Choosing a legal form of business organization

When starting your own business YOU need to decide on a form of business, or in other words select the organizational and legal form. First and foremost, you need to understand what the organizational and legal form is. The legal definition is as follows”: it is a form of business entity that fixes a method of property consolidation and its use by the economic entity, and subsequent legal status and purpose of business. Under the laws of the Russian Federation there are two entities with the following legal forms: legal entities and individual entrepreneurs.

Legal entities have an extensive classification, but for small business the best choice would be a limited liability company - LLC (OOO in Russian)or registration as the individual entrepreneur (IP in Russian).

Each of the above forms has its pros and cons and you have to consider them to see what kind of organizational and legal form is more appropriate for YOUR business.

To make it easier to choose, here are the main features (advantages and disadvantages) of LLC and individual entrepreneurship. 

Limited liability company

LLC is set up when one or more persons establish a company with capital divided into shares, which are determined by the constituent documents.

You may wonder why the founded company is called “limited liability”. The point is that you and the other founding members will not be held liable for the obligations incurred by the company. Moreover, the risks of losses related to the company will be carried by YOU and other founding members only in the amount equivalent to YOUR contribution in the share capital of the company. This is what the limitation of liability is about.

Now let us take a look at the main pros and cons of LLC:

+ The main advantage of LLC is YOUR (as founder) maximum financial security since YOU do not risk your own personal funds and property;

+ Moreover, LLC is easy to establish, i.e. the procedure of concluding an agreement between the parties is simple, registration procedure is also non-burdensome and takes 5 business days following the submission of all required documents to the registration authority (state fee for registration is 4000 rubles);

+ If YOU plan to set up a business not individually, but in a team, the registration of LLC will allow consolidation of material, human and financial resources of all the partners, which will undoubtedly have a positive impact on business development.

But LLC has its drawbacks:

- Lack of organizational flexibility in case you need quick replacement of the participants. As a rule in order to address this issue the consent of all members is needed. This might not always be easily achieved;

- Since LLC is usually established by several founders, eventually each of them comes up with their own vision of business development, which could lead to failure to take quick and sound decisions. Doing business often requires fast and accurate actions and all the participants should be confident about these actions;

 

- The procedure of entering into LLC is rather complicated for the new founders. This can hinder the inflow of additional funding, which may come from new potential shareholders.