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4.1.2.2.1. The Legal Nature of LLC

A LLC is one of the most common organizational legal forms of legal entities in Russia. One of the main reasons for this is that the Federal Law on Limited Liability Companies regulates many aspects on facultative basis, allowing the legal entity’s bodies to resolve various issues at its discretion. This work is done internally at the company.

Charter capital[36] is divided into participatory interests belonging to the LLC participants. The company is not liable for its participants' obligations. As a general rule, the participants are not liable for the company's obligations either.

Generally, a LLC is not obliged to publish its reports.

4.1.2.2.2. The Features of the Establishment of A Limited Liability Company

In accordance with Clause 1 of Article 89 of the CC of the RF, the LLC founders are obliged to sign an LLC foundation agreement in writing, which shall define some aspects of the company’s foundation.

This contract is not a constituent document of the LLC.

The term for the payment of shares in the charter capital (that has been established by the agreement) may not exceed 4 months. Within this period, the founders are obliged to pay the shares fully.

4.1.2.2.3. LLC Participants

Both individuals and legal entities can be participants to an LLC. The number of LLC participants shall not exceed 50. At the excess of this limit, the LLC must be transformed into a JSC. The LLC may have a single participant (a company having a single participant cannot appear as such a participant, according to Article 7 of the FL on Limited Liability Companies).

4.1.2.2.4. The Transfer of Participatory Interest in LLC’s Charter Capital

As a general rule, the transfer of an LLC’s participatory interest from one person to another is allowed. Upon alienation of the entire participatory interest, this person ceases to be the company's participant. In case a participatory interest is sold to a third party, the other participants of an LLC have the priority to buy the share or part of the share (the seller must first offer its share to the other participants). An LLC charter may include the necessity to obtain the consent of all participants for the alienation of a share. Furthermore, the charter may establish a ban on the shares' alienation.

4.1.2.2.5. LLC Profit Distribution Among the Participants

At the general meeting of an LLC, participants may decide to distribute the company's net profit among its participants quarterly, biannually, or annually. Distribution is made in proportion to the participant's interest in the charter capital. The company's charter may provide other proportions of profit distribution. The FL on Limited Liability Companies contains a list of circumstances under which profit distribution is prohibited.

4.1.2.2.6. Increase and Reduction of LLC Charter Capital

An increase of LLC charter capital may be implemented:

i) at the expense of the company’s assets (without the implementation of additional deposits),

ii) at the expense of LLC participants’ additional deposits,

iii) at the expense of the deposits of the persons entering the company as a participant, if it is not prohibited by the company’s charter.

A reduction of LLC charter capital is implemented by:

i) the reduction of the shares par value for all participants of the company,

ii) the redemption of the company's shares.

4.1.2.2.7. Contributions to the Company’s Assets

The general meeting of participants may oblige all of the participants of an LLC to make contributions to the company’s assets; these contributions do not change the sizes and par value of the participants’ shares in the charter capital (and do not increase the company's Charter Capital). Such contributions are made by all participants in proportion to their shares, unless otherwise stated in the charter.

4.1.2.2.8. LLC Management Bodies

LLC Management Bodies are:

i) The General Participants Meeting

The general participants meeting is the highest management body of an LLC. All of the company’s participants have the right to participate in it. During the general participants meeting, most of the important issues concerning the LLC’s activities can be addressed and resolved.

ii) Board of Directors (Supervisory Board)

The terms "board of directors" and "supervisory board" are synonyms. The formation of a board of directors (supervisory board) in an LLC is not obligatory.

The company's charter determines the competence of the board of directors (supervisory board), taking into consideration the Federal Law on Limited Liability Companies.

iii) A Sole Executive Body

The sole executive body manages the company's current activities. The general meeting of shareholders or the board of directors (supervisory board) elects a sole executive body, which shall be accountable to them.

iv) Executive Board

Forming an executive board is not obligatory for an LLC. The appointment of executive board members is within the competence of the general participants meeting or the board of directors (supervisory board). The chairman of this body is a person holding a position in the sole executive body.

v) An Audit Committee (Auditor)

Forming an audit committee is obligatory for a company which has more than 15 participants. The general participants meeting of the LLC appoints a member to the audit committee. The company’s audit committee (auditor) has the right to carry out inspections of company’s financial and economic activities, and has access to all documentation concerning a company’s activities at any time. The company’s audit committee (auditor) shall carry out an inspection of company’s annual reports and balance sheets, before their approval by the general meeting of participants of the company.

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For more information about the minimum amount of an LLC Charter Capital, see chapter 4.1.2.1.C.