Establishing and Managing a Limited Liability Company (LLC) in Russia (December 2021)
A limited liability company (hereinafter also referred to as an “LLC”) is a corporation founded by one or several persons, whose charter capital is divided into participatory interests. A limited liability company acquires legal capacity from the time of its state registration.
The legal status of a limited liability company is regulated by the Civil Code of the Russian Federation and Federal Law “On Limited Liability Companies” No. 14-FZ dated February 8, 1998 (hereinafter referred to as the “Law on LLC”).
I. Establishing an LLC
1.1. Resolution on Establishment, Foundation Documents
A limited liability can be founded by one of several Russian and/or foreign individuals and/or legal entities, but it may not have as its sole participant any other legal entity, 100% shares (participatory interest) of which also belong to a sole shareholder (participant).
A company is founded through the holding of a meeting of founders, at which the founders adopt a resolution to establish a limited liability company, elect the management bodies of the company, and approve the company's articles of association. All resolutions are documented in the minutes of the foundation meeting.
In addition, the founders of the company enter into a written agreement on the foundation of the company, which determines the procedure for carrying out joint actions in founding the company, the amount of the charter capital of the company, and the amount and nominal value of the participatory interests of each founder of the company. It also determines the amount of, the procedure for, and the terms for paying for these participatory interests in the charter capital of the company.
If a company is founded by one party, the agreement on the foundation of the company is replaced by a written resolution of the sole participant on the establishment of the company.
The founding document of a limited liability company is the articles of association approved by the company’s participant(s). The participant(s) may also decide that the company shall act in accordance with model articles of association: there are 36 versions of the model articles of association approved by the Ministry of Economic Development of the Russian Federation, and information on a particular version (number) of the chosen model articles of association shall be entered into the Unified State Register of Legal Entities (hereinafter referred to as the “Register”)
1.2. Registration of a Company
State registration of LLCs is carried out by a tax authority within three business days of the submission of a complete set of documents. However, in practice, state registration may sometimes take longer. Along with an application for state registration signed by each founder (an individual or executive of a founding legal entity), and subsequently notarized, the tax authority shall be provided with the following documents:
- a resolution on the foundation of the company (minutes of the foundation meeting);
- the Articles of Association (except when the company acts on the basis of model articles of association);
- an excerpt from the register of foreign legal entities of the respective country of incorporation (applicable to a founder that is a foreign legal entity);
- a document confirming payment of the state duty of 4,000 rubles (if the documents are provided electronically, the state duty is not paid).
After the registration of the company, information on it and its participants shall be entered into the Register. Starting from its registration, the company is obligated to file accounting, tax and other statements and returns.
1.3. List of Company Participants
After its state registration, a company must maintain a list of company participants, containing information on each participant, the amount of their participatory interest and payment therefor, and the amount of the participatory interest held by the company. In the case of inconsistency between the information in the list of participants and the information in the Register, the right to a participatory interest shall be established on the basis of information contained in the Register.
The number of company participants must not exceed fifty. If the number of participants exceeds the said limit, the limited liability company must be converted to a joint-stock company within one year.
II. Charter Capital and Net Assets of the Company
The charter capital of a limited liability company is comprised of contributions from the company participants, and its minimal amount equals to 10,000 rubles. The charter capital of a company may be paid in cash or by making an in-kind contribution. If the nominal value of an in-kind contribution exceeds 20,000 rubles, such a contribution must be assessed by an independent appraiser.
The company shall ensure that any interested party may have access to the information regarding the value of its net assets. If the net asset value of the company is less than its charter capital at the end of the financial year that follows the second and any subsequent financial year, the company must adopt either a resolution on the decrease of the charter capital of the company to an amount not exceeding its net asset value or a resolution on the liquidation of the company.
III. Disposal of Participatory Interests
A participant in a limited liability company is entitled to sell or otherwise dispose of (exchange, give as a gift) their participatory interest or a portion thereof in favor of one or several participants in the company. No consent of the company or the other participants to such a transaction is required unless the articles of association of the company stipulate otherwise.
A company participant is also entitled to dispose of their participatory interest or a portion thereof in favor of a third party that is not a participant in the company. However, such an arrangement may be prohibited by the company’s articles of association.
In any case involving the sale of a participatory interest to a third party, company participants have the preemptive right to purchase such a participatory interest at the price offered to the third party, or at a price pre-determined by the company's articles of association, in proportion to the amount of their participatory interests (unless the articles of association stipulate otherwise). For that to happen a company participant intending to sell a participatory interest shall send to other participants a notarized offer specifying the price and other terms and conditions of sale.
The articles of association may additionally stipulate the preemptive right to purchase a participatory interest (or a portion thereof) by the company itself where the other participants have waived their preemptive right.
Furthermore, Russian legislation allows for conclusion of option agreements on sale or purchase of a participatory interest. In this case, for transfer of the participation interest the respective party shall accept an offer contained in such an agreement.
A transaction involving the disposal of a participatory interest (or a portion thereof) including acceptance of an offer under an option agreement must be notarized. A notary public certifying the relevant transaction shall provide the registration body with an application to introduce changes to the Register. The participatory interest shall be deemed transferred to its acquirer once the corresponding entry has been made in the Register.
If it is prohibited to dispose of a participatory interest in favor of a third party, and the other participants have refused to purchase it, or consent to disposal of the participatory interest (or a portion thereof) or to its transfer to heirs (legal successors) has not been received, the company shall pay the participant or its heirs (legal successors) the actual value of the participatory interest corresponding to the respective portion of the company net assets determined on the basis of its accounting reports.
IV. Agreements on Exercising Rights of Company Participants
In the cases where it is necessary to regulate the rights and obligations of the company participants, in addition to the articles of association and the provisions established by the Law On LLC, the company participants are entitled to enter into a written agreement on the exercising of the rights of company participants (corporate agreement), which may be entered into either during the foundation of the company, or at some point thereafter. Under such an agreement, the participants undertake to exercise their rights in a certain manner or to refrain from exercising their rights altogether.
In particular, the participants may establish an obligation to vote in a certain manner at the general meeting of participants in the company, to coordinate a voting pattern with other participants, to sell a participatory interest or portion thereof at a certain price and/or upon th occurrence of certain circumstances, or to refrain from disposing of a participatory interest or portion thereof until certain conditions have been met, as well as to carry out, in coordination, other actions concerning management, establishment, operations, reorganization or liquidation of the company.
When establishing joint ventures, the most common provisions of corporate agreements are, inter alia, the following:
- planning of the company's activities (both short-term and long-term one);
- participants' obligations to finance the company;
- formation of the company's management bodies and their accountability to the participants;
- procedure for approval of certain transactions conducted by the company, and
procedure for withdrawal from the joint venture and procedure for resolving deadlock situations. The agreement on exercising the rights of company participants is a Russian equivalent of the "shareholders’ agreement" commonly found in foreign jurisdictions. The parties to the corporate agreement shall notify the company of conclusion thereof, but it is not necessary to disclose its content to the company (as a general rule, such agreements shall be treated as confidential). Also, information on existence of the corporate agreement specifying the rights of participants disproportionally to the amounts of their participatory interests or establishing restrictions on, and conditions for disposal of participatory interests shall be entered into the Register, while the registration authorities do not request that the relevant agreement be provided.
V. Financing of the Company
Participants may at any time adopt a resolution to increase the charter capital. In addition to achieving the goal of financing of the company, reaching the certain amount of the charter capital may allow to apply a reduced tax rate on dividends payable to foreign participants provided by the relevant treaty for the avoidance of double taxation. Increase in the charter capital requires registration of the changes to the company's articles of association in terms of the information on the amount of the charter capital.
Another method of company financing is making of contributions to the company's property. Such contributions shall also be made by participants but they do not change the amount or nominal value of participatory interests of the company's participants. Since the company's charter capital is not changed, in-kind contributions do not entail the necessity to introduce and register any changes to the articles of association.
Both contributions in case of the charter capital increase and contributions to the company's property are not subject to VAT (if made in a monetary form) and corporate profits tax.
Loans constitute a repayable source of financing of the company's activities. With respect to interest-bearing loans of participants thin capitalization rules stipulated by Russian legislation shall be taken into consideration: if a proportion between debts owed to the company's participant and the amount of the company's equity capital exceeds 3:1, the interest on such debt accrued in favor of the participant in excess of the limits established by law shall be taxable as dividends (distributable profits of the company). It should also be noted that in case of bankruptcy of the company, loans granted by its participants are usually considered by courts as corporate financing and therefore they can be repaid only after settlements with other creditors.
VI. Profit Distribution. Payments to Participants
The general meeting of participants may adopt a resolution to distribute net profit among participants. As a general rule, the corporate profits tax rate applied to payment of dividends to a foreign company amounts to 15%. However, treaties for the avoidance of double taxation may establish a reduced tax rate (usually 5 - 10%) to be applied if certain criteria are met.
Any other methods of making payments to a participant, such as payment of interest on the debt owed to the participant or a royalty payment (e.g., for the use of a trademark), are not considered as distribution of profits in a strict sense but they are often used in practice. As a general rule, such payments are subject to corporate profits tax at a rate of 20% but treaties for the avoidance of double taxation may provide for exemptions. It should be noted that in certain circumstances there is a risk that such payments may be reclassified as dividends by Russian tax authorities.
Sometimes payments to participants are made on the basis of an agreement on provision of services (e.g. consulting services). In this case it should also be taken into account that there is a high risk of reclassification of such payments as dividends with additional accrual of taxes by the tax authorities.
VII. Participant Withdrawal or Expulsion
A company participant is entitled to withdraw from the company by disposing of a participatory interest in favor of the company, regardless of consent of the other participants or the company itself if provided for by the company's articles of association. However, a withdrawal of company participants that results in no participants remaining in the company, or a withdrawal of the sole participant from the company, is not permitted.
Company participants, whose aggregate participatory interest constitutes at least 10% of the company’s charter capital, are entitled to petition, through a judicial procedure, for the expulsion from the company of a participant who grossly violates their obligations, makes the company’s activities impossible, or substantially hinders its activities.
In the case of withdrawal or expulsion, the company participant is paid the actual value of their participatory interest, equal to the portion of the value of the company's net assets, in proportion to the amount of the participant's participatory interest in the company's charter capital.
VIII. Management Bodies
8.1. General Meeting of Participants
The general meeting of participants is the supreme management body of a limited liability company. Major decisions of the company (amending the company’s articles of association, changing the amount of the charter capital, distributing profits) and the basic rights related to the management and control over the company's activities (appointment of all or certain management bodies of the company, approval of annual reports and balance sheets) fall within the exclusive authority of the general meeting of participants.
Companies are required to hold a regular general meeting of participants once a year within the statutory time limits. All other general meetings of participants are extraordinary (unless otherwise stipulated by the articles of association). An extraordinary general meeting of participants may be held upon the initiative of the executive body and other company management bodies, the company auditor, or company participants holding at least 10% of the total votes.
Company participants may also take decisions on the issues on the agenda without holding a meeting, by way of an absentee vote. However, not all issues may be decided by absentee vote; for instance, the company’s annual reports and accounting balance sheets may not be approved by way of an absentee vote, e.g. annual reports and accounting balance sheets may not be approved in such a manner.
If there is a sole participant in the company, such a participant adopts all decisions falling within the authority of the general meeting of participants autonomously and formalizes such decisions in writing.
It should be noted that decisions taken by the general meeting of participants must be certified by a notary public unless the company’s articles of association state otherwise. A notary public shall also certify actual adoption of a decision by a sole participant.
8.2. Board of Directors (Supervisory Board)
The company’s articles of association may provide for the establishment of the company’s board of directors (supervisory board), which is not mandatory.
The company’s articles of association may endow the board of directors (supervisory board) with the authority to elect the executive bodies and prematurely terminate their powers, to make decisions regarding the company’s large-scale transactions and interested-party transactions, and to resolve other issues provided for by the articles of association.
8.3. Auditing Commission
The articles of association may provide for the establishment of an auditing commission (the election of an internal auditor). Companies with more than 15 participants are required to establish an auditing commission (elect an internal auditor).
8.4 Executive Bodies
The company’s current activities are managed, and all other issues not falling within the authority of the general meeting of participants and the board of directors are settled, as a general rule, by the company’s single-member executive body. The single-member executive body of the company acts on the company’s behalf, represents its interests, and conducts transactions. The single-member executive body is usually called the general director. Also, the company's articles of association may provide for vesting authorities of the single-member executive body in several individuals acting jointly or formation of several single-member executive bodies acting independently.
The single-member executive body is elected either by the general meeting of participants or by the company’s board of directors (supervisory board), and acts on behalf of the company by virtue of law, without any special power of attorney. The executive body’s powers may be limited by the articles of association. However, legal consequences of a transaction conducted by the executive body on behalf of the company in excess of the limits of his/her authority.Such a transaction may be invalidated by a court upon a claim from the company only if the company manages to prove that the other party to the transaction was, or should have been, aware of the limits of the executive body's authority. If the executive body's actions have caused damage to the company, company participants are entitled to bring an action for damages against the executive body.
The company’s articles of association may provide for the establishment of a collective executive body (a management board, directorate) headed by a person carrying out the functions of the single-member executive body. The members of the collective executive body may participate in the decision-making process within the authorities of the collective executive body set forth in the articles of association, but they are not allowed to represent the company's interests before third parties without a power of attorney.
It should be noted that both individuals performing the functions of the single-member executive body and members of the collective executive body shall be deemed as employees of the company, and, therefore, requirements of the Russian labor and migration legislation shall apply to them. Due to this, appointment of a foreign citizen to such positions is possible only after a work permit has been obtained and other formalities have been fulfilled.
IX. Liability of the Company and Its Participants
A limited liability company is liable for its obligations with all of its assets. The company is not liable for the liabilities of its participants.Participants of a limited liability company are generally not liable for the company’s obligations and bear the risk of losses related to the company’s activities only to the extent of the value of their participatory interests. If the participants have not paid their participatory interests in full, they shall be jointly and severally liable for the company’s obligations to the extent of the unpaid portion of the participatory interests held thereby.
- The Law on LLC provides for several cases when participants, which, owing to their participatory interest in the charter capital of the company or on other basis, can give instructions or otherwise determine the company’s actions, are held liable along with the company for the obligations of the latter. Such participants can be held subsidiary liable if the company is bankrupt through their own fault or if, as a result of their unfair or unreasonable actions, the company has failed to perform its obligations to third parties as it was removed from the Register as being inactive. Moreover, a parent company additionally bears liability jointly and severally with a subsidiary company for transactions conducted by the latter in the execution of obligatory instructions from the parent company.
X. Disputes Involving a Limited Liability Company
Disputes related to the establishment or management of, or participation in, a limited liability company fall within the category of so-called "corporate disputes", the procedure for resolution whereof is established by the Arbitration Procedure Code of the Russian Federation. Corporate disputes include, in particular:
- disputes related to the establishment, reorganization or liquidation of a company;
- disputes related to the appointment to a position, termination or suspension of powers, as well as to the liability of persons who comprise (comprised) the management bodies and supervision bodies of the company;
- disputes upon claims from company founders or participants for damages caused to the company, for the invalidation of transactions conducted by the company.
The resolution of corporate disputes falls within the authority of state arbitration courts at the place of location of the company. Addressing such disputes to a tribunal (commercial arbitration) is only possible if the company and all its participants as well as other persons being plaintiffs or defendants in corresponding disputes have concluded an arbitration agreement and the place of arbitration is located in the territory of Russia.
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