Russian legislation provides for both commercial and non-commercial legal entities.

Currently in Russia, investment business projects are mostly realized via incorporation of commercial legal entities.

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

• General partnerships
• Limited partnerships
• Limited liability companies
• Additional liability companies
• Joint stock companies

Moreover, there are also special federal laws which regulate the establishment of limited liability companies (“LLC”) and joint stock companies (“JSC”) notably the Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998 (as amended) (the “LLC Law”) and the Federal Law No. 208-FZ “On Joint Stock Companies” dated 26 December 1995 (as amended) (the “JSC Law”).

LLC and JSC are the most popular forms of commercial legal entities among foreign investors. Please see below our analysis on the provisions of the LLC Law and the JSC Law.

Notwithstanding a significant number of similar features, LLC and JSC are not identic types of legal entities and have a lot of peculiarities and differences (systematized below) which affect the choice of legal entity’s constitution before its incorporation.

1. Property rights on the shares and access to register of shareholder (participants)

According to Articles 44, 45 and 46 of the JSC Law, property rights over shares are registered in the shareholders register which could be held by (a) the joint stock company itself (if the amount of shareholders is equal to or less than 50) or (b) by an independent registrar. Cession of shares should be fixed in the register and does not lead to the introduction of amendments to the company’s Charter. There is no information in the Charter of JSC on the number and names of its shareholders. Access to the register is strictly regulated by law and is limited for the shareholders and third parties.

Under the recent amendments to the LLC Law (which come into force on 1 July 2009), information on the participants of LLC is registered in the Uniform State Register of Legal Entities and is available to the public. Therefore, any person would be able to receive an extract from the Uniform State Register of Legal Entities with all requested information on LLC and its participants that may jeopardize business security.

2. Alienation and pledge of shares

According to Article 2 of the JSC Law, alienation and pledge of shares in JSC could be freely performed and do not require approval of shareholders or JSC, except for the alienation by the way of shares sale in the closed joint stock company where under Article 7 of the JSC Law, the shareholders have preemptive rights to buy shares to be sold by another shareholder proportionally to the number of shares  owned by them at the price offered to third parties.

Alienation and pledge of participatory interest in LLC have more restrictions.

According to the recent amendments to the LLC Law, transaction aimed at alienation of participatory interest in LLC should be notarized.

As well as in closed joint stock company, in LLC its participants have preemptive rights to buy participatory interest to be sold by another participant proportionally to their participatory interest at the price offered to third parties.

Under Article 22 of the LLC Law, pledge of participatory interest in favor of the participant or third party could be performed only after the approval of general meeting of LLC participants. Furthermore, the Charter of LLC may prohibit pledge of participatory interest to third party.

Although, the restrictions above allow LLC to protect itself from unwilling changes in the structure of the Charter capital and, therefore, from redistribution of influence among the participants, they complicate to the participants the process of leaving the business and its transfer to third parties.

3. Withdrawal from a company

If a shareholder of JSC intends to leave the company, for instance, due to the absence of dividends, the only way for this is to sell his/her/its shares since, as a matter of Russian law, there is no option for the shareholder to request division of participatory share. However, if the company is not public, it would be rather difficult for minority shareholders to find a buyer and agree on the fair price. In practice, in such companies dividends are not paid since the majority shareholder controlling the financial flows of the company gains income by other ways.

Under the LLC Law, LLC participants would be able to leave the company by the way of division of participatory interest notwithstanding the approval of other participants or the company if such an option is provided by the LLC’s Charter.

4. Exclusion of a participant/shareholder

Shareholder is able not to exercise its rights such as take part in the shareholders meetings and nominate candidates to the management bodies and not to perform its obligations including inform the register's administrator on the changes of his/hers/its details. Nobody can divest shareholders of its rights which are validly held. Even if majority shareholder lost the interest in the company and, for instance, divested  the company of its assets, and does not take part in the management of the company he will lose his shares only in case of company's bankruptcy.

In contrast, according to Article 10 of the LLC Law, participant(s) whose interest in the company is more than 10 per cent. can demand in court to exclude a participant who outrages his participants' obligations or by his activity (inactivity) makes the company's business activity impossible or difficult. This rule provides defense to LLC from an unfair participant.Besides the above, there are some other distinctions between LLC and JSC.

Our services at the incorporation stage:

Entity incorporation process

1. Structuring an entity, determination of its participants and optimization of its managing bodies, selection of a candidate for such entity’s General Director.
2. Drafting all required documentation to achieve the state registration of an entity. This stage includes:
   
   • drafting entity’s Charter;
   • drafting entity’s foundation agreement;
   • opening of entity’s settlement account with a credit institution;
   • drafting the documents required for entity’s state registration;
   • getting FAS’s permission (if necessary).
3. Entity’s state registration (at least 50% of the Charter Capital of LLC must be paid before filing the documents with the registering authority). This stage includes:
   
   • support of the entity’s state registration process;
   • support of the entity’s registration with the non-budgetary funds (the RF Social Security Fund, the RF Pension Fund, the Compulsory  Medical Insurance Fund) Mosgorstat;
   • drafting the documents required for manufacturing of the entity’s seal.
4. Share state registration (only for joint stock company). This stage includes:
   
   • drafting the Decision on share issuing;
   • drafting the Securities Prospectus (if necessary);
   • drafting other documents required for the state registration of a share issue;
   • drafting Report on the results of share issuing;
   • support of the process of state registration of a share issue.

Time frames

Preliminary time frames for creation of a limited liability company
Drafting the required documentation	2 weeks
Entity’s state registration	1 week
Entity’s registration with the non-budgetary funds (after creation of the LLC)	1 week

Preliminary time frames for creation of a joint stock company
Drafting the required documentation	2 weeks
Entity’s state registration	1 week
Entity’s registration with the non-budgetary funds (after creation of the LLC)	1 week
state registration of shares (after filing required documents)	1 month