Difference between an LLC and a JSC: the main differences between these forms of business

Contents:

• Characteristics of an LLC
• Characteristics of a Joint Stock Company
• Differences between LLC and JSC
• The main differences between an LLC and a JSC
• Comparison of LLC and JSC governance structures
• Differences in liability and risks
• How does share buy-back take place in different forms of business?

The year 2023 showed an increase in the number of new businesses in Russia. More companies have started to open – this applies to LLCs and JSCs. At the same time, the statistics on the number of closed enterprises is also positive – the number of closed firms decreased by 15% compared to 2022. Thus, we can conclude that business has adapted to the conditions of sanctions. Undoubtedly, new companies will open in 2024 as well. It is important for an entrepreneur to choose the form of business. What is the difference between LLC and JSC, we will tell you in this article. It is obvious that the business environment today is more favourable for the development of start-ups and attracting investment. It’s the right time to open your own company, but it remains to choose – LLC or JSC.

Characteristics of an LLC

Limited Liability Company (LLC) is a popular format for doing business in Russia. Such a legal entity can be created by one or several founders from among legal entities and companies. The charter capital is contributed at the stage of formation of the organisation and is divided proportionally between the owners. The participants are jointly and severally liable, and the risks are limited to the contributions of the participants.

The popularity of the LLC lies in its more flexible structure for small and medium-sized businesses. LLC members are free to form a management structure, reorganise and appoint directors themselves. The founders have the right to trade their shares freely or with the consent of the other founders, or have no such right.

Characteristics of a Joint Stock Company

A joint-stock company (JSC) is a form of doing business. The creation of a JSC is regulated within the framework of the constituent assembly of future shareholders. It can be created by one or several founders, however, the priority format is the participation of several founders. The form has an authorised capital, which is distributed in an appropriate amount among the participants-shareholders.

JSC is excellent for future large companies that have a number of investors. It will allow free sale and purchase of shares to ensure liquidity of assets.

There are two types of JSCs – public and non-public joint stock companies. For NPJSCs, the articles of association require the consent of other shareholders to sell shares to third parties.

Depending on the needs of the business, a joint stock company and a limited liability company offer different strategies for managing, attracting investment, and allocating risk. Understanding the advantages of these forms will help entrepreneurs make an informed choice.

Differences between LLC and JSC 

LLC and JSC are two popular formats for doing business in Russia, each of which has its own peculiarities:

• In an LLC, participants own shares, which are not securities and can be transferred to others without or with the consent of the other participants.
• In a JSC, ownership of the company is through shares, which are securities and can be sold by shareholders with the consent of other shareholders or freely without their consent. It all depends on the provisions in the articles of association.

The main differences between an LLC and a JSC

Distinctive features can be classified into several groups:

1. Peculiarities of ownership. In LLCs, participants own shares, in JSCs – shares.
2. Openness of ownership: shares of public JSCs can be freely traded on the stock exchange, shares of LLCs are more difficult to sell. In the case of an LLC, the consent of other participants may be required, as well as the introduction of relevant changes in the Unified State Register of Legal Entities.
3. Peculiarities of head counting at the meeting: in LLC the number of votes is proportional to shares, in JSC each share represents one vote.
4. Management system: management in LLCs takes place through the general meeting of participants. JSCs most often require a structure with a board of directors.
5. Additional requirements. A JSC must necessarily keep a register of shareholders. JSCs must also register the issue of shares.

It should be noted that today LLCs and JSCs can be registered under a more simplified procedure than a few years ago. This is due to the gradual transition to an electronic registration process. Whereas previously the procedure took up to a month, today registration takes place in a week. You can submit documents online after filling in the P11001 application form. Also today the concept of “Authorised capital” has become more flexible. Its size is symbolic – 10,000 roubles for LLCs and NPJSC.  

Features of LLC management in Russia include great opportunities for determining the management structure – director, board of directors, general meeting of participants and so on. Also, the company may have one participant, which simplifies management and increases confidentiality. Ownership of an LLC in Russia is due to comfortable conditions for doing business, minimising taxes and risks associated with liability.

The latest changes in legislation that concern JSCs came into force on 1 January 2024. From this date, the procedure for holding general meetings of shareholders was relaxed. In addition, it is still possible to elect the Board of Directors. Russia’s JSC policy aims to ensure stability, predictability for shareholders and corporations, and plays an active role in regulating JSC activities.

Comparison of LLC and JSC governance structures

Transition to effective company management requires an understanding of the key differences between the governance institutions of a JSC and an LLC. Each of these forms has its own peculiarities that affect the structure and functioning of management bodies.

In limited liability companies, the basic principles of governance are contained in the company’s articles of association. LLCs are characterised by a simpler approach to company management – at a general meeting of participants they can make a decision on any issue. At the same time, the executive bodies can be represented either by a single managing director or by a collective body.

As for JSCs, a NPJSC may include no more than 50 shareholders. According to Article 88 of the Civil Code of the Russian Federation, in case of excess, the company must be transformed into a PJSC within a year or liquidated in court. In general, a JSC has several main governing bodies – the general meeting of shareholders, the general director and the board of directors. The general meeting of shareholders is the supreme governing body and makes the most significant decisions. The Board of Directors plays an important role in the management of the company, forming strategic directions of development and controlling the activities of the executive bodies. The CEO’s task is to implement the strategy and manage the company’s day-to-day operations.

Obviously, each form has its own advantages and peculiarities. LLCs allow for greater management flexibility, while JSCs are oriented towards a stricter structure and formalisation of processes. There are many factors to consider when choosing a form of company establishment. The optimal choice depends on the specifics of the activity, the size of the company and the desired level of responsibility.

Differences in liability and risks

Such differences can be categorised according to some parameters:

• Is there a limitation of liability? In an LLC, members bear the risk of liability within the limits of their shares and contributions. In a JSC, shareholders are liable only to the extent of the value of their shares.
• Bankruptcy. In an LLC, members do not incur additional liabilities, except as provided by law (e.g., for non-payment of taxes). In a JSC, shareholders are not liable for additional obligations, except in cases stipulated by law.
• Judicial liability. Members of an LLC can be sued in the event of wilful bankruptcy or improper bookkeeping. Shareholders of a JSC are protected from legal liability for the actions of the company if they strictly act in accordance with the law and do not interfere with the operational management of the company.
• Are there risks to the assets? In an LLC, the members have direct control over the company’s assets, which can lead to a high risk of misappropriation or misuse. In a JSC, assets are controlled and distributed according to rules set by the board of directors and management, which reduces the risk of misuse of assets.

How does share buy-back take place in different forms of business?

In an LLC, members have the right to buy out a share from a withdrawing founder. The withdrawal agreement is registered in the Unified State Register of Legal Entities with the indication of the new owner. All changes must be notarised. It is also required to prepare an agreement on the redemption of shares, approved by the general meeting of participants. A distinctive feature of a JSC is the possibility of refusing to buy out shares without giving reasons. Only documents on shares will be required to make changes in the register of shareholders.

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