Starting Your Own Business in Russia:
Off-the-Shelf Company vs. Incorporating a Company From Scratch
It is possible to start a business in Russia by buying an off-the-shelf company instead of trying to incorporate a company from scratch but whether or not this is the best way, Timur Beslangurov explores below.
Off-the-Shelf Company: Pros and Cons
What is an off-the-shelf company in Russia? This type of company is usually a Limited Liability (OOO) or Private (Closed) Joint Stock Company (ZAO) that already exists and ready to be sold to a needy businessperson. This means that the company has founders, a general director, and has a registered (legal) address. And it has submitted statutory accounting and tax reporting during the entire period of its activity.
The founder of an off-the-shelf company may be an individual or a legal entity or both. Therefore you will have to buy this company from its founders by entering into a share (stock) purchase agreement. After the agreement is signed, you will have to make amendments to the by-laws of the company and inform the tax authorities about the relevant changes. If you do not wholly buy the company – you do not formally own the company and you are not entitled to operate or manage the company or receive dividends. There is no such thing as a “beneficial owner” in Russia as in other countries.
The General Director of an off-the-shelf company is usually one individual. Again, Russian legislation does not recognize such a thing as a Nominal Director, as other countries do. This means that the Director of an off-the-shelf company is, on the one hand, fully liable for the activity of the company and, on the other hand, it is impossible to fully restrict his powers in the dayto- day management of the company. This means that even by issuing a general power of attorney to a different person, the General Director cannot transfer liability - administrative or criminal. I would think twice before becoming a General Director of a company that is being sold to a new owner! On the other hand, you can limit the powers of the General Director by the By-laws, but only to some extent, as you wouldn’t be able to restrict his right to manage the bank accounts, but only limit the amount of withdrawals per transaction.
A registered or (so-called legal) address shouldn’t be used for company registration purposes for several important reasons. It is illegal to use a residential premise for company registration purposes, although occasionally you come across off-the-shelf companies that have a residential address as a registered address. The company has to be located physically by the tax authorities. If the tax authorities cannot physically locate the company they may impose heavy fines. If you plan to rent office premises where the company will actually be located, you will have to go through either the registration of a subdivision of your company with the tax authorities at the address of the office premises or re-register your company’s location from the registered address to the real office address, which may require the changing of tax district authority followed by a tax official’s visit.
Moreover, if you plan to employ foreigners in your company you will not be able to do so legally if you have a registered address instead of an actual office, because migration authorities may be issuing work visas for future employees. Migration authorities usually visit a company in order to be sure that the company physically exists and is not a “one-day” operation involved in illegal immigration.
Submission of statutory accounting and tax reporting must be done during the duration of the company’s existence. It is a mistake to think that off-the-shelf companies have dormant accountancy. Each company has a general director. According to the law a general director has to receive a salary, even a minimal amount. This is a requirement. When buying an off the shelf company you have to be sure that everything is done properly and there are no tax liabilities. It is troublesome to find an offthe- shelf company that officially paid a salary to a general girector and which accounted for it properly because the cost of such a company would increase every month, and the older the company, the harder it would be to sell it.
These are the “cons” of the registration of an off-the-shelf company, but what are the “pros”? The only one is time. But if you plan to have a serious business, you should approach the issues seriously and plan everything including the company registration process carefully. You may create a lot of difficulties right from the start by buying an off-the-shelf company without proper planning. A well known phrase is quite right in this case – “fail to plan – plan to fail.”
One may note that all of the above-mentioned cons could be solved from the start by amending everything – registration of the new owners, appointment of the new general director, a change of address, making due diligence and paying all of the taxes due. But please do not forget about one more requirement. According to existing practice enforced by tax authorities, an application with all the amendments should be signed personally by the existing (old, nominal) general director in the presence of a notary public and personally be submitted and collected from the tax authorities. This is a warning to you because very often such nominal directors do not even know that they are directors; in hundreds of such off the shelf companies, they were appointed illegally. This fraud takes place when a passport is lost or stolen (identity theft) or a homeless person “sells” his identity to become a general director for 100 rubles.
The question is who will make all the changes; you or the company that sold you this off-the-shelf company? If you make the changes, what are the additional costs? If there are no additional costs, what will be the costs of the off-the-shelf company including the initial registration of the company, submission of all the reports, making amendments (which takes approximately the same volume of work and hassle as registration of a company from the scratch)?
Be careful about trusting “lawyers” that sell off-the-shelf companies; especially those that sell them for 300-500 dollars.
Registration of a Company from Scratch
Of course it may take more time to register a new company than to buy an existing off-the-shelf company, but a new company that you form will be legal from the outset; you may concentrate on running the business rather than trying to fix problems that the “faster off-the-shelf company” might cause.
You need he following in order to legally register a company:
- Real office premises – an actual office where you will be physically located. The authorities check!
- A candidate for General Director and not a “nominal” one. We already explained that there is no such a thing as “nominal” General Director.
- Know who will be doing the statutory accounting and tax reporting. The fact of an absence of activity or income is irrelevant – submission of the accounting and tax reports is still required.
We wish you a great start-up and furious growth!