LLC or Representative Office of a Foreign Company: Which to Choose?

When entering the Russian market, foreign companies are faced with a choice between setting up a limited liability company (LLC) or opening a representative office. Each option has its advantages and disadvantages, and the choice depends on the specific needs and goals of the company.

What is an LLC?

An LLC is a Russian legal entity created by one or more founders. The founders can be both individuals and legal entities, including foreign citizens and companies. The shareholders of an LLC bear limited liability for its obligations to the extent of the invested funds.

What is a representative office of a foreign company (RO)?

A Representative Office of a Foreign Company (RO) is a separate subdivision of a foreign company established in Russia without forming a legal entity. A RO has no assets of its own and cannot enter into contracts on behalf of a foreign company. It performs only representative and auxiliary functions.

Differences between an LLC and a RO

1.Legal Status:

 LLC – Legal entity.

 RO – Separate subdivision without formation of a legal entity.

2.State duty for opening:

LLC – 4,000 Rubles

RO – 120,000 Rubles (except for representative offices of companies from the EAEU – for them the fee is 4000 Rubles)

3.Terms of opening:

LLC – 3 working days

RO- 15 working days

4.Liability:

 LLC – Limited (to the extent of the invested funds)

 RO – Unlimited (for obligations of a foreign company)

5.Taxation:

 LLC – General taxation system, if the founder is a foreign legal entity or the company is engaged in imports

RO – General system of taxation

6.Conduct of business:

LLC – Independent conduct of activity in its entirety

RO – Limited activity (only representative and auxiliary functions)

7.Management:

LLC – Shareholders of the LLC

RO – Manager appointed by the foreign company

8.Possibility to obtain licenses and participate in public procurement:

LLC – Possible

RO – Impossible, as the representative office does not have the status of a legal entity

9.Possibility to import – export goods:

LLC – Possible

RO – Impossible, as the representative office does not have the status of a legal entity and cannot be engaged in customs clearance

Advantages and disadvantages of LLC

1. Advantages:

• Limited liability of the shareholders;
  • Possibility to conduct independent activities;
  • Possibility to participate in government tenders, obtain licences and carry out import and export operations.

2. Disadvantages:

• The need to comply with corporate procedures;
  • Higher administrative costs;
  • Complicated liquidation procedure.

Advantages and disadvantages of RO

1. Advantages:

• No need to register a legal entity;
  • Lower administrative costs;
  • Easier to transfer funds from the representative office account to the accounts of the parent company.

2. Disadvantages:

• Unlimited liability of the foreign company;
  • Limited legal capacity;
  • Complicated procedure for opening and amending information on the representative office.

Registration procedure

LLC:

• Preparation of constituent documents, payment of state fee;
  • Submission of documents to the tax office in person, through a notary or by post;
  • Registration of the company, registration period – 3 working days;
  • Entering information about the LLC into the Unified State Register of Legal Entities;
  • Receipt of LLC founding documents.

RO:

• Preparation of documents for accreditation of the representative office, payment of state fee;
• Submission of documents to the tax authority on the establishment of RO in person or by power of attorney;
• Accreditation of RO in the tax authority, accreditation period – 15 working days;
• Entering information about the RO into the Unified Register of Accredited Branches and Representative Offices of Foreign Organisations (RAFP);
• Obtaining a certificate of RO registration with the tax authority and an extract from the RAFP on accreditation of the company.

Which option to choose?

The choice between an LLC and a RO depends on the following factors:

1.Purpose and scale of activities:

 An LLC is suitable for companies planning to operate independently in Russia, while a RO is suitable for companies that only need representative and support functions.

2.Risk level:

 LLC provides limited liability, while RO provides unlimited liability.

3. Administrative costs:

 LLC requires higher administrative costs than RO.

4.Reputational risks:

 LLC is perceived as a more reliable and stable partner than RO.

Based on the differences, as well as depending on the goals of doing business in Russia, foreign companies can choose the appropriate option for operating in the Russian market.