Liquidation of a limited liability company in Russia

There’s no point in me explaining why companies are forced to close, but today we’ll talk about how to do it in Russia and whether you can simply abandon it indefinitely. What happens if you don't liquidate your company? You might think that if your LLC doesn’t operate, you can just leave it and the authorities will understand. The liquidation procedure is complicated and troublesome, and the legal entity will eventually be closed by the Federal Tax Service, which might seem attractive. However, this decision could lead to some unpleasant consequences.

Although a dormant organization with no income or employees is not required to pay taxes or contributions to various funds, it still must report to authorities from time to time. Failure to submit reports and returns will result in fines from the Federal Tax Service and the Social Fund. Additionally, the company may be fined by Rosstat (Federal Service of State Statistics) for failing to submit statistical reports. Business owners can also face fines, and numerous violations can even result in deportation for foreign nationals.

So, if you want to shut your company down because it no longer operates, what else should you know? You might think that if your business has debts to contractors or clients and they try to collect money through court, you don’t have to pay them. The debts will just be written off with the company. Indeed, while an individual entrepreneur is liable for debts with their personal property, an LLC is only liable with its charter capital. However, the director and members can be held vicariously liable for the company’s debts and liabilities. This is called “subsidiary liability” in Russia. That means if a firm goes bankrupt and bankruptcy proceedings are initiated, but the company’s assets aren’t enough to pay creditors, the remaining debts can be recovered from its management if it’s proven that their actions led to the company’s insolvency. So, if things are bad, pretending you’re not involved won’t work.

Another point is, as I mentioned earlier, the tax service can, but doesn’t have to, forcibly liquidate an abandoned company under two conditions: no transactions on the accounts and no reporting for the last 12 months. Today, the tax service is actively cleaning up the registers of business entities. Often, they inspect premises, and tax representatives visit the LLC's registered address to verify whether business activities are being conducted there. If this is not confirmed, data on unreliability is entered into the state register.

When liquidating an organization with outstanding debts or one that didn’t submit reports, the majority participant and the director will be prohibited from registering another LLC and participating in its management for several years due to disqualification. The tax service actively checks how real the business relationships are and requires that due diligence be observed. Therefore, companies must find ways to ensure they know everything about their potential partners. If one of the founders or directors turns out to have been disqualified—whether recently or a long time ago—the chances of cooperation are almost zero. Additionally, participation in competitions and tenders is blocked.

So, if you want to continue doing business in the future, make sure to close your inactive LLC. Note that I’m talking about Russian practice, and things may be different in other countries.

How to liquidate a company?

This process takes time. Although the steps don’t have special names like dissolution, winding up, or termination in English convention, it’s still a multi-step and complex process.

1. Hold a meeting of the LLC members or prepare the sole founder’s resolution if you started the organization alone. In the minutes or resolution, write that you decided to begin a voluntary liquidation of the LLC, approve the composition of the liquidation commission and its chairman, or appoint a sole liquidator. This function can be taken on by the director, accountant, sole founder, any LLC member, or any third party—natural or legal. The liquidator or liquidation commission will manage the company, including representing the legal entity in court without the power of attorney.
   Additionally, approve the procedure and terms of liquidation. The maximum possible term is one year, and it’s safest to indicate this. For example, if you indicate that the liquidation period will be 3 months and the process drags on, you’ll need to extend it by applying to the commercial court, which will involve paying a 6,000 ruble fee and waiting for the court’s decision.
2. Report the liquidation to the tax authority within 3 days using the form R1516. In five working days, the tax office will issue a certificate confirming the entry in the Unified State Register of Legal Entities that your company is in the process of liquidation. From this moment on, you can no longer change the constituent documents.
3. Notify creditors. Publish a notice of liquidation in the State Registration Bulletin. This period can be less than 2 months. During this time, anyone to whom your LLC owes money can demand repayment of the debt. Within three working days from the decision date, enter information into the Unified Federal Register of Facts of Activities of Legal Entities. Also, send a written notice of liquidation to counterparties to whom you have debts.
4. Warn employees in writing about the upcoming dismissal no later than two months in advance. You must also submit a written notice to the employment service no later than 2 months in advance. If the dismissal is for more than 3 months, ensure this notice is provided in time. After this period, terminate the employees’ contracts. Remember to give them severance pay, compensation for unused vacation days, and maintain their average monthly salary while they’re looking for new employment, but no longer than two months.
5. Prepare the interim liquidation balance sheet. At least two months after publishing the liquidation notice, prepare an interim liquidation balance sheet. This can be done by an accountant. It must be approved by a meeting of the founders or by decision of the sole founder, then submitted to the tax office. You also need to attach confirmation of the publication in the State Registration Bulletin.
6. Pay off debts. After the interim balance sheet is approved, settle the company’s debts in the following order:
   1. Pay those owed for moral damage or harm to life and health.
   2. Pay employees for wages and severance pay.
   3. After one month, pay taxes, insurance premiums, fines, and penalties.
   4. Pay any remaining debts.
7. Prepare the final liquidation balance sheet. Once debts are cleared, prepare the final liquidation balance sheet, which must also be approved by the members or sole founder.
8. File closing reports with the tax service and social and pension funds within a month. If your LLC has any property left, it must be distributed among the participants.
9. Submit a termination request to the Federal Tax Service. The state fee for terminating a firm is just 500 rubles.

As you can see, there are many nuances that business owners must keep in mind to close their companies properly. It’s worth finding liquidation experts who will handle most of the process for you. We have extensive experience in helping with the dissolution of legal entities. If needed, don’t hesitate to contact us.