Establishing Business in Russia - Start-up in Russia, Legal Forms of Incorporation

Law Offices of David G. Arganian, Seattle, WA

Establishing Business in Russia - Start-up in Russia, Legal Forms of Incorporation

Choosing which type of legal entity to register is one of the most important stages before undertaking business activity in Russia. The type of legal presence will influence all activity, including financial and tax reporting, customs and currency control. Therefore, an investor should pay special attention to determining the appropriate corporate form which will help him achieve his goals while meeting all legal requirements.

A foreign investor may act through one of several legal forms:

- As a representative office of foreign legal entity.
- As a branch office of foreign legal entity.
- As a Russian legal entity .

The procedures for establishing a company in Russia are quite well-developed and are regulated by the RF Civil Code and by additional RF laws.

Russian Legal Entities

In accordance with the Civil Code, the following are some of the most important types of legal entities:

- Joint stock companies (JSC);
- Limited liability companies (LLC);
- Additional liability companies;
- General partnerships;
- Limited partnerships.
Joint stock and limited liability companies are forms that are most frequently used by foreign investors to enter the Russian market and are reviewed below.

Limited Liability Company

The limited liability company (hereinafter LLC) is recognized as a company established by one or more persons, whose authorized capital is divided into participation interests, the size of which is stipulated by founding documents. Participants of the LLC do not bear liability by its obligations but bear the risk of losses connected with the company's activity within the cost of the contributions they have made. An LLC can be founded by either a person or group of people, or a Russian or foreign company. The number of participants in an LLC cannot exceed 50. If the number of exceeds 50, then the LLC is subject to reorganization into an Open JSC within a year. On the expiry of this term, if the number of participants has not been reduced, it shall be liquidated under the court decision. The Company cannot be the sole participant of another business association consisting of one entity (an individual or a legal entity).

The minimum authorized capital may not be less than RUR 10,000 (approximately $370) and at least 50 percent of the capital must be paid in prior to the company's registration. Contributions can be made in cash or in-kind.

The founding document of an LLC is known as Charter, which is approved by participants. An LLC has a three-tier management structure which consists of:

- The general participants' meeting is the highest governing body that makes all the fundamental decisions for managing and maintaining the company's economic activity. If the shareholder intends to sell its share / part in the share capital, the shareholder will have to get this protocol processed with a notary, along with the subsequent registration with the tax authorities.
- Board of Directors, which supervises the general company's activity. The presence of this body is not required. Formation of the Board of Directors is the shareholders' voluntary expression of will to implement additional control over the company.
- Executive body (usually the general director or managing company). The primary function of the executive body is the daily management of a company. In addition to being responsible to the company's shareholders, the sole executive body has criminal and administrative responsibility before the state.

The use of the LLC legal form of business ownership is convenient if:

The company's business activity has an un-branched (simple) structure;
Direct control of the Russian company is concentrated with one person - the director general. It is no less important that there is trust in the person appointed to the post of general director;
Making maximally efficient decisions on the company's current affairs is important for shareholders.
Joint Stock Company

A joint stock company (JSC) is a company, whose authorized 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 to the JSC's activity within the value of their shares. Registration on issuing shares and subsequently filing reports to the Federal Financial Markets Service is mandatory. There are two types of JSCs:

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

The distinctions between the two abovementioned forms are as follows:
Open Joint Stock Company
Minimum authorized capital is RUR 100,000 (approximately $3,700);
Unlimited number of shareholders;
Sale of shares occurs without prior approval of shareholders, including in the securities market, both within and outside of the territory of the Russian Federation

Closed Joint Stock Company
Minimum authorized capital is RUR 10000 (approximately $370);
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 not be freely sold. Share transfers are subject to preemptive rights of other shareholders.

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 or Supervisory Council. In contrast to the Board of Directors in an LLC, a number of issues related to the general shareholders meeting can be transferred to authority of the board of directors of a JSC. Furthermore, a JSC must annually undergo a professional outside audit for control and approval of its annual financial reports.

Branch and Representative Offices

Branch and representative offices of foreign legal entities are not considered to be Russian legal entities, but bodies representing the interests of foreign legal entity with headquarters in another country. The table below provides a comparison of the two forms:

Representative Office Branch

A representative office is a subdivision of a foreign legal entity which represents the company's (headquarters) interests in Russia and cannot undertake commercial activity. The main purpose of establishing a representative office is marketing research for the Russian market and promotion of commercial relations between the head company and Russian companies.

Branch

A branch is a subdivision of a foreign legal entity which may undertake commercial activity.

The term for which a representative office can be set up is a maximum of three years, with the right of extension. The term for which a representative office can be set up is up to five years, with the right of extension. The state fee depends on the authority under which the representative office / branch is accredited.

State Registration Chamber Fees

- Standard procedure
$ 1000 (1 year)
$ 2000 (2 years)
$ 2500 (3 years)

- Expedited procedure
$ 1500 (1 year)
$ 2500 (2 years)
$ 3000 (3 years

State Registration Chamber Fees

- Standard procedure
120 000 RUR + 500 USD (one year)
120 000 RUR + 1000 USD (2 years)
120 000 RUR + 1500 USD (3 years)
120 000 RUR + 2000 USD (5 years)

- Expedited procedure
120 000 RUR + 1000 USD (1 year)
120 000 RUR + 1500 USD (2 years)
120 000 RUR + 2000 USD (3 years)
120 000 RUR + 2500 USD (5 years)

The management structure of a representative or a branch office is represented by the executive body in the person of the head of the branch or representative office. The head of the subdivision of a foreign legal entity acts on the basis of the Power of Attorney issued by the foreign legal entity. The foreign company itself determines the Head's scope of authority. The foreign company may at any time revoke the power of attorney and transfer it to another entity.
Registration

Once a form of a legal presence is chosen, the procedure for state registration must be started. In accordance with the Federal Law "On State Registration of Legal Entities," registration is performed by tax authorities who file documents with the Unified State Register within five days (the tax authority in Moscow - 7 days). When you register a Russian legal entity, one of the shareholders must submit documentation in person. The person authorized to sign the application and submit the documents is referred to as the Applicant. If the shareholder is a company, then the director of the company in question acts as the Applicant. If the applicant is not able to attend the public authority for registration, documents may be sent by mail. In this case, registered documents will be sent to the stated address of legal entity being created. Afterwards, the following procedures must be completed:
- Receipt of the State Statistics Committee letter;
- Obtaining registration certificates with non-budgetary funds (the Pension Fund, Obligatory Medical Insurance Fund and Social Security Fund);
- Opening of bank accounts;
- Notification of tax authorities and Pension fund about the opening of bank accounts;
- Production of a company's seal;
- In case of establishing a JSC, the securities issue must be registered with the Federal Service for Financial Markets of the Russian Federation.

The deadline for registration of a Russian legal entity depends on its legal organizational form. For an LLC - 2-3 weeks, for a JSC - 2-3 weeks + 1 month for the registering the issue of shares. A fee of 4800 rubles is applied when registering Russian legal entities. The fee for registering shares depends on the type of shares.

Branches and representative offices must also be accredited with state bodies authorized to grant such accreditation. Usually, these authorities include the State Registration Chamber at the Ministry of Justice of the Russian Federation, the Chamber of Commerce and Industry and various Ministries of Russia. For example, if the company is engaged in educational activity, a representative or branch office may be accredited with Ministry of Education.

To establish a company, a foreign investor has to prepare a comprehensive list of documents required by Russian law. All documents from the home country of a foreign legal entity must be notarized and apostilled and a notarized translation into Russian must be provided.

The deadline for registering a representative office / branch of a foreign entity takes 1 to 2 months, depending on the use of expedited accreditation procedures with the authorities responsible for issuing permits for opening representative offices / branches.

Russian Legal Entity Branch and / or Representative Office

One of the founders must be present in person to submit documents for registration
Any person with power of attorney may submit documents for registration The registration authorities:
- The Federal Tax Service
- The State Statistics Committee
- Social Insurance Fund
- Pension Fund

The following must also be performed:

- Opening a savings account
- Opening of current accounts
- Notifying the tax authorities and the Pension Fund about opening bank accounts
- Production of company's seal
- Signing a contract on compulsory medical insurance.

For corporations and the Federal Financial Markets Service (FFMS). The registration authorities:

- State Registration Chamber (and other body depending on the head company's type of business activity)
- The Federal Tax Service
- The State Statistics Committee
- Social Insurance Fund
- Pension Fund

The following must also be performed:

- Opening of current accounts
- Notifying the tax authorities and the Pension Fund about opening bank accounts
- Production of company's seal
- Signing a contract on compulsory medical insurance

The registration period is 2-3 weeks, depending on how quickly the Client signs the documents.

With regards to the abovementioned registration period, registration of a JSC will take 1 month with the FFMS. The deadline for registering a representative office / branch of a foreign entity takes 1 to 2 months, depending on the use of expedited accreditation procedures with the authorities responsible for issuing permits for opening representative offices / branches.