The Most Common Form for Starting a Business in Ukraine
In this article we will discuss the most common form of starting business in Ukraine, according to current legislation of Ukraine, which provides a number of legal forms for the establishment of the enterprise. Prospective investor can choose any of the possible:
• full liability partnership;
• limited partnership;
• limited liability partnership;
• additional liability partnership;
• private company;
• joint stock company;
In addition, there are individual entrepreneurs who do business in Ukraine but are not included in the list of business entities. The most common forms of business in Ukraine are limited liability partnership and sole proprietorship. All the above-mentioned legal forms and basic requirements for their establishment are listed below.
Full liability partnership
A full liability partnership is a company in which all the participants conduct one entrepreneurial activity and are jointly liable with all their property, according to the obligations of the partnership.
The participants are liable for the obligations of the partnership proportionally to their contributions made to the company. This means that when a full liability partnership is liquidated, the participants are jointly liable for debts (if the existing property of the company is not enough) with all their assets, which according to the legislation of Ukraine may be levied. That is why this kind of business partnership is not common among Ukrainian businessmen.
There are no advantages to this legal form of company in Ukraine, including in the field of taxation. The statute capital is not formed, the contributions of the participants form the common capital, whose size and manner in which it is created is determined solely by the participants in the full liability partnership. The accumulation of considerable capital by the participants is not required in the establishment of the company. Nowadays, in Ukraine there are about 400 full liability partnerships. More than 80% of them are Lombard (pawnshop) institutions, as this is a specific requirement for obtaining licenses for Lombard activity.
In a limited partnership there are one or more participants who carry out entrepreneurial activity on behalf of the partnership, and are liable for the obligations of partnership with all their property. In addition, there are one or more other participants (investors), whose liability is limited by their investments in the partnership’s property. There are no advantages to this type of legal form of partnership in Ukraine. Nowadays there are about 80 limited partnerships in Ukraine, but only 20 of them really operate.
Limited liability partnership
A limited liability company is a company the statute capital of which is divided into shares specified in the founding documents (Article 50 of the Law of Ukraine on Business Associations). In Ukraine these types of business entities are most common and at the moment have significant advantages over the other types of business entities because of the simple registration procedure.
Firstly, legislation does not set the amount of minimum capital. Moreover, the statute capital is not necessarily paid by the participants during the registration of a limited liability company; it may be paid within one year from the date of the public registration of the company. If during the year the sum specified in the statute of the company is not paid, the participants must either expel from the company those who have not made their contributions (in full) or reduce the statute capital. Afterwards, the order of redistribution of the shares in the statute capital should be defined.
Secondly, the limits on the number of participants are very broad. The minimum quantity of participants in the company is 1 person, the maximum is 100 persons. If the number of participants exceeds 100 the limited liability company is subjected to transformation into a public joint stock company.
Thirdly, the participants are liable only within the limits of their investments, so the members of the company do not risk their personal assets. The participants who do not make a contribution in full are jointly liable within the limits of the unpaid deposit according to their obligations. The internal organization of a limited liability company is shown below. The supreme body of the company is the General Members’ Meeting (hereinafter the Meeting), which includes all the participants. The Meeting makes all major decisions in the company. The votes are distributed between the members according to the money contributed by each member. The Meeting is considered to be plenipotentiary if participants (or their representatives) who together have more than 60% of the vote are present.
The Meetings should be convened at least twice a year but the company statute may provide for a greater number of meetings. In addition, Extraordinary General Meeting is convened under the circumstances specified in the statute or in case the company becomes insolvent. Extraordinary General Meetings may be convened at the request of the director and members of the partnership, which together have more than 20% of the vote.
All resolutions adopted at the General Meeting are recorded in a protocol. The distribution of profits (dividends) is also made through such a protocol. The executive body is a director or a Board of Directors. The director executes the decisions of the Meeting, makes all the payments, signs the documents, issues orders and instructions, and acts on behalf of the company. The director holds the original founding documents of the company and the company seal. However, the powers of the director may be limited by company statute.
Additional liability partnership
An additional liability partnership is a company in which statute capital is divided into shares in the amount specified in the founding documents. Participants in such a company are liable for its debts in correspondence to their contributions to the statute capital and, in the case where there is a lack of these sums, additionally with their property in equal proportion in accordance with their investments. The critical amount of the liabilities of the participants is specified in the founding documents.
The additional liability partnership, in fact, is a middle-of-the-road option between a limited liability company and a full liability partnership, as members of the company risk not only their shares but partly their property. An additional liability partnership possesses the same features in terms of its organization as a limited liability company. There are no advantages to this type of legal form of business in Ukraine. Nowadays in Ukraine there are about 900 additional liability partnerships but only 30% of them really operate.
Another legal form of enterprise in Ukraine is a private company/private enterprise. However, due to the lack of legislative regulation for this organizational form, it is not very popular, although many people still choose this form of business. In fact, a private company is governed by the Commercial Code of Ukraine only, where one may find only one article. Thus, in accordance with Article 113 of the Commercial Code of Ukraine, a private company is an enterprise that operates on the basis of private ownership by one or more citizens, foreigners, stateless persons, and its (their) work or hired work. A private enterprise is also an enterprise that functions on the basis of private ownership of the entity. It is also a legal entity.
Its internal organization, the relationship between the owners, and the minimum amount of the statute capital is not regulated by legislation. All these issues are regulated by the owners in their statute. On the one hand, this may be considered an advantage in establishing a private company as it does not set clear limits in the organization of a private company. On the other hand, the lack of legal regulations may also be a disadvantage. In any case, it is better to put everything in writing in the statute to avoid disputes in the future.
Joint stock company
According to Article 3 of the Law of Ukraine on Joint Stock Companies a joint stock company is an economic entity, the statute capital of which is divided into a certain number of shares of equal face value. Corporate rights are certified by shares.
The characteristic features of a joint stock company are the following:
1) The minimum statute capital of a joint stock company is 1250 minimum wages. For example, if the minimum wage is UAH 1218, the minimum statute capital of the company shall be UAH 1,522,500.
2) The joint stock company is a legal entity that issues shares on its own behalf and is obliged to fulfill the obligations arising from the conditions of their release. Through the issuance and sale of shares they form their statute capital and augment it if necessary. The individuals and legal entities that have purchased shares in joint stock companies are registered in the register and acquire the status of shareholders. The accounting of shares happens only in a non-paper form in the national securities depositories.
3) Shareholders are not liable for the obligations of the company and risk a loss within the value of their shares. Joint stock companies are not liable for the obligations of the shareholders.
4) There are closed (private) and open (public) joint stock companies. The shares in closed joint stock companies are distributed only among the founders, and shares in public joint stock companies may be bought freely on the stock market. The shareholders of a private joint stock company have preferences in acquisition of shares that are sold by other shareholders of this company on the terms offered to a third party, proportionally to their shares. There must not be more than 100 shareholders in a private joint stock company, for a public joint stock company the maximum number of members is not limited.
5) Compared to a limited liability company, procedure for registering a joint stock company is rather complicated. In addition to registration in the public register as a legal entity, one must enroll the issuance of shares, get an ISIN code, and settle a contract with the securities depository for keeping the register of shareholders.
6) Compared to other legal forms of business a joint stock company requires significant regular expenses regardless of performance, including costs associated with the maintenance of the register of shareholders, costs of the obligatory annual audit, filing a large number of regular (annual) and current reports and established penalties for violation of these requirements, which may reach up to EUR 12,000 for one violation.
7) The internal organization of a joint stock company is also similar to a limited liability company. The General Meeting is the supreme body of a joint stock company. The General Meeting is considered to be valid if shareholders owning jointly more than 60% of the voting shares have registered themselves for participation in the General Meeting. For deciding each of the issues in a public company one voting share gives one vote to a shareholder. A joint stock company is obligated to convene a General Meeting annually (an Annual General Meeting). The Extraordinary Shareholders’ Meeting is convened in cases of insolvency of the company and in the circumstances specified in the charter, and for the sake of the corporation as a whole. Shareholders who together have more than 10% of the vote have the right to convene an Extraordinary Meeting at any time and for any reason. A public company executive body manages the company’s current operations. The public company executive body is accountable to the General Meeting and organizes the implementation of their decisions. The executive body acts on behalf of the public company within the limits established by the company’s statute and the law. The decisions of the General Meetings are made in the form of a protocol.
There are no advantages to this type of business in Ukraine. Usually such a legal form is chosen by large companies that plan to raise a significant amount of foreign capital: large industrial companies, banks, insurance companies, etc. The number of the joint stock companies in Ukraine has sharply decreased during the last 4 years, mainly due to the large volume of reports and other associated costs; many joint stock companies were liquidated or have been transformed into limited liability companies.
The individual entrepreneur
Any individual has the right to engage in any business that is not prohibited by law. If an individual wants to conduct business it must be registered in accordance with the law. In order to register, a person must submit to the public register a standard application form, a copy of the tax identification number and a receipt confirming payment of state registration (today the registration fee is UAH 34).
If a person is not a resident of Ukraine and wants to register as an individual entrepreneur, s(he) must first obtain a tax identification number in Ukraine and a document confirming the registration of residence/stay in Ukraine.
To get a tax identification number a person must submit to the tax authorities an application and a copy of the foreigner’s passport notarized with translation into Ukrainian. The application may be submitted by a representative with the legalized or apostilled power of attorney in the way according to the international and domestic laws of the country where the apostille/legalization takes place. The period of receiving a tax identification number is 5–10 days.
To register for residence the foreigner must be the owner of property or rent accommodation. It should also be understood that it is reasonable to register as individual entrepreneur if a non-resident has a permission to stay and a place of temporary or permanent residence in Ukraine. Without these documents the terms of his/her stay in Ukraine are limited.
Author: Kateryna Bovan
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