Foundation agreement

Jan, 19 2024


Foundation agreement is a document in which the persons who have decided to create a company determine the procedure for conducting joint business activities and the conditions for creating such a legal entity. Thus, a foundation agreement is necessary for setting up a company with two or more participants.

The document may also contain the rules of allocation of profit received, rules of management, conditions of withdrawal from the company.

Features of drafting foundation agreement

Foundation agreement is necessary for the creation of company and is considered to be the main document for the formation of legal entity, drawn up in writing. From the legal standpoint, such a contract entails mandatory fulfillment of obligations and existence of founders’ rights. However, in fact, a legal entity is considered registered only after it passes the mandatory state registration procedure in the authorized bodies and is entered in the so-called Unified State Register of Legal Entities.

Required information in the foundation agreement

What legal entities need a foundation agreement? Business partnerships operate on the basis of foundation agreement. All other legal entities, with the exception of state corporations, operate on the basis of charter. The contract signed by the participants must contain the following information:

  • name of the legal entity;
  • legal form;
  • location;
  • procedure for managing the activities of legal entity.

However, in addition to the mandatory ones, there are a number of secondary, but no less important points that should be mentioned in the document:

  • composition and size of the authorized capital at the time of creation;
  • conditions of changing the members’ shares and their size;
  • terms and conditions for making contributions to the authorized capital, size of shares and their composition;
  • liability of the founders.

As a rule, the document also specifies conditions for the total amount of capital that is contributed by each participant.

Functions of the foundation agreement

This type of contract performs the following important functions:

  • Fixes the rules of interaction between the founders from the moment of signing the contract and until official registration of the legal entity in the state authorities;
  • Regulates the entire complex of corporate relations that will arise after state registration of a legal entity;
  • Defines and fixes the legal form and status of legal entity.

Members of foundation agreement

According to the law, both individuals and legal entities, as well as public legal entities, can become parties to the agreement. However, it is worth considering the existing restrictions: thus, when forming a full partnership, only those individuals who are registered as individual entrepreneurs and have the appropriate documents can join it. Thus, a public legal entity will not be able to enter into a full partnership on the basis of this type of document.

Rights and obligations of participants

So, the foundation agreement fixes and describes the entire complex of property rights of all participants of the created legal entity. On the basis of the document, each participant can participate in the distribution of the received profit. If the partnership breaks up, according to the document, the participants receive part of the property, but only after the settlement of all liabilities, if any, is made. The value of the property may also be paid, rather than the property itself.

In addition to property rights, participants are also endowed with a number of non-property rights. So the participant has the right to demand to exclude another founder in court, but with the payment of his share. Such a claim is possible if the other participant, by his actions or their absence, has caused harm to the enterprise, or in any other way significantly impedes the effective work of the organization.

The main responsibilities of each founder include the obligation to make a timely and full contribution, which is specified in the foundation agreement. However, in addition to this, the document may contain other mandatory conditions for participants. For example, the obligation may include participation in the management of legal entity and implementation of business activities.

Amendment and termination of the foundation agreement

Since this type of contract regulates the activities of all participants from the moment of conclusion to the moment of state registration, it can be terminated on general grounds until the moment of official registration of a legal entity. That is, all obligations for making deposits and for managing, as well as any other obligations, after the termination of the contract are terminated.

If a legal entity has passed the liquidation procedure, the foundation agreement on the basis of which this enterprise was created will also be terminated.

In respect of all contracts, including the foundation one, the same norms of civil legislation apply. Therefore, on the basis of these rules, a foundation agreement may be declared invalid in court on the basis of general rules on contracts. As a result, the act of state registration of legal entity will be canceled, and the company will be liquidated.

Author of the article
Foundation agreement
Valentina Khlavich
Managing Partner
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