It is at the stage of setting up a company that you need to decide which legal form will best suit the business's goals and the structure of relations between its members. Although in both an LLC and a JSC the members (shareholders) are not liable for the company's obligations and bear risk only up to the value of their shares, the choice between these forms affects not only the ownership structure and the flexibility of investment mechanisms, including the ability to issue and trade securities, but also the level of associated costs — both for setting up the company and for running it and complying with corporate procedures.

Similarities between an LLC and a JSC

• Limited liability of members (shareholders)

In both an LLC and a JSC, members (shareholders) are not liable for the company's obligations and bear the risk of losses related to its activities only up to the value of their participation interests (shares).

• Corporate nature

LLCs and JSCs are corporate legal entities in which members (shareholders) have the right to participate in managing the company's affairs, including decisions on key issues. Both forms provide for a system of governing bodies comprising a supreme body (the general meeting of members/shareholders) and executive bodies responsible for day-to-day management.

• Charter capital

Both an LLC and a JSC have a charter capital divided into participation interests or shares respectively, which determines the extent of members' (shareholders') corporate rights.

Differences between an LLC and a JSC

• Costs of setting up and running the company
Setting up and running a JSC generally involves higher costs than an LLC, owing to the need to maintain a shareholder register through a registrar or depository, comply with securities market legislation and follow more complex corporate procedures. In an LLC, the costs of setting up and running the company are generally lower and administrative procedures are less expensive.

• Complexity of corporate procedures
Acquiring shares in a JSC or participation interests in an LLC may require additional corporate procedures (notices, pre-emption rights, consent of the company/members). In a JSC, securities market requirements and the registrar's/depository's internal procedures are added, which sometimes makes transactions more formalised than in an LLC. The procedure for convening and holding meetings in a JSC is regulated in detail by law and subject to strict requirements, breaches of which may lead to resolutions being challenged. In an LLC, these procedures are largely determined by the charter and less strictly regulated.

• Access to information
In a JSC, access to the register and disclosure of information are strictly regulated by securities market legislation, ensuring greater transparency and protection of shareholders' rights. In an LLC, the scope of and procedure for access to the list of members and corporate documents are determined by the LLC Law and the charter, which gives more flexibility but also creates a risk of restricted access to information and, consequently, a greater likelihood of corporate conflicts between members.

• Exit of a member
In a JSC, participation usually ends through the sale of shares. A shareholder may require the company to buy back shares in the cases provided for by law. In an LLC, a member may have a direct right to withdraw from the company (if expressly provided for by the charter) and may require the company to buy their participation interest in the cases established by law (for example, if the company refuses to consent to its sale).

• Transfers to third parties and pre-emption rights
In a JSC, the charter may require the consent of shareholders and/or the company to the sale of shares to third parties, and may give shareholders and/or the company itself a pre-emption right to acquire shares. In an LLC, members' consent to the sale of a participation interest to third parties may also be required, and members and/or the company have a pre-emption right to buy a departing member's interest when it is sold for consideration.

• Recording ownership
In a JSC, shareholders' rights are evidenced by entries in the shareholder register maintained by a registrar or depository, and the procedure for keeping the register is regulated by the Bank of Russia. In an LLC, information about members and their interests is recorded in the Unified State Register of Legal Entities and in the internal list of members, which the company's sole executive body is responsible for keeping unless the charter provides otherwise (for example, the list may be kept by a notary).

• Number of members
A JSC may have an unlimited number of shareholders. An LLC may have no more than 50 members; if the limit is exceeded, the company must convert into another form (usually a public JSC) within 1 year or it may be liquidated by court decision.

Conclusion

JSCs and LLCs are corporate organisations of a similar legal nature, but they are designed for different models of doing business and corporate governance. An LLC generally suits companies with a limited number of members, a relatively simple ownership structure and a need for more flexible and less formalised corporate procedures. A JSC, on the other hand, makes sense where a more complex ownership structure is envisaged, along with active use of investment instruments, bringing in new investors through shares and more detailed regulation of shareholders' rights. The more complex and formalised corporate governance model of a JSC compared with an LLC generally comes with stricter requirements for transaction procedures and the recording of rights.

C Cases recommendations

The choice between an LLC and a JSC should be based not on a formal preference for one legal form or another but on the actual goals of the business's founders.

We recommend considering a JSC if:

• a significant number of members and a multi-level ownership structure (including indirect ownership, investment structures and options) are planned;
• the business is focused on issuing and trading shares, including the use of options and convertible instruments, for which JSC and securities market legislation provide more formalised and developed mechanisms (in an LLC, similar structures require more complex contractual arrangements);
• detailed regulation of shareholders' rights in the charter and shareholder agreements is planned, including disproportionate allocation of votes and dividends;
• the company plans to attract investors in future through share issues and other equity instruments (including without a public offering).

We recommend considering an LLC if:

• minimal administrative costs are required (an LLC has no costs for a registrar, maintaining a register or complying with additional Bank of Russia requirements);
• a limited number of members and a relatively simple ownership structure are planned;
• the business does not involve shares, options or convertible instruments, and investment is to be raised through new members joining the charter capital, additional contributions or other contractual structures;
• corporate procedures (convening meetings, adopting and documenting resolutions) need to take minimal time;
• a flexible exit mechanism for members is needed (the right to withdraw and buyback of interests by the company in the cases provided for by law and the charter).

If you are choosing between registering an LLC or a JSC, or considering changing your existing form, and want to take into account not only the legal differences but also the practical consequences for your ownership structure, corporate governance and fundraising, the C Cases team is ready to analyse your situation and propose the best model for the owners' goals and the business's development plans.

Sources

• Civil Code of the Russian Federation (Part One) No. 51-FZ of 30.11.1994;
• Federal Law No. 14-FZ of 08.02.1998 "On Limited Liability Companies";
• Federal Law No. 39-FZ of 22.04.1996 "On the Securities Market";
• Federal Law No. 208-FZ of 26.12.1995 "On Joint-Stock Companies".