Establishing a Company in Russia

The procedures for establishing a company in Russia are by now fairly clear and well-developed. Nevertheless, some important issues should be kept in mind.

Overview of a Procedure of Establishment
A uniform procedure of state registration of establishment, reorganization and liquidation of legal entities in Russia is regulated by the Federal law on State Registration of Legal Entities (the ''Law'').
The registration of legal entities is currently performed by the Ministry of Taxation of Russia.
Under the Law the Ministry of Taxation shall register the company within five days after all necessary documents and information are filed (the Law provides a comprehensive list of documents necessary for registration). From the date of issue of the registration certificate the company starts to exist, i.e., may enter into contracts, etc.
At the same time, for the company to be fully operable, the following needs to be completed:

- production and registration of a corporate seal;

- registration with the State Statistics Committee;

- registration as a taxpayer;

- registration with the Pension Fund, Medical Insurance Fund and Social Insurance Fund;

- opening of bank accounts.
It takes approximately another six weeks to fulfill such actions.

Accounting and Taxation
Pursuant to Russian accounting and bookkeeping legislation, all records of a company are to be made in Russian, expressed in Russian roubles and maintained according to Russian bookkeeping standards. The accounts according to other standards (e.g. US GAAP, IAS) may be also prepared by the company. However, they are intended for internal use, since the Russian tax authorities would accept only the accounts prepared in accordance with Russian standards.
Each company, whether Russian or foreign, which runs business in the Russian Federation has an obligation to register with tax authorities.
Taxpayers must file certain tax returns on a regular basis, usually monthly. Moreover, taxpayers must submit to the tax authority its balance sheet quarterly.

Choosing a Legal Form of a Company
An investor must correctly determine the new company's legal form, i.e., the corporate form which best meets the conditions of the project and is most appropriate for reaching its long term goals. The most common corporate forms are a closed joint stock company (CJSC) and a limited liability company (LLC). The main distinctions between these two forms are control and minority rights, the liability of shareholders and directors, and the requirements for withdrawal of a shareholder or participant from the company.In general, the regulatory protections provided to a CJSC make it best suited to investors embarking on a joint venture with Russian parties. An LLC is likely to be better suited to a founder who proposes to take the sole stake in a Russian enterprise.

Sole Ownership
Some limitations apply to sole ownership of a Russian company. The company may be established by a single founder, as long as the founder is not a company owned by a single legal entity or individual. In other words, the founding company must have more than one shareholder in order to act as a sole founder. If the founder is held only by one shareholder, it will have to establish the company together with another founder (for example, another company belonging to the founder's group of companies). Alternatively, the investor may consider holding its Russian assets through a nominee shareholder (an intermediate company), provided that the nominee shareholder is held by more than one shareholder.

Entering into an Existing Project
When acquiring shares or a participatory interest in an existing company, an investor needs to perform a thorough risk assessment. It is vital to examine the financial state of the company in which shares (or a participatory interest in the case of an LLC) are being acquired.An investor should also confirm that the previous shareholders or participants complied with the requirements of law. This applies to the establishment of the company and to its subsequent business activities. This is especially important when acquiring shares in a company that was created through privatization, since the establishment and activity of such companies were regulated (and are still partially regulated) by special ''privatization'' legislation.

The Foundation Documents
When establishing a company the founders enter into an agreement, where they take an obligation to establish a company. Such agreement on establishment of a CJSC (agreement for establishment) is not a constitutive document of the CJSC under the Russian law (only the charter is). To the contrary, an agreement on establishment of an LLC is a constitutive document (foundation agreement) of the LLC along with the charter. The charter and the foundation agreement/agreement on establishment of the company are the documents that are required to be filed with the registration authorities. The structure and contents of these documents are determined by the Russian law.

Management Structure of a Russian Company
CJSCs and LLCs have a three-tier management structure consisting of (i) the general meeting, (ii) the board of directors, and (iii) the executive body. Both a CJSC and an LLC may, however, decide at their own discretion not to form a board of directors (in practice, most LLCs do not form a board).
The management structure and procedures in the Russian company are substantially regulated by the Russian law, thus certain agreements (e.g. management or voting agreements) between the founders of the company may be deemed unenforceable under Russian law.

General Meeting
The highest management body of a CJSC or an LLC is the general meeting of shareholders or participants, respectively. An annual general meeting must be held within the time frame set out in the charter, and must occur at least once a year. The annual general meeting is convened by the board of directors of a CJSC and the executive body of an LLC, and it approves the annual results of the company. For both a CJSC and an LLC, an extraordinary general meeting may be convened in cases specified in the charter or when this is in the interests of the company and its shareholders or participants. The competence of the general meeting for a CJSC is set out in the law and cannot be reduced or extended by the shareholders.

Board of Directors
The board of directors of a CJSC (and an LLC, if provided for in the charter) supervises the company's operation in the periods between general meetings. Its primary functions include convening general meetings, distribution of company shares, formation of the executive body, formation of branches and representative offices of the company, and the approval of major and interested-party transactions. Shareholders are allowed to expand the competence of the board of directors by detailing such additional competencies in the company charter.

Executive Body
The executive body of a company may be either an individual (usually called a General Director, President or Chairman of the management committee), or an individual and a collegial body consisting of several managers. The capacity of an individual acting as an executive body is verified by the protocol of the relevant company body appointing such individual.The single-person executive body of the company acts on the behalf of the company without a power of attorney and, represents its interests, enters into transactions on the behalf of the company, approves its personnel structure, issues orders and gives instructions which shall be binding for all company employees. Executive bodies shall report to the board of directors and the general meeting.