Establishing a legal presence
Ukrainian legislation provides for a large variety of potential investment and business vehicles, all of which can be grouped into the following two principal categories: corporate and contractual. Corporate investment and business vehicles encompass the variety of business legal entities through which investors may do business in Ukraine. Contractual investment vehicles encompass joint venture agreements, joint cooperation agreements, and other agreements of a similar nature. In addition, Ukrainian legislation provides for special investment vehicles for portfolio, institutional, and/or private investors.
The basic rules governing various issues concerning the establishment, maintenance and liquidation of business legal entities in Ukraine are provided in the Civil Code of Ukraine (the Civil Code) and the Commercial Code of Ukraine (the Commercial Code), both adopted on 16 January 2003, and effective from 1 January 2004. Apart from the Civil Code and the Commercial Code, the Law of Ukraine "On Companies " (the Company Law) dated 19 September 1991, as amended, and the newly adopted Law of Ukraine "On Joint Stock Companies " (the JSC Law), dated 17 September 2008, govern various issues related to establishing, maintaining and liquidating companies in Ukraine. The Law of Ukraine "On the State Registration of Legal Entities and Individual Entrepreneurs " became effective on 1 July 2004.
Under the Civil Code, legal entities, which carry out entrepreneurial activities in order to earn profits, must be established in the form of companies. The following types of companies may be established in Ukraine: company with full liability; company with combined liability; company with additional liability; limited liability company; and joint stock company.
Of these, the most common vehicles for conducting business activities in Ukraine are:
- joint stock companies (JSCs)
- limited liability companies (LLCs),
both of which embody the concept of limited liability for investors.
Joint Stock Companies
JSCs are very similar in form and operation to US corporations, (German AGs, and/or French societes anonym es (SAs). A JSC is a company whose charter capital is divided into shares of equal par value. Shareholders of a JSC are liable for the latter's obligations only to the extent of their respective equity contributions to its charter capital.
Set forth below is a brief overview of the main provisions of the JSC Law.
JSCs may exist in the form of either a public or a private company (the rough equivalents of open and closed JSCs existed under the former legislation). The number of shareholders in a private JSC may not be more than 100. The first issuance of shares upon the establishment of either a public or a private JSC must be made exclusively by means of a private placement of shares among the founders of the JSC.
Limited Liability Companies
The legal nature of an LLC is similar to that of a German GmbH and/or a French societe a responsibility Umitee (SARL). Investors in the LLC, i.e., its interest-holders or participants, are liable for the LLC's commitments only to the extent of their capital contributions to its charter capital. Their participatory (i.e., ownership) interests in the LLC are expressed in the form of the respective percentages of the LLC's charter capital owned by them. Participatory interests in an LLC do not qualify as "securities" for purposes of the applicable Ukrainian legislation and, therefore, are not subject to registration with the Securities Commission.
Similar to a JSC, an LLC may be established either by a single founder or by a group of founders. Ukrainian law imposes certain restrictions on the establishment and operations of an LLC. In particular, (a) a wholly-owned subsidiary in the legal form of an LLC (the same as with a JSC) may not be established by another wholly- owned subsidiary (either foreign or Ukrainian); (b) an individual or a legal entity (either foreign or Ukrainian) may not be the sole founder of and/or the sole participant in more than one LLC in Ukraine; (c) a subsidiary in the legal form of an LLC (the same as with a JSC), which is wholly-owned by a foreign company, may not own land in Ukraine under the current version of the Land Code; and (d) the maximum number of founders/participants of an LLC may not exceed 10 legal entities or individuals. Those LLCs which are established by less than 10 founders, and later expand to more than 10 participants, are subject to a mandatory reorganization into a JSC within one year. Failure to comply with this reorganization requirement or decrease the number of the participants to 10 may result in court termination of an LLC.
There are no legal restrictions on how the participatory interests of an LLC may be distributed; this issue remains entirely within the
discretion of the founders of the LLC.
How to choose between an LLC and JSC
In choosing between an LLC and a closed JSC in establishing a wholly-owned subsidiary, an LLC appears to be more popular than a closed JSC, due to the various establishment and operations considerations discussed above. Generally speaking, the main general corporate benefit of an LLC in comparison with a JSC is that the procedure for the establishment and the operations of an LLC is significantly less burdensome and time-consuming, since there is no legal requirement that an LLC must issue shares or perform the procedural steps required in connection with the issuance of securities (e.g., the establishment and maintenance of a securities register, etc.). The absence of shares in an LLC makes this form of legal entity more mobile and flexible when it is necessary for the participants of the LLC to change (increase or decrease) the charter capital of the company.
Still, a JSC may be preferable if it is expected that new owners may be added to the company at a higher company valuation. Whereas, in an LLC, a participatory interest is bought at its nominal value, a JSC, starting from 30 April 2009, may sell its shares only at the market price, except for some cases established by law. In this way, a JSC can raise financing through newly-issued shares at a higher valuation without all of the shareholders being required to contribute in proportion to their shareholdings. If such financing is planned in the mid-term, a JSC, while more burdensome overall, may be a preferable option to first founding a company as an LLC, and then re-organizing it as a JSC, a procedure which may take up to one year.
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