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Under the Soviet system, the four forms of ownership were state, communal/social, trade-union and private. Legal entities were state-owned and centrally-controlled. It became apparent that in order to restructure the economy it was necessary to transfer as many enterprises as possible to private ownership. To this end, privatisation has been conducted by attracting strategic investors in key industries of the economy, often by conducting investment tenders.

To encourage market reforms, a new Civil Code of the Russian Federation has been adopted which integrates various types of market-oriented entities. As a result of the new Civil Code, Russia has seen swift growth in the number of newly established legal entities.

The first part of the Civil Code provides an extensive list of legal structures of business entities. The primary structures are as follows: general partnerships, limited partnerships, limited liability companies, double liability companies, open and closed joint-stock companies, production co-operatives and unitary enterprises.

4.1 Individual Enterpreneuship

An individual may engage in entrepreneurial activity without establishing a legal entity once he/she is registered with state registration authorities as an individual entrepreneur. Individual entrepreneurs include heads of farms that operate without having formed legal entities, once such farms have undergone state registration.

An individual entrepreneurial activity carried out without the formation of a legal entity is subject to regulations applicable to market-oriented legal entities, unless otherwise implied by legislation, other legal regulations or the nature of the legal relationship.

An individual engaged in individual entrepreneurial activity who has not established a legal entity and who is not registered as an entrepreneur may not refer to the lack of his/her entrepreneurial status with regard to agreements he/she has concluded.

An individual entrepreneur is liable for his/her obligations with all his/her property except that which may not be seized under current legislation.

4.2 Establishing Presence in Russia through a Representative Office or Branch

Representative offices and branches are isolated subdivisions of legal entities, situated away from their place of location. A representative office represents and defends the interests of the legal entity. Besides executing the functions of a representative office, a branch also performs other functions of the legal entity Representative offices and branch offices are not regarded as legal entities, and act on the basis of regulations established by the legal entity that created them. Representative offices and branches must be mentioned in the constituent documents of their legal entities.

Branch offices may carry out business activities on behalf of the legal entity. Representative offices and branch offices of Russian companies do not need to be registered by the state. However, it is necessary that they be registered with both the tax authorities and the social funds in the place of their location. The management of an accredited branch of a foreign legal entity must annually file a report on its activities with the State Registration Chamber of the Ministry of Justice of the Russian Federation.

Activities of representative offices of foreign legal entities are regulated by the Decision of the Council of Ministers of the USSR ¹ 1074 of 30 November 1989 whose provisions are valid unless they are not consistent with current legislation. In the past, the activities of a representative office were quite restricted. Representative offices could perform economic activities in Russia only to fulfil specific contracts. The representative office could also solicit orders and sign contracts.

With the break-up of the former Soviet Union, and the adoption of more liberal foreign investment laws, the representative office is now the main way in which a foreign company may establish a direct business presence in Russia.

However, a representative office only represents the interests of the foreign legal entity while a branch is established to carry on the Russian business activities of the foreign legal entity in its own name.

The number of «accredited» expatriate employees in a representative office is limited.

4.3. Presence in Russia through Market-Oriented Entities

In lieu of establishing a representative office, a foreign legal entity may choose to conduct Russian business operations by investing in enterprises established jointly with Russian individuals or a Russian legal entity by establishing businesses which fully belong to the foreign entity or by acquiring enterprises, assets, stocks, shares, bonds or other securities which, in accordance with Russian legislation, may belong to foreign investors.

4.3.1 Limited Liability Companies

A limited liability company (LLC) docs not require the personal involvement of its members in the management of the company's affairs. The Civil Code of the Russian Federation and Federal Law «On limited Inability Companies* provide the basic criteria of an LLC. The following are some of the characteristics of an LLC:

  • The maximum number of shareholders and the minimum amount of charter capital of an LLC is defined in the Law «On Limited Liability Companies». The minimum amount of charter capital for a limited liability company which is fully or partly owned by foreign investors must be 100 minimum monthly wages (as at 1 September 1999, a minimum statutory monthly wage is 83.49 roubles). It should be noted that the minimum monthly wage is established by federal law and is subject to change.
  • An LLC's charter capital consists of the nominal value of shares, the size of which is stipulated by the constituent documents. All partners must make a contribution to the charter capital.
  • The shareholders of an LLC are not liable for company debts and risk losses only in the amount of their charter capital contribution.
  • If the net assets of an LLC are less than the charter capital by the end of the second year of activity and every year thereafter, the LLC is obliged to reduce its charter capital. The LLC is subject to liquidation if its assets at the end of the year are less than the minimum charter capital established by the Federation' «On Limited Liability Companies».
  • The governing body of an LLC is the general meeting of its shareholders. In addition, an executive body shall be established to manage the LLC and report to the general meeting of the shareholders.
  • A shareholder of an LLC has the right to sell or cede its share to one or more shareholders. Cession of a share to any third party is allowed unless otherwise stipulated by the constituent documents. If the constituent documents do not allow a shareholder to sell its share to a third party, and no current shareholders want to purchase the share, the LLC is obliged to purchase the share at its actual value, or reimburse its value in kind.
  • A LLC may not have a one-person business entity as its single shareholder.

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