Starting November 19, 2024, amendments to the Civil Code (CC) will come into effect, allowing a limited liability company (LLC) to operate without developing or adopting its own individual founding document—a Сorporate Charter. Instead, it can function based on a Model Charter approved by the government.

What are the advantages and disadvantages of adopting the Model Charter as the founding document? In which cases should one consider the necessity of having an individual LLC Charter?

The main advantage: simplifying the procedure for establishing a legal entity.

The Charter is not developed. The Unified State Register (USR) records that the legal entity operates based on the Model Charter. This means that the legal entity will function under standard general rules provided by the legislation on business entities. At the same time, the USR records the LLC’s individualizing provisions, which are typically required in the Charter. These include the LLC’s specific name, details of its location and charter capital, information about the LLC's founders (members), the size of their shares, and the limits of the members’ subsidiary liability (for additional liability companies, or ALCs).

The disadvantage: the specifics of relationships between LLC members (founders), as well as between the members and the company itself, are not taken into account.

Permissible features of the management system and the competence of the LLC’s governing bodies cannot be utilized. Additionally, other conditions governed by default rules of the Law on Business Entities and other legislative acts cannot be altered. Under normal circumstances, members (founders) would be able to modify these provisions to suit the individual needs and specific functioning and development of their LLC.

What general legislative rules can be altered by LLC founders (members)? In which cases is a Model Charter insufficient?

Let's highlight the most common instances where members individualize the provisions of the Law in the Charter:

 Establishing a disproportionate ratio between the size of a member’s contribution to the company's charter capital and their share in the charter capital (Part 1, Article 94 of the Law on Business Entities).

 Altering the ratio between a member’s share in the charter capital and the dividends they are entitled to when profits are distributed (Part 1, Article 96 of the Law on Business Entities).

 Imposing restrictions on the free transfer of a member’s share in the charter capital to other members, particularly by requiring the consent of the other members for such a transfer and defining the procedure for obtaining this consent (Part 1, Article 97 of the Law on Business Entities).

 Prohibiting the transfer of a member’s share to third parties (Part 3, Article 97; Part 1, Article 101 of the Law on Business Entities).

 Establishing rules different from those prescribed by law for exercising the preemptive right of other members to purchase a member’s share. This may include setting a disproportionate ratio between the right to acquire a share (or part of a share) and the size of members' shares in the LLC's charter capital, reducing the period for exercising the preemptive right to less than 30 days, and other similar provisions (Article 97 of the Law on Business Entities).

 Utilizing the right granted in Article 102-1 of the Law on Business Entities to transfer or sell a share (or part of a share) acquired by the LLC to members of the Board of Directors (Supervisory Board), the executive body, and/or employees of the LLC, provided this is stipulated in the LLC's Charter.

 Requiring consent from other members for the transfer of a deceased member’s share in the LLC’s charter capital to their heirs (Part 1, Article 102 of the Law on Business Entities).

 Establishing a special procedure for determining the number of votes held by members when making decisions at the general meeting, such that voting power is not proportional to their shares in the charter capital (Part 1, Article 109 of the Law on Business Entities).

 Defining a specific governance structure for the LLC, particularly by adopting a three-tier system (General Meeting – Board of Directors (Supervisory Board) – Executive Body (Board of Directors and/or Director)), which is uncommon for LLCs. The competencies among these governing bodies are defined accordingly. Common variations of these adjustments include:

- Expanding the exclusive powers of the General Meeting of the LLC (Part 2, Article 34 of the Law on Business Entities).

- Redistributing legally prescribed competencies among the LLC's governing bodies. For example, the founders may wish to transfer matters typically under the General Meeting’s competence to the Board of Directors, including decisions on major transactions or transactions involving affiliated parties (Part 2, Article 35 of the Law on Business Entities). Certain matters, such as the creation and liquidation of the LLC’s representative offices and branches or the provision of free (sponsorship) assistance, could be assigned to the executive body (Parts 3 and 4, Article 35 of the Law on Business Entities). Additionally, responsibilities related to preparing, convening, and conducting the general meeting of LLC members could be transferred from the executive body to the Board of Directors (Article 108 of the Law on Business Entities).

- Introducing a procedure for obtaining additional approval from members (or from the Board of Directors) for certain transactions that fall under the executive body's authority (Part 1, Article 53 of the Law on Business Entities), such as obtaining or providing loans, issuing guarantees or sureties, disposing of key assets, or pledging them, among others.

- Increasing the quorum required for decision-making by the LLC's collegial bodies compared to the standard set by the Law on Business Entities (Parts 1 and 2, Article 45 of the Law on Business Entities). Among other things, members can stipulate that all decisions in the LLC must be made unanimously or establish a qualified majority for decisions on specific issues of particular importance to the members. These may include the election of the director and determination of their employment terms, delegation of executive powers to a management organization, creation of subsidiaries, election of an auditor, and setting the size and conditions for their remuneration.

If any of these scenarios resonate with you, an individual LLC Charter is indispensable!

We have extensive experience in drafting founding documents for legal entities, considering your interests and the specifics of your business. We can help minimize the risk of conflicts in the future and reduce the pain of resolving them if they arise.