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While preparing a position on a specific case, it is recommended to refer (whenever possible) to the court decisions on analogue cases. The judges listen to such arguments, and even in the final decision on the case, they sometimes indicate how a similar dispute was previously solved by another court. Moreover, the references should be made to the decisions of the Supreme Court of the RF, the courts of the subjects, and the arbitration courts of cessation. The court decisions, standing below, are seldom cited as an example. Practice shows that the party, whose position is supported with the court decisions on analogue cases, has a much better chance of winning the case.
Thus, while studying any aspect, one should analyze not only the federal laws and other legal acts, but also the acts of the courts on relevant issues.
Evgeny Arkhipov[24 - Lomonosov Moscow State University, PhD candidate, LL. B. 2014.]
Chapter 2 – Business Association Forms
1. Persons Conducting Entrepreneurial Activities
1.1. Entrepreneurial Activities
The Civil Code of the Russian Federation includes the following definition of entrepreneurial activities: "independent activity, performed at one's own risk, aimed at systematically deriving a profit from the use of the property, the sale of commodities, the performance of work, or the rendering of services by the persons, registered in this capacity in conformity with the law-established procedure," (Clause 1 of Article 2 of the CC of the RF). Judicial practice clarifies the given definition. Thus, on February 24, 2004 Constitutional Court of the Russian Federation rendered decision No. 3-P on the matter of the verification of the constitutionality of separate provisions of Articles 74 and 77 of the Federal Law on Joint Stock Companies, regulating the consolidation order of the placed stocks of a joint stock company and redemption of fractional shares. This decision was related to the complaints of citizens and the “Cadet Establishment” company, and as per the inquiry of Oktyaberski District Court of the city of Penza, specified the following:
The right to free use of one’s abilities and property for entrepreneurial and other economic activities, not forbidden by law, serves as a basis for constitutional legal status of the participants of business companies, in particular of shareholders of joint stock companies being legal entities, as well as natural persons, including those who are not entrepreneurs, and who exercise their rights through holding stocks, certifying the rights to obligation of its owners, towards the joint stock company.
Proceeding from the aforementioned position of the Constitutional Court of the Russian Federation, the activities of shareholders shall be recognized as entrepreneurial.
1.2. The Right to Engagement in Entrepreneurial Activities
Natural persons (people) and legal entities (organizations) can be engaged in entrepreneurial activities in Russia.
1.2.1. Natural Persons
Another name given to natural persons in Russian law is “citizens.” One should take into account that in civil and business legislation the word «citizens» means all "natural persons," and not only the citizens of the Russian Federation. While referring to citizens of Russia, one shall specifically indicate this, by saying "citizens of the Russian Federation." The word «people» in the civil and business legislation is not used.
Every person can be engaged in entrepreneurial activities in Russia. Such right is fixed in the Constitution of the RF under Clause 1 of Article 34.
It is important to note that there are exceptions to this rule. The primary exceptions are related to the legal capacity of citizens, e.g. the ability of citizens to acquire and exercise civil rights by their actions, to create civil duties for themselves and perform those duties. The legal capacity of citizens is defined by the CC of the RF. As a general rule, citizens gain full legal capacity at 18 years of age. Before reaching this age, citizens cannot independently exercise most transactions.
1.2.2. Legal Entities
Profit organizations[25 - See Section 3.3 of the present chapter for the classification of legal entities.] have the right to be engaged in entrepreneurial activities. Non-Profit organizations may conduct income generating activities, as long as this is established in their charters, and only to the extent that this serves the purposes for which they have been established, and corresponds to such purposes (Clause 4 of Article 50 of the CC of the RF).
1.2.3. Participation of the Russian Federation, its subjects and Municipalities in the Civil Legal Relations
State and municipal organs (being expressly authorized), participate in civil legal relations on behalf of the Russian Federation, its subjects, and the municipalities. State authorities can be legal entities (see, for instance, clause 15 of the Rules on the Ministry of Justice of the Russian Federation, approved by Decree No. 1313 of the Russian President, dated October 13, 2004).
The Russian Federation, its subjects, and municipalities do not exercise entrepreneurial activities.
2. Individual Entrepreneurs
2.1. Registration as an Individual Entrepreneur
The citizen conducting entrepreneurial activities must be registered as an individual entrepreneur (Clause 1 of Article 23 of the CC of the RF). The registration procedure is regulated by the Federal Law on Registration. The Federal Tax Service (hereinafter FTS) of Russia is the body carrying out the state registration of individual entrepreneurs. For the purposes of being registered, the citizen needs to inform the FTS of Russia of his/her place of residence (Clause 3 of Article 8 of the Federal Law on Registration). The set of documents required for submission to the territorial body of the FTS of Russia, is indicated in Clause 1 of Article 22.1 of the Federal Law on Registration.
The absence of state registration shall result in administrative or criminal liability for illegal entrepreneurship. Moreover, despite the absence of registration, entrepreneurial activities of the citizen can be regulated by the norms of the CC of the RF. These norms are also applicable to individual entrepreneurs and legal entities who are already registered (Clause 4 of Article 23 of the CC of the RF).
2.2. Status of an Individual Entrepreneur
The activities of individual entrepreneurs are regulated by the same norms which establish rights and duties for commercial organizations. A possible exception is in a case when the law states otherwise, or based on the nature of the individual entrepreneur.
2.3. The Responsibility of an Individual Entrepreneur
The individual entrepreneur is liable for his obligations with all of his/her property (Article 24 of the CC of the RF). In other words, for the repayment of the debt of the individual entrepreneur, anything belonging to him/her may be levied to repay the debt. An exception to this rule is contained in Article 446 of the Civil Procedure Code of the RF. The levy cannot be executed on certain property owned by the citizen, particularly:
i) living premises, if it is the only suitable permanent residence for the citizen and the members of his family for residing together (if such premises are not objects of mortgage);
ii) the land plot which such living premises are situated on;
iii) the objects of habitual household furniture and utensils, and items of personal use (except for jewelry and other items of luxury);
iv) the property necessary for professional occupation of the citizen being the debtor, except for items which cost 10,000 rubles or more;
v) foodstuffs and money to the total sum of not less than the living wage (around 10,000 rubles).
2.4. Employees of an Individual Entrepreneur
The individual entrepreneur has the right to hire employees as per the labor contracts. Features of the legal regulation of work of the employees hired by the individual entrepreneur are established by Chapter 48 of the Labor Code of the RF.
3. General Provisions on Legal Entities
3.1. Classification of Legal Entities
Legal entities can only be created in those organizational and legal forms which are listed in the CC of the RF. State corporations and state companies, which are not mentioned in the CC of the RF, are an exception to this rule.[26 - See section 5.2 for more information about state corporations and state companies.] In total, 22 organizational and legal forms of legal entities exist in Russia.
All legal entities are divided into:
i) profit and non-profit organizations;
ii) corporations and unitary legal entities.
All types of legal entities can be schematically displayed as followes:
Moreover, there is one more organizational-legal form – advocacy formations (being legal entities). Legal entities of this type are non-profit organizations, however in the CC of the RF, they are not assigned to either corporations or to unitary organizations. Obviously, this is an omission of the legislator. At the same time, the analysis of the legislation allows the claim that Bar Associations (variety of formations of advocates which are legal entities) are referred to corporations.
3.2. Profit Organizations and Non-Profit Organizations
There are 6 types of profit organizations and 16 types of non-profit organizations in Russia (see above).
3.2.1. Legal Status of Profit Organizations and Non-Profit Organizations
Organizations, which activities’ main purpose is to generate profit, are considered as profit organizations. Non-profit organizations can be created for social, charitable, cultural, educational, scientific, and managerial purposes, for the purposes of the health of citizens, the development of physical culture and sports, the satisfying of spiritual and other non-material needs of citizens, the protection of rights and legitimate interests of the citizens and organizations, the settlement of disputes and conflicts, providing legal aid, as well as other purposes aimed at the achievement of public benefits (Clause 2 of Article 2 of Federal Law on Non-Profit Organizations).[27 - See section 1.B.b of the present chapter for the right of a non-profit organization to generate profit from its activities.]
As a general rule, profit organizations[28 - Commercial organization can be created for certain purposes which are listed in its charter. In such an event, it will have a limited legal capacity.] have general legal capacity.[29 - State and municipal unitary enterprises are given an exception to this rule.] This means that they can be engaged in any activity, if this activity does not contradict with the legislation. Non-profit organizations, on the contrary, possess only special legal capacity. This means that they can be engaged only in the activities which correspond to the subject and purpose of the activities fixed in their charters.
3.3. Corporations and Unitary legal entities
The CC of the RF allocates 13 types of corporations and 8 types of unitary organizations.[30 - As mentioned above, the CC of the RF does not contain any indication to which type of enterprises the advocates formations being legal entities, shall be referred to.]
A corporation consists of members. Members of any corporation form the highest body of the management of the corporation, and due to this, have certain rights and duties in relation to the legal entity.
Basic rights of members are (Article 65.2 of the CC of the RF):
i) the right to manage a corporation;
ii) the right to receive information on the corporation’s activities. The principal duties of members are:
i) participation in the formation of the corporation’s property,
ii) participation in the adoption of decisions required for the company to continue its existence.
The following rights are also attributed to profit corporations’ members:
i) the right to receive income from the activities of the corporation,
ii) the right to receive a part of the property that is remaining after the liquidation of organization.
Other rights and duties of corporations’ participants are established in special laws (Federal Law on Limited Liability Companies, FL on Joint Stock Companies, FL on Non-Profit Organizations, and others).
The participants of a corporation are named members, shareholders or just participants depending on a specific type.
Unitary legal entities have no members.
3.4. Establishment of Legal Entities
The legal entity is considered established from the moment the record is entered into the Unified State Register of Legal Entities (USRLE).
The procedure for the establishment of any legal entity consists of the following steps:
i) drawing up necessary documents,
ii) submission of documents to the registering body,
iii) receipt of documents confirming registration of the legal entity.
Below we will consider each of these three stages in more detail.
3.5. Preparation of Necessary Documents
The list of documents which should be submitted to the registering body is established in Article 12 of Federal Law on Registration. These documents are:
i) a statement on state registration,
ii) a decision on the establishment of a legal entity,
iii) constituent documents,
iv) an extract from the register of foreign legal entities of the respective country of origin (or any other proof of equal legal force) of the legal status of the foreign legal entity being a founder,
v) a document confirming the payment of the state fee.
In addition, the following shall be submitted at the establishment of a non-profit organization in the appropriate body:
i) information on founders in duplicate,
ii) a statement for the inclusion of a non-profit organization in the register of non-profit organizations which are carrying out the functions of a foreign agent, as for non-profit organizations which are carrying out functions of a foreign agent.
3.5.1. Application of State Registration
The application form for the state registration of a legal entity is approved by Order No. MMB-7–6/25, at the Federal Tariff Service (FTS) of Russia, dated January 25, 2012 (appendix No. 1 to this order, form No. P11001). The application form shall be filled out strictly in accordance with the registration requirements, which are approved by the specified order of the FTS of Russia (Appendix No. 20, sections I and II).
3.5.2. Decision on the Establishment of a Legal Entity
The decision on the establishment of a legal entity is made, as a rule, by a protocol which is formed in the results of the meeting of founders. The protocol is composed in a written form, made in a single document and is signed by all of the participants of the meeting.
Provisions of Chapter 9.1 of the CC of the RF shall be complied while holding a shareholder meeting. This chapter is devoted to the decision-making at the meetings, as well as the invalidity of such decisions. This chapter refers to the meetings, including the meetings of the legal entity’s founders.
If the legal entity has only one founder, the decision on the establishment of a legal entity is made by him/her individually, and is not formalized in the form of a protocol. Such a document will be called, for example, “The Decision on the Formation of the Joint Stock Company ‘Alfa’.”
At the establishment of a non-profit organization, the decision on the establishment is provided in duplicate.
3.5.3. Constituent Documents
One of the constituent document of any legal entity is its charter. An exception is the fellowships constituent document, which is the foundation agreement. Rules of the CC of the RF on charters (clause 1 of Art. 52 of the Civil Code of the RF) are applicable to the foundation agreement of the association/fellowship.
The charter of the legal entity must necessarily contain the following information:
i) The Name
Legal entities have full and/or reduced names. The name must contain an indication on the organizational-legal form of the legal entity. Some federal laws establish additional requirements for the name of the legal entity. For instance, the Federal Law on Education establishes that the educational organization must have an indication on type of the educational organization in its name (Clause 5 of Article 23).
ii) The Organizational-Legal Form
iii) The Location
The location is a locality where the legal entity was registered (Clause 2 of Article 54 of the CC of the RF). There is no need to indicate the full address of the legal entity in the charter.
iv) The order of management of the legal entity’s activities
Under the management order in the CC of the RF, there is a list of the managing bodies of the legal entity, with an indication of their powers.
Additionally, in the charters of non-profit organizations, and in cases provided by law, as well as in the charters of profit organizations, the subject and the purposes of legal entities’ activities have to be defined (Clause 4 of Article 52 of the CC of the RF). The subject means the list of the variety of the activities of the organization. The legislation sets other requirements on the content of the charter, depending on its organizational-legal form, and the variety of conducted activities.
The charter of legal entity may contain any provisions which do not contradict to the legislation of Russia.
The CC of the RF allows the possible use of sample charters. However, currently the state authorities have not approved of any sample form of a charter.
Constituent documents are provided to the registering body in duplicate (in triplicate in case of establishing a non-profit organization).
