Types of business entity in Russia
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There are three types of business entity in Russia. These are: limited liability companies (LLCs), Joint-Stock Companies (JSCs) and partnerships. The first two are joint-stock companies (in that they are owned by their shareholders) and have limited liability (the shareholders are only liable for the company's debts to the face value of the shares).
There are two types of Russian Joint-Stock Companies:
- Open joint-stock company (Russian: Открытое акционерное общество (abbreviated OAO) is a legal entity where shares may be publicly traded without the permission of other shareholders. An OAO can distribute its shares to an unlimited number of shareholders and sell them without limitations. The statutory minimum charter capital is 100,000 Russian roubles.
- A closed joint-stock company (Russian: Закрытое акционерное общество (abbreviated ZAO) is a legal entity whose shares are distributed among a limited number of shareholders - maximum 50. The statutory minimum charter capital is 10,000 Russian roubles.
Founders of a joint-stock company sign a written agreement for its formation. This agreement establishes procedures for creating the company, such as size of authorized capital, types and categories of shares, cost of shares, the order for settling payments and the rights and responsibilities of the founders. This agreement then becomes the organization charter, which contains information on the name of the company, the locations of offices, the type of company (OAO or ZAO), as well as other specific information on shares, capital, and so on. The company shares allotted upon founding the company must be fully paid within a year from the company's foundation, unless a shorter period is required by the founding contract. However, at least half of the shares must be paid within three months, starting from the state registration of the company. Though a share which has been paid does not necessarily give voting rights to its owner.
Joint-stock companies are required to register the issue of shares with the Russian Federal Securities Market Commission (FSMC), so that shares can be traded either publicly (for an OAO) or among a limited number of people (for a ZAO). For registration, a set of documents must be submitted to the FSMC, and the procedure usually takes 30 days to enact.
In Russia, a JSC can be completely or partially owned by the federal government. Such JSCs are different from another type of state-controlled company, the unitary enterprise. This is a commercial organization that operates state-owned assets. State-owned JSCs do not own or operate any state property and the state acts just like an ordinary shareholder.
Some state-owned public corporations were formerly government agencies in the Soviet Union which were reorganized into completely state-owned JSCs in 1992-1993 in order to undergo transition to a fully independent business. The management and the board of directors in such state-owned corporations were appointed by the Council of Ministers/the government, and included top government officials and ministers. The largest of such corporations were initially incorporated as Russian joint-stock companies (RAOs). Best known examples were RAO UES and RAO Gazprom. But they have since been converted to public JSCs (OAO), even though their shares remain the property of the government.
Less important or partially owned JSCs are managed through the Federal Agency for State Property Management.
While a joint-stock company presents several advantages compared to a typical business establishment, the burden of creating a JSC typically outweighs that of a limited liability company (LLC). This is especially true in Russia where the abnormally excessive legal and bureaucratic challenges facing prospective entrepreneurs typically dissuade most from starting a JSC. Without the need to issue shares in an LLC, it makes limited liability companies much more flexible when the need arises for members to change the charter capital of the company. Furthermore, a limited liability company can collectively or individually hold at least a 10% interest in the company’s charter capital, and it does not have the power to request a court expel another participant. All of this is not possible in a joint-stock company, or prohibitively difficult.
- Statistics about the Benefits of Democratic Change in Lithuania, Russia and the Ukraine
- Joint-stock company: Charter capital. Shares, Russian Law Online, retrieved August 2012.
- Choosing Between Limited Liability Company LLC or Joint Stock Company JSC in Russia, Doing Business in St. Petersburg, retrieved August 2012.