Tuesday, December 28, 2010

Doing Business in Russia

I was recently browsing through discussions and postings on LinkedIn groups and found an interesting article that I would like to share with you. It was posted on FizzLaw group’s bulletin, a group dedicated to providing small businesses with access to small business lawyers. Originally being from Russia, I have always been interested in understanding how business is done there. This article was written by Daniel J. Alexander II, an attorney and a member of FizzLaw group. The full text can be found on his blog at http://www.outhousegeneralcounsel.com/2010/10/establishing-legal-presence-in-russia.html

The article presents a well researched summary of current Russian laws relevant to business formation. Just one more note: I have not personally verified the research and, knowing the constantly changing nature of Russian laws and regulations, I believe it would be wise to check the information below before relying on it to open a business in Russia. I also had to make minor formatting changes to be able to repost here.

“A foreign investor may act through one of several legal forms:

►As a representative or branch office of foreign legal entity;
►As a Russian legal entity; and
►As a foreign investor.

The procedures for establishing a company in Russia are quite well-developed and are regulated by the RF Civil Code and by additional RF laws.

Russian Legal Entities

In accordance with the Civil Code, the following are some of the most important types of legal entities:

►Joint stock companies (JSC);
►Limited liability companies (LLC);
►Additional liability companies;
►General partnerships; and
►Limited partnerships.

Joint stock and limited liability companies are forms that are most frequently used by foreign investors to enter the Russian market and are reviewed below.

Limited Liability Company

The limited liability company (hereinafter LLC) is recognized as a company established by one or more persons, whose authorized capital is divided into participation interests, the size of which is stipulated by founding documents. Participants of the LLC do not bear liability by its obligations but bear the risk of losses connected with the company's activity within the cost of the contributions they have made. An LLC can be founded by either a person or group of people, or a Russian or foreign company. The number of participants in an LLC cannot exceed 50. If the number of exceeds 50, then the LLC is subject to reorganization into a JSC within a year. On the expiry of this term, if the number of participants has not been reduced, it shall be liquidated under the court decision. The minimum authorized capital may not be less than RUR 10,000 (approximately $370) and at least 50 percent of the capital must be paid in prior to the company’s registration. Contributions can be made in cash or in-kind.

The founding documents of an LLC are known as Articles of Incorporation signed by its founders, and the Charter, which is approved by them. If the company is set up by a single person, its foundation document is the Charter.

An LLC has a three-tier management structure which consists of:

►General participants meeting, the highest governing body which has exclusive rights to amend the Charter, approve annual financial reports, etc;
►Board of Directors, which supervises the general company’s activity; and
►Executive body, which may be an individual (usually the general director) and a collegial body. The primary function of the executive body is the daily management of a company.

Joint Stock Company

A joint stock company (JSC) is a company, whose authorized capital is divided into a definite number of shares; the owners of the JSC (the shareholders) do not bear liability for its obligations, but do accept the risks involved with losses connected to the JSC’s activity within the value of their shares.

There are two types of JSCs:

►Closed joint stock companies (CJSC); and
►Open joint stock companies. (OJSC)

The distinctions between the two above mentioned forms are as follows:

Open Joint Stock Company

►Minimum authorized capital is RUR 10 000 (approximately $370)
►Unlimited number of shareholders
►Shares may be freely sold to third parties

Closed Joint Stock Company

►Minimum authorized capital is RUR 100,000 (approximately $3,700)
►Limited number of shareholders, which cannot exceed 50. Otherwise, the company is subject to reorganization into Open Joint Stock Company within one year

►Shares may not be freely sold. Share transfers are subject to preemptive rights of other shareholders

The management structure of a JSC is similar to the management structure of an LLC. Both open and closed JSCs are obliged to have two governing bodies: the General Shareholders’ Meeting and the Executive Body. The OJSC with over 50 shareholders must have a Board of Directors or Supervisory Council. Furthermore, a JSC must annually undergo a professional outside audit for control and approval of its annual financial reports.

Branch and Representative Offices

Branch and representative offices of foreign legal entities are not considered to be Russian legal entities, but bodies representing the interests of foreign legal entity with headquarters in another country.

Representative Office

►A representative office is subdivision of a foreign legal entity which represents the company’s (headquarters) interests in Russia and cannot undertake commercial activity. The main purpose of establishing a representative office is marketing research for the Russian market and promotion of commercial relations between the head company and Russian companies.
►The term for which a representative office can be set up is a maximum of three years, with the right of extension.


►A branch is a subdivision of a foreign legal entity which may undertake commercial activity.
►The term for which a branch can be set up is up to five years, with the right of extension.

The management structure of a representative or a branch office is represented by the executive body in the person of the head of the branch or representative office. The head of the subdivision of a foreign legal entity acts on the basis of a Power of Attorney issued by the parent company.


Once a form of a legal presence is chosen, the procedure for state registration must be started. In accordance with the Federal Law “On State Registration of Legal Entities,” registration is performed by tax authorities which file documents with the Unified State Register within five days.

Afterwards, the following procedures must be completed:

►Registration with the State Statistics Committee
►Registration with non-budgetary funds (the Pension Fund, Obligatory Medical Insurance Fund and Social Security Fund)
►Opening of bank accounts
►Notification of tax authorities about the opening of bank accounts
►Production and registration of a company’s seal
►In case of establishing a JSC, the securities issue must be registered with the Federal Service for Financial Markets of the Russian Federation.

Branches and representative offices must also be accredited with state bodies authorized to grant such accreditation. Usually, these authorities include the State Registration Chamber at the Ministry of Justice of the Russian Federation, the Chamber of Commerce and Industry and various Ministries of Russia. For example, if the company is engaged in educational activity, a representative or branch office may be accredited with Ministry of Education.

To establish a company, a foreign investor has to prepare a comprehensive list of documents required by Russian law. All documents from the home country of a foreign legal entity must be notarized and apostilled and a notarized translation into Russian must be provided.”

Friday, December 17, 2010

12-Month Extension on the 100% Capital Gain Exclusion for Investments into Small Businesses

Today, President Obama signed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” (the “Act”).  Among other features, the Act extends for an additional year the 100% exclusion from federal capital gains tax for sales of qualified small business stock (QSBS) purchased during 2011.  As I wrote in my earlier post from November 15, 2010, this benefit previously applied only with respect of stock purchased through the end of 2010.  This extension provides a continued incentive for investment in small businesses.  Note that the QSBS must be held for 5 years in order to qualify for the tax exclusion.

Trade Name vs Trade Mark

Is a trade name the same as a trade mark? What is the difference between the two terms? Should I trademark my business name? These are the commonly asked questions that today’s post aims to answer.

Trade name is the official legal name of your business entity. This name appears on the incorporation papers and you can find it if you search the Department of State business registry. You use this name to open bank accounts, obtain business credit cards, and this name is the one you use to pursue or defend a claim in courts. Trademark, on the other hand, is any word, design, slogan, sound or symbol that serves to identify the source of goods or services (service mark).

Not every trade name (or business name) may be trademarked. You should trademark your trade name only if you use it in commerce to advertise, promote or identify the source of goods or services your company produces. For example, Google is both a trade name (there is a Delaware corporation called “Google”) and a trademark (because Google puts its name on its products and services to identify the source). On the other hand, TJ Maxx is a trademark for retail department store services, but is not a trade name. The actual name of the company is TJX Operating Companies, Inc., which is a trade name that consumers would not typically identify with what TJ Maxx does.

Just having the name registered with the New York Department of State as a name of your business does not afford you protection against someone using the same name as a trademark. For example, person A started marketing his handbags under the name “Handy Bandy” in New York in 2000 without forming a legal entity. Person B could form a legal entity “Handy Bandy” and register it with the New York State in 2004. This is possible because in the NY Department of State registry the name is still available. However, person B would not be able to use this name as a trademark to identify the source of handbags because person A already uses this name for this purpose and has a common law trademark. The reverse may also be true. If person A registered his business in New York State under the name “Handy Bandy” in 2000, there may be an argument made that if person A does not use this name as a trademark, then the name may be available to person B wishing to use it as a trademark to advertise and sell handbags. This would be a difficult but not an impossible argument to make.

In conclusion, business owners may want to consider whether they use their trade names as trademarks, and if they do, to register them with the U.S. Patent and Trademark Office.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Sunday, December 12, 2010

Virtual World: Get Ready to Meet COICA (Combating Online Infringements and Counterfeits Act)

On November 18, 2010, the Senate Judiciary Committee unanimously approved COICA, a legislation that, if passed by the full Congress and signed by the President, would allow the Attorney General to commence a legal action to obtain injunction against the domain name of any website suspected of infringing copyrights or trademarks. It would also allow Attorney General to ban credit card companies from processing US payments to the website and forbid online ad networks from working with the website.

In particular, the Act would allow the Attorney General to seek a temporary restraining order, preliminary or permanent injunction against a domain name used by a website if the domain name is used by the website “dedicated to infringing activities”, i.e., if the website is “primarily designed, has no demonstrable commercially significant purpose or use other than, or is marketed by its operator, or by a person acting in concert with the operator, to" infringe copyrights or trademarks and such infringing activities, if taken together, are "central to the activity” of the website. The definition is extremely broad and is met if the website includes "a link or aggregated links to other sites or Internet resources for obtaining access to” infringing products or services.

The injunctive relief can be obtained against the domain name registrar where the website is registered, the domain name registry which maintains the database of names for the target website’s domain, and any of the service provides or operators of network linked to the Internet. If the injunctive relief is obtained, the domain registrar, registry or service operator must suspend operation of the domain name, but can petition the court for relief from such order.

When initiating a legal action, the Attorney General must notify the domain registrant of the alleged violation and its intent to obtain injunction, as well as publish a notice of the action once the injunction is obtained.

The Act also gives the Attorney General the right to keep a list of websites that meet the definition of “dedicated to infringing activities” but which have not been the subject of suspension. A website owner would have to bring an action against the Attorney General in federal court to be considered for removal from such list.

The Act has been subject to a lot of criticism. One such criticism is that the Act violates the freedom of speech protected by the First Amendment. (See Law Professors’ Letter in Opposition to S.3804, signed by 51 law professors, available at http://www.eff.org/files). Another important criticism raised by the Letter is that domain registrars, registries or service providers will have “no information whatsoever concerning the allegations regarding the presence of infringing content at the target websites because they have no relationship to the operators of those websites; they are therefore in no position, and they have no conceivable incentive, to contest those allegations. The Act contains no provisions designed to ensure that the persons actually responsible for the allegedly infringing content – the operators of the target websites – are even aware of the proceedings against them, let alone have been afforded any meaningful opportunity to contest the allegations in a true, adversarial proceeding.” Additional objections have been raised in a Letter from NetCoalition.com (which represents Amazon, Bloomberg, eBay, Google, IAC, Yahoo!, Wikipedia and others), dated November 15, 2010, available also at http://www.eff.org/files.

According to Wired.com, “COICA is the latest effort by Hollywood, the recording industry and the big media companies to stem the tidal wave of internet file sharing that has upended those industries and, they claim, cost them tens of billions of dollars over the last decade. The content companies have tried suing college students. They’ve tried suing internet startups. Now they want the federal government to act as their private security agents, policing the internet for suspected pirates before making them walk the digital plank.” (http://www.wired.com/epicenter/2010/11/coica-web-censorship-bill).

In conclusion, the Act, if passed, may not pass judicial scrutiny given constitutional concerns. Also, financial burden resulting from business interruption and legal fees for some (especially smaller or lesser known) websites could be astronomical. Finally, there are already civil and criminal remedies set in place by current trademark or copyright laws, - is there really a need for such radical measures?