When a business stops making a profit and its debts keep growing, its owners want to "close" the company and stop paying for its upkeep. Yet the company often still has previously accumulated obligations (to banks, government bodies, employees or its own members). In this situation, winding up the legal entity is not always possible and is most often a risky option. The way the company is "closed" determines the timing and costs, the likelihood of additional tax assessments, the risk of claims (for example, from the Federal Tax Service) and of liability.

Most often a business can cease operations in three main ways:

• Simplified liquidation;
• Standard liquidation;
• Striking off the Unified State Register of Legal Entities because the information about the company is inaccurate.

We look at each of these below.

Simplified liquidation

Since 01.07.2023, small and medium-sized businesses have been able to have a company struck off the register following its members' decision to cease operations, i.e. liquidated under a simplified procedure (Article 21.3 of Federal Law No. 129-FZ of 08.08.2001 "On State Registration of Legal Entities and Individual Entrepreneurs"). However, simplified liquidation does not mean that a legal entity can be wound up regardless of its debts.

Before the procedure is completed, the Federal Tax Service may initiate a review and send requests for documents and explanations. Ignoring such requests or providing only some of the documents will result in refusal to "close" the company. If the review reveals that the company has outstanding settlements with creditors, the simplified liquidation may be halted, and the debts identified will lead to additional taxes and fines.

Simplified liquidation is carried out by filing an application on form R19001 and only if all of the following conditions are met:

• The company is a small or medium-sized business;
• The company is not a VAT payer or is exempt from calculating and paying VAT;
• The Federal Tax Service has no information about outstanding settlements with creditors;
• The register contains no note that information about the company is inaccurate;
• The company has no unpaid taxes, duties or other mandatory payments;
• The company does not own real estate or vehicles;
• The company is not in the process of liquidation, reorganisation or striking-off by decision of the Federal Tax Service;
• No bankruptcy proceedings have been initiated against the company.

The decision on the forthcoming striking-off is published in the register and in the State Registration Bulletin. Creditors then have 3 months from publication to file objections. When this period expires, the company must not have debts to creditors who could later claim them. In other words, if the company knows that its creditors do not intend to notify the Federal Tax Service of debts owed to them, it can cease operations in this way. Otherwise, the Federal Tax Service will refuse the simplified liquidation.

Timing: from 3 months and 5 business days.

Standard liquidation

Standard liquidation is the most transparent way of winding up a company and involves settling with all creditors. However, where there are debts, this option almost inevitably attracts increased attention from the Federal Tax Service, including possible audits and the identification of additional liabilities. If unpaid debts or errors in accounting for them are discovered during the liquidation, this may lead to refusal of the liquidation, additional taxes and fines and, in some cases, to bankruptcy proceedings against the company and subsequent liability for the controlling persons.

To carry out this procedure, the company's members must file an application to liquidate the legal entity on form R15016 with the Federal Tax Service (Article 57.3 of Federal Law No. 14-FZ of 08.02.1998 "On Limited Liability Companies"). Note that the application is filed not once but 3 times during the procedure, and a state duty (RUB 800) must be paid for each. In addition, liquidation requires notices to be published in the Unified Federal Register of Information on the Activities of Legal Entities and the State Registration Bulletin, actions by the liquidator/liquidation commission and dealings with a notary (if the application is filed through a notary). All of this entails additional costs.

Timing: 3 to 12 months.

Striking off because information is inaccurate

The Federal Tax Service plays the key role in striking a company off the register on the grounds of inaccurate information: it initiates and runs the process, takes the key decisions and determines the timing and scope of reviews. The company itself cannot fully control the timing and course of the process or predict which reviews will be initiated.

The procedure may be initiated either by an application from the company's member or CEO (on form P34001) or by an application from any interested party, such as a landlord or counterparty (on form P34002), so starting it does not always depend on a deliberate choice by the members. Once the relevant entry is made, the Federal Tax Service decides to strike the company off.

Bear in mind that this mechanism is not a stand-alone way of winding up a company but a tool of state control and response to violations. Its use may end the legal entity's activities, but such a "closure" still does not mean that debts are automatically written off, nor does it rule out claims against the company.

Because such striking-off is the Federal Tax Service's response to improper conduct of business by the company, its CEO may be held administratively liable and fined RUB 5,000 to RUB 10,000 (Article 14.25(4) of the Code of Administrative Offences), and a repeat violation may lead to disqualification for 1–3 years (Article 14.25(5) of the Code of Administrative Offences). When an LLC is "closed" in this way, a member who held at least 50% of the votes when it was struck off may not be a member of other companies for three years after the LLC ceased to exist (Article 23(1)(f) of Federal Law No. 129-FZ of 08.08.2001 "On State Registration of Legal Entities and Individual Entrepreneurs").

Timing: from 14 months (in practice, the Federal Tax Service may extend this significantly, which means the procedure cannot be fully controlled).

Conclusion

All the available ways of winding up a company differ significantly in procedure, timing and cost, but each carries the risk that unpaid debts will be uncovered.

Striking off for inaccurate information is not always controllable, and if liquidation proceedings are initiated (of either kind), there is a high risk of a tax audit uncovering unpaid debts to creditors. Such debts may well lead the Federal Tax Service to refuse the liquidation or result in additional corporate income tax and a fine.

Possible consequences and risks

Under the law, a legal entity must pay its existing debts or file for bankruptcy. Ceasing operations with debts may therefore have the following consequences:

Additional tax assessments: Unpaid debt may be treated as non-operating income subject to corporate income tax (Article 250 of the Tax Code). Incorrectly determining the tax base may lead not only to additional tax but also to fines (20% / 40% of the unpaid tax) (Article 122 of the Tax Code).

Refusal to wind up the company: Debts may lead the Federal Tax Service to refuse to complete the company's "closure".

Bankruptcy: If the debts cannot be paid, the company's counterparties may file for its bankruptcy. The company may also initiate bankruptcy itself, but this takes considerably more time and money than the methods discussed above.

Tax audits: Audits are almost inevitable in a liquidation, so there is a risk of other debts (including tax), additional tax assessments or violations being uncovered.

Administrative liability: Striking a company off the register for inaccurate information may result in a fine for the CEO or a temporary ban on serving as CEO of other companies.

C Cases recommendations

In light of these risks, the C Cases team recommends:

• Carrying out a preliminary legal and tax audit to identify the actual extent of the obligations and assess the risks of how they may be classified;
• Paying off the debt or settling it in another way, for example through debt forgiveness by creditors (where possible);

Important: if creditors forgive a debt, the company must pay tax on the amount forgiven.

• Choosing the method of winding up based on the company's financial position and other factors;
• Assessing whether bankruptcy makes sense, since in some cases it is the only possible way to cease operations when the debts cannot be repaid.

If you need to wind up a legal entity and want to minimise the risks of "closing" it, the C Cases team is ready to carry out a comprehensive legal review, propose the best option for your goals and support a properly managed wind-up of your company that will not have adverse consequences for the business owners, directors or creditors.

Sources

• Tax Code of the Russian Federation;
• Code of Administrative Offences of the Russian Federation;
• Federal Law No. 129-FZ of 08.08.2001 "On State Registration of Legal Entities and Individual Entrepreneurs";
• Federal Law No. 14-FZ of 08.02.1998 "On Limited Liability Companies".