If you are planning to start a company, this material may be useful for you. This article explains what a limited liability company (LLC) is, how it operates, who its founders and participants are, what its charter and charter capital mean, and other important points company owners should know.
We often use abbreviations formed from the first letters of words. One of them is LLC. It stands for Limited Liability Company, which is a legal form of business that allows one person or several partners to establish a company and operate in most areas of business. Other examples of business structures include additional liability companies, open joint-stock companies and closed joint-stock companies.
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A Limited Liability Company (LLC) is one of the organisational and legal forms of doing business that allows a person to carry out entrepreneurial activity alone or together with partners. By the way, under Article 13 of the Civil Code of the Republic of Azerbaijan, entrepreneurial activity is an independent activity carried out by a person mainly for the purpose of earning profit or income from the use of property, production or sale of goods, performance of work or provision of services. |
The legal definition of an LLC is set out in Article 87 of the Civil Code. According to this article, an LLC:
As mentioned above, an LLC may be established by one or several founders.
The Civil Code does not directly set a numerical limit on founders. However, according to the Decision of the Plenum of the Constitutional Court dated 16 December 2011 on the interpretation of Articles 107-2.1 and 107-5.1 of the Civil Code of the Republic of Azerbaijan, the number of participants in a limited liability company is subject to the same limit as a closed joint-stock company. This limit has been set at 50.
The founders of an LLC may be individuals, legal entities, or a combination of both. An LLC may also have only one founder. However, another business company consisting of only one participant cannot act as its sole founder.
If you contact us, you can receive more detailed information about the number of founders, company registration and incorporation documents
The charter is the main incorporation document of an LLC.
It usually contains information about:
The issues that must be covered by the charter are determined by Articles 47.2 and 89 of the Civil Code. The charter is not just a formal document. It also protects the interests of the company’s participants. If disagreements arise between them, the provisions of the charter may play an important role in resolving the issue. If the LLC is established and registered online, the charter may be generated automatically through the electronic registration system.
When explaining what an LLC is, it is also important to understand charter capital. Charter capital is the initial investment made by the founders in the company. The amount, formation and payment of charter capital and related matters are regulated by Article 90 of the Civil Code. The company’s charter capital represents the minimum amount of property intended to protect the interests of its creditors. If the LLC’s charter does not specify a period for payment of charter capital, the founders must fully pay it before state registration. If a payment period is specified, it may not exceed three months.
Before state registration, the persons establishing an LLC are called founders. After registration, they become participants of the company. Participants may be citizens of Azerbaijan or foreign countries, as well as legal entities of different ownership forms.
Participants are generally not personally liable for the debts of the limited liability company. This means that if the LLC becomes insolvent, its debts to creditors are normally paid from the company’s own assets rather than the personal assets of its founders. Participants are also not responsible for each other’s obligations. Their financial risk related to the company’s activity is generally limited to the value of their contributions to the charter capital.
We have already discussed the founders, participants and charter of an LLC. However, these steps alone are not enough to start business activity. The company must also be formally established and registered with the state.
To establish an LLC:
The process is explained in more detail in the article “How to Establish an LLC in Azerbaijan”.
State registration is carried out by the State Tax Service under the Ministry of Economy of the Republic of Azerbaijan in accordance with the Law “On State Registration and State Register of Legal Entities”. Registration with the tax authorities in the required form also serves as the state registration of the LLC. Registration may also be completed electronically online in real time.
The process of establishing and registering a foreign-invested LLC is generally similar to the establishment and registration of a locally invested LLC.
Once an LLC has been established and registered, there are still several practical steps required for normal business operations. A company needs to make payments to suppliers and partners, pay taxes and other budget obligations, and comply with applicable rules for cash transactions. For these purposes, the company generally needs to open a bank account and may also need to order a company seal depending on its operational needs.
The taxes payable by an LLC depend on the taxation system applicable under the Tax Code of the Republic of Azerbaijan. LLCs that qualify as simplified tax payers may be exempt from VAT, corporate income tax and property tax, subject to the conditions established by law.
If the company no longer uses the simplified tax regime and becomes a corporate income tax payer, it may also be required to calculate and pay property tax. If the company registers for VAT, it must calculate and pay VAT to the state budget in accordance with the Tax Code, taking into account any deductible VAT amounts where applicable.
If you have questions about choosing the appropriate tax regime, you can use our tax consulting service. Our specialists can help you assess suitable options for your business
Regardless of the chosen tax regime, when salaries are paid to employees, the company must also make the required social insurance and other statutory payments. Our employee settlement service can help you manage these processes without expanding your internal accounting team.
The required reports are determined by the Tax Code and other relevant legislation. To prepare and submit reports correctly and on time, an LLC should maintain proper:
Accounting requirements, tax legislation and reporting rules are regularly updated. To stay informed about these changes, you can use our accounting consultation service or request a callback
Although liquidation goes beyond the basic question of what an LLC is, it is still an important part of understanding the full life cycle of a company. At some point, a business may need to be reorganised or liquidated depending on its circumstances. Closing a company is usually much more complicated than opening one.
The liquidation process may include:
The process may take several months.
The exact procedure depends on whether the liquidation is voluntary or compulsory.
Conclusion
In this article, we explained what the abbreviation LLC means and looked at the main features of a limited liability company as a legal form of business. We also covered how an LLC is established, what its charter and charter capital are, who its founders and participants may be, how state registration works, and what basic tax and reporting obligations may apply.
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