.

Importantly, a transaction aimed at the disposal of a participation interest or a portion thereof in the charter capital of an LLC is subject to notarization. Failure to comply with the notarial form of such transactions leads to the invalidation thereof.

Legal Status of Joint Stock Company

A joint stock company (JSC) is a business company, whose charter capital is divided into a definite number of shares; the owners of the JSC (the shareholders) do not bear liability for its obligations, but do accept the risks involved with losses connected with the JSC's operations within the value of their shares.

Russian law provides that only joint-stock companies may issue stock, which is deemed as securities and is subject to registration.

 A company may be created as a new company or by reorganizing an existing legal entity (consolidation, merger, division, spin-off or a change in legal form, etc.).

There are two types of JSCs:

  • Closed joint stock companies (CJSC);
  • Open joint stock companies. (OJSC).

The distinctions between Open Joint Stock Company and Closed Joint Stock Company are as follows: 

Open Joint Stock Company

Closed Joint Stock Company

Minimum charter capital is RUR 100,000

Minimum charter capital is RUR 10,000.

Unlimited number of shareholders                                                                

Limited number of shareholders, which cannot exceed 50. Otherwise, the company is subject to reorganization into Open Joint Stock Company within one year.

Shares may be freely sold to third parties

Shares may not be freely sold. Shareholders have a right of first refusal to acquire shares sold by other shareholders to third parties, at the price offered to the third parties.

The management structure of a JSC is similar to the management structure of an LLC. Both open and closed JSCs are obliged to have two governing bodies: the General Shareholders' Meeting and the Executive Body.

The OJSC with over 50 shareholders must have a Board of Directors (the Supervisory Board). Furthermore, a JSC must annually undergo an external audit for control and approval of its annual financial reports.

Applicant for the state registration of the Russian company

The main issue is that foreign representatives of the foreign company establishing a new company in Russia can simply be not physically available in Russia at the moment of submission of the documents for the state registration.

The Federal Law "On legal entities' registration" does not demand that the application of the documents for the state registration of a new legal entity is filed only by Director, President, Chairman of management board, etc. company's founder/founders (the sole executive body/chairman of the collective executive body of the company) themselves.

However, in Moscow there is a rule (quasy law) that the documents for the state registration of a legal entity should be presented by the applicant itself (not by a person acting on the basis of a power of attorney).

After the Russian company is registered the applicant for the state registration (e.g. of changes regarding the company) will be the Director General.

In such cases we usually recommend to consider one of the following solutions:

  • to register a new legal entity not in Moscow, but e.g. in Moscow Region (where the Moscow rule on the necessity of personal application is not applicable). Moscow Region is as near to Moscow center, as some of the Moscow districts are. The company that is established in Moscow Region can freely open bank account and conduct business in Moscow);
  • to introduce to the company a foreign person situating in Russia or Russian citizen as a minor shareholder (having e.g. 0.1% of the company's share capital) - usually this minor shareholder is a person to be appointed the Director General. This minor shareholder will apply the documents and make all the procedures necessary to establish the new Russian legal entity and to open its bank accounts. In order to protect the interests of the foreign mother company, at the very beginning the minor shareholder should sign the documents (with open date) connected with transfer of the share back to the company.

Name of a Russian Legal Entity

In some cases foreign investors with to have the name of their Russian entity to include the words "Russia" or "Russian Federation" namely in the same transliteration and pronunciation as in the Russian language (being the name of the Russia as the country).

According to the Russian laws the use of the words "Russia" or "Russian Federation" in the names of legal entity is not free. There should be a special permission granted by the commission of the Government of the Russian Federation.

In order to conter this obstacle, we recommend to use not specifically the word "Russia" as in the Russian language, but use the Russian transliteration of the English word for "Russia" (e.g. Руссия, Раша etc.).

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