Benefits and drawbacks of «LIMITED LIABILITY company» (Llc) | Diplomat Law Firm

Benefits and drawbacks of «LIMITED LIABILITY company» (Llc)

Monday, 23 March, 2015

Limited Liability Company (LLC), as one of the organizational forms (OF) of a commercial organization, in practice, is the most common form of doing business in Uzbekistan. By the way, not only small and medium businesses are performing in this form, but as a rule, also a big business.

What makes LLC such "popular" form of commercial organization?

1) An Actof the Republic of Uzbekistan "On limited and additional liability Companies" (the Act) defines a limited liability company as business entity established by one or several persons with the charter capital (authorized capital) divided into shares bycertain constitutive documents. It should be noted that the Act determines along with the LLC the legal status of additional liability companies (ALC), but in practice such OF almost does not occur.

2) If the private enterprise (PE) is characterized by the so-called "personality" of doing business (created and managed by the owner - a single individual), the founder of the LLC may be a single person, as a natural person or a legal entity, so and there may be two or more founders (individuals and entities). The Act clearly defined only the upper limit of the number of founders (participants): the number of participants of society should not be more than fifty.

It is important to note that the founders of LLCmay be as foreign citizens and foreign legal entities, so-called "foreign-invested enterprises" (in the latter case). Depending on the participation of the founders - individual or legal entity of Uzbekistan and foreign legal entity, as well as the authorized fundexactly in the form of LLC suchbusinesses as: a joint venture in the form of LLC – JV LLC, the foreign company as LLC - FCLLC, a subsidiary in the form of LLC - Subsidiary LLC are established.

Unfortunately, in practice majority wrongly percept that there cannot be one founder (participant) in the LLC. The Act says the opposite: one person, who becomes his sole participant, can found LLC. The LLC may subsequently become a company with one participant. The Act discloses important limitation: society cannot have as its sole participant another business entity consisting of one person.

3) The essential point, or rather, one of the significant advantages of the legal status of LLC - assignability (onerously sale or free) of fraction (fraction part) by founders. As a rule,so-called "business acquisition" (transactions of "mergers and acquisitions» - «M&A») are carried out in this way.

4) The authorized fund (capital) of LLC consists of the nominal value of the shares of its participants. The authorized fund (capital)of LLC shall not be less thanforty minimum wages set by law at the date of submission of documents for state registration. Surely, at this point the position of LLC is "inferior"in comparison to the PE: law does not specify the minimum size of the authorized fund of the latter.

5) If the owner of the PE (founder) is simultaneously the head (director) of the company; and he/shedoes not have rights to delegate his/her power to manage the organization to another person, in LLCits executive organ may be elected (appointed) not necessarily from the founders (participants).

Moreover, the Act provides the establishment of collegial executive body: if the charter of the company provide the establishment of the collegial executive body (board, management, and others). The general meeting of the Company elects such body;the company’s charter defines an amount of participants of the collegial executive body and a period that they will operate.

6) A significant advantage of LLC is presented in the fact that the participants of LLC are not liable for its obligations and bear the risk of losses associated with actives within the value of their contributions. The legislation provides for additional (subsidiary) liability of the owner (founder) of PE owned property for the obligations of private enterprise with insufficient assets of the enterprise.

The above rules concerning property liability for the obligations of the participants should not be confused with the possibilityof prosecution of LLC participants if they commit crimes.

7) LLC has rightstoarrive at a decision to distribute its net profits between the members of the company quarterly every six months or once a year. The decision on the determination of profit to be distributed between the members of the company is concluded while the general meeting of members of company.

Parts of the profit of the company intended for distribution among its members are distributed in proportion to their shares in the authorized capital of the company.

However, in practice it may be difficult to obtain dividends. In this regard, the provisions on the profit from PE are more favorable.

Thus, with all so-called "pros" and "cons", LLC is one of the most common organizational forms of doing business in the country; and it is necessary to bear in mind all those for people, who are just taking their first steps to the world of business.


Stanislav Kim

Partner, Head of Corporate Practice

Diplomat Law Firm