Difference between LLC and CJSC: what to pay attention to when choosing a form of ownership

Contents:

• How is the authorised capital formed in an LLC and a JSC?
• Governance structure: differences
• Different approaches to profit distribution
• Obligations of participants in LLCs and JSCs
• Detailed comparison
• Outcomes

A limited liability company (LLC) and a joint-stock company (JSC) are two forms of business, which differ from each other in the methods and complexity of management, distribution of authorised capital and other characteristics. At the same time, a JSC can be represented as a public or non-public joint stock company (PAO and NPJSC). In this article we will elaborate on the differences between LLC and NPJSC, as it is NPJSC that is closest to LLC. It is also important to say that since 2014, the NPJSC has replaced the closed joint stock company, which is reflected in the renaming of the business form.

For more details on the differences between LLCs and NPJSCs, see this article.

How is the authorised capital formed in an LLC and a JSC?

The authorised capital of the two organisational and legal forms plays a key role in their structure. However, the process of formation and requirements to it are different for LLCs and JSCs.

For example, in an LLC the authorised capital, as a rule, is formed from the contributions of its participants. The minimum required amount of authorised capital for an LLC is ten thousand roubles. An LLC is able to start operations after contributing at least half of its authorised capital.

In NPJSC the authorised capital is represented by stocks. The minimum amount of authorised capital for non-public JSCs is 10,000 roubles just as for LLCs.

Thus, an LLC is easier to form with limited financial resources, while a JSC requires larger initial investments, but offers a more flexible structure for further investment attraction.

Governance structure: differences

The management structure and the relationship between members and stockholders are different in LLCs and JSCs.

For example, in an LLC, all founders participate in the management process of the company. Each member of the company has a voice in decision-making that is proportional to their stocks in the authorised capital. The main management body is the general meeting of participants, the executive body is the director or general director.

A joint stock company (even a closed one) has a more complex management structure, which includes a general meeting of stockholders, a board of directors and an executive body – the management board. Stockholders (especially minority stockholders) may not directly participate in management processes. However, they elect the board of directors at the annual general meeting of stockholders. This board of directors, in turn, controls the work of the executive body.

Thus, in an LLC, the participants have more control over the company’s activities. In a joint stock company, however, control and management mechanisms are more widely distributed among stockholders, the board of directors and the management of the company.

Different approaches to profit distribution

Certain differences can also be noted here. For example, the after-tax profit of a limited liability company is distributed among the participants in accordance with their stocks in the authorised capital. Unless the constituent documents contain a different provision, all decisions on the distribution of profits are made unanimously at the general meeting of the owners.

The income that remains in the joint-stock company after payment of taxes and formation of the reserve fund may be distributed in the joint-stock company among the stockholders in the form of dividends. The decision on this, as well as the amount of dividends is determined at the general meeting of stockholders. The initiator is the board of directors. If the company received a reduced profit at the end of the year, then dividends may not be paid at all.  

Thus, in an LLC the distribution of profit depends on the contributions of participants, while in a JSC the distribution of profit is made in the form of dividends and depends on the number and nominal value of stocks.

Obligations of participants in LLCs and JSCs

First of all, it is worth considering that the founders of an LLC bear the risk of losses within the limits of their contributions to the authorised capital. Thus, they are liable only for the company’s debts within the framework of an equal stocks of their contribution. If the amount of the authorised capital has not been fully repaid for any reason, the participants become jointly and severally liable for its obligations.

Stockholders are usually not personally liable for the debts of the company. They risk the amount of their investment in the company’s stocks – the value of the stocks. Stockholders and participants may have additional liability in accordance with the obligations or debts of the company pledged by them, if this is provided for in their constituent documents or corporate agreement.

To summarise, LLC members are more risky than stockholders, who can only lose an amount within the value of the stocks.

Detailed comparison

A comparative analysis of the risks and benefits associated with choosing an LLC or a JSC to do business includes several key aspects. An LLC has the following advantages:

• Uncomplicated registration and simple company management
• Limitation of participants’ liability to the amount of their contributions to the authorised capital
• The possibility of a quick and relatively cheap registration process

However, it is important to take into account that the number of participants cannot exceed 50 founders, and one should also be aware of the complexity of the process of selling a stocks to third parties due to the pre-emptive right of other participants.

The advantages of a joint stock company are as follows:

• Significant flexibility in attracting investment through the sale of stocks
• Unlimited number of members
• The process of selling stocks to third parties is usually less complicated than in an LLC

However, it is important to consider the more complex and costly registration process, as well as more stringent financial reporting and confidentiality requirements.

Outcomes

There are certain differences between an LLC and a JSC that affect the details of the disposition, structuring and all-day operation of the company. These relate to the following:

• The order of business operations: An LLC is characterised by simplicity of management and operations, while a joint-stock company attracts more complex and multi-level management structures.
• The division of finances: in an LLC, finances are distributed in proportion to each member’s stockss of the stocks capital, while in a JSC, the benefit is distributed in the form of dividends according to the level of stockholding.
• Protection against loss: LLC members are liable only to the extent of their contributions to the authorised capital, stockholders – to the extent of the value of the stocks.
• Financial attraction: a JSC can significantly increase its capital by selling stocks, while in an LLC such a process is limited.
• Volume and documents: JSCs face more stringent requirements for financial statements and transparency, unlike LLCs.

Thus, the differences between LLCs and JSCs are profound and distinct, which can significantly affect long-term business strategy and international operations.

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