Perhaps one of the first questions for starting a business concerns the corporate structure of the business. In this regard, it is necessary to fully identify the available corporate vehicles and then proceed to establishment of company. This article provides a short comparative study of two important corporate vehicles under the Iranian law.
A. Corporate Vehicles
Legal or natural persons whether Iranian of foreigner can establish a company in Iran under the Commercial Code. The Commercial Code has provided the following corporate vehicles:
• Public Joint Stock Company (Sherkat Sahami Aam);
• Private Joint Stock Company (Sherkat Sahami Khas);
• Limited Liability Company (Sherkat ba Masouliyat Mahdoud);
• General Partnership (Sherkat Tazamoni, cooperative partnership);
• Limited Partnership (Sherkat Mokhtalet Gheyr Sahami);
• Joint Stock Partnership (Sherkat Mokhtalet Sahami);
• Proportional Liability Partnership (Sherkat Nesbi);
• Production and Consumption Cooperation Company (Sherkat Tavavoni Tolid va Masraf).
In practice most persons choose either the Private Joint Stock Company (PJSC) or the Limited Liability Company (LLC) mainly because in both vehicles the liability of shareholders is limited to value of their share. In general LLC is contemplated to be appropriate for trading and small investments and PJSC is suitable for large investments or joint ventures. In any case selecting either vehicles require studying and reviewing the business plan and also legal framework of the business sector since for example in some sectors the only available option is PJSC.
B. Limited Liability & Private Joint Stock Company in a Glance
Limited Liability Company (Sherkat ba Masouliyat Mahdoud) is formed between at least two partners whether individual or company. The main characteristic of such company is that liability of shareholders is limited to the amount contributed to the company capital. Also, capital is divided into partnership portions and not shares. The term “Limited Liability Company” must appear immediately before or after the company’s name; otherwise, if it does not appear in the aforementioned manner, the company shall be considered as a general partnership. The name of the company must not include the name of any partners, otherwise the partner whose name appears will be considered as a member of a general partnership with unlimited liability towards the third party. Regarding management, LLC may be managed by one or more directors, with or without salary from within the partners or outside of their circle for unlimited period. LLC has a distinct and independent legal personality and is able to start proceedings against others and also it may be sued.
Private Joint Stock (Sherkat Sahami Khas) shall consist of at least 3 shareholders. The capital is divided into shares and the liability of each shareholder is limited to the nominal value of their shares. Like the LLC, PJSC enjoys from a separate legal personality which is distinct from its shareholders. Consequently, personal property of shareholders is immune from debts of the company and no creditor may be able to use such property for payment of debt. Also, due to distinct legal personality of such company, it may sue others and it may be sued. As it is inferred from the term “private”, shares are not offered to the public. Transfer of shares may be restricted in articles of association. Furthermore, the term “Private Joint Stock Company” must be appeared immediately before or after the name in a legible printing in all letter heads, notices and etc.
Although liability of the shareholders in both LLC and PJSC is limited to their shares, these two company types have the following differences:
• LLC is based on an old law which has been enacted in 1928 and does not contain detailed provisions on governance of the company and overall is not transparent enough for third parties. On the other hand, PJSC is governed by relatively newer regulations enacted in 1969. Such law contains detailed regulations on the internal structure and decision making of the company and is more appropriate for investment;
• In LLC, there should be at least 2 partners but if shareholders are more than 12 persons, then a Inspector Board shall be formed in accordance with article 109 of the Commercial Code. However, in PJSC, there should be at least 3 partners and inspectors shall be appointed in any case;
• LLC may have paid or unpaid directors or director for unlimited period from among or outside of the shareholders. In contrast, A PJSC may have paid or unpaid directors or director for a limited period, only chosen from among the shareholders;
• On the one hand, LLC governance structure is comprised of a General Assembly of Shareholders and Directors; If the shareholders are more than 12 persons, then appointment of an Inspector Board is mandatory. On the other hand, PJSC governance structure is comprised of General Assembly of Shareholders (Founding, Ordinary or Extraordinary), Director or Board of Directors and also inspectors;
• In accordance with Iranian Commercial Code, in PJSC one-twentieth (1/20) of gross profit shall be deducted as “Legal Reserve Fund” until such Reserve amounts to one-tenth (1/10) of the company capital; after that this requirement would not apply. However, no such provision applies to LLC;
• LLC shall be dissolved by the decisions of the shareholders who own more than 50 percent of the capital. But PJSC may be dissolved by convening an Extraordinary General Assembly meeting and passing a resolution on dissolution of the company, the company goes into the process of liquidation; for this purpose, a liquidator shall be chosen by the said assembly and usually takes around 2 years to finish the liquidation;
• In Joint Stock Company we have the concept of subscribed share capital which means although the shareholders must subscribe 100% of the capital, only 35% of the company’s capital need be paid at the time of formation. In LLC, all the capital must be acknowledged to have been received by the directors but no amount shall be paid at the time of formation;
C. Registration Procedure
In this part, an overview of the company registration has been provided. There is no difference between PJSC and LLC from registration point of view EXCEPT in PJSC 35% of the capital shall be paid to the bank in the process of formation. The practical phases are:
• Documents Preparation: The applicants are required to prepare some documents for the purpose of registration;
• Translation: In case of foreign applicants whether company or individual, all documents shall be translated by certified and official translator;
• Obtaining FIDA Code: In case of foreign applicants, FIDA is an identification code given to foreign natural and legal persons regardless of their title whether partner or manager or inspector; such code is issued by Iranian Tax Administration based on the information of such persons and their ID cards;
• Online Registration: Upon preparation and/or translation of all required documents and obtaining FIDA code, online registration of the company will begin.
• Signing the Documents: After online registration, the applicant shall sign all relevant documents; such documents shall be mailed to Company Registration General Office. After check and control of documents by the Office, the company registration applicant shall pay all costs and fees to obtain registration code and official newspaper.
A brief introduction on LLC and PJSC was provided in this essay; more detailed and elaborate insight on such corporate vehicles requires a deep and thorough analysis of the contemplated business. As a result, it is necessary to make decision in regard to company registration in accordance with the business plan and also legal advice.