Azerbaijani law recognizes a sole proprietorship - in Azerbaijan, an individual may engage in a business activity without forming a legal person. An individual obtains the status of a sole proprietor after registering with the Azerbaijani Ministry of Taxes. Upon the registration, the Ministry of Taxes issues to the sole proprietor a certificate, which indicates the person’s tax
identification number (TIN). For her business related matters in most cases a sole proprietor is identified by her TIN.
Sole proprietorship is more suitable for small businesses. The most significant downside of operating as a sole proprietor is an unlimited liability that a person becomes exposed to – i.e., creditors may go after non-business related property of the sole proprietor.
Partnerships and LLCs
The Civil Code recognizes two types of partnerships: general partnership and limited partnership. In general, partnership partners have unlimited liability – i.e., creditors may go after a partner’s personal property if the partnership property does not cover the partnership’s debt. The default rules of the Civil Code entitle partners equal rights in governing the partnership. Perhaps the most significant distinguishing feature of the partnership, however, is that many issues, such as governance and distribution of profit and loss, may be allocated among partners pursuant to an agreement between partners. In other words, laws set out few mandatory rules (i.e., rules that may not be changed by agreement) and leaves many important issues to partners. In a limited partnership general partners have unlimited liability, while limited partners (typically investors) may only lose their investment if the partnership becomes insolvent and gets liquidated. There are very few registered partnerships in the Azerbaijani market8.
Most individuals, who are engaged in business through a legal entity, prefer to form a limited liability company (LLC). LLC, on one hand, offers relative flexibility in designing the governance structure, on the other hand, limits the liability of its members (i.e., shareholders). General meeting of members of an LLC (GMP) is the supreme governing body of an LLC. In case an LLC has only one member, that member acts by issuing decisions. The Civil Code allocates certain key decisions, such as reorganization (including merger), liquidation of an LLC and distribution of dividends, to the GMP’s exclusive competence. Making decisions on most other issues may be assigned to other governing bodies of an LLC, which GMP may freely create.
While members may enter into a members’ (or shareholders’) agreement, most governance related issues must be governed by the LLC’s charter. The charter of an LLC, which is its key constitutional document, should govern in detail, among other things, procedure for convening GMP and other collegial bodies, appointment of LLC’s directors and officers.
The Civil Code also provides for and governs additional liability companies (ADL). Members of an ADL may take liabilities in addition to their contributions. Members’ liabilities must be determined in the ADL’s charter. In most other matters, ADLs are similar to LLCs. It is fair to say that ADLs are not popular in Azerbaijan.
Joint Stock Companies
The Civil Code provides for two types of joint stock companies (JSC or stock company) – open and closed joint stock companies. The idea of open joint stock companies is very similar to public companies. They issue shares that may be traded in open securities market. Closed joint stock companies (CJSC) are meant as closed corporations – shares of a CJSC can be traded among limited number of persons, such as its existing shareholders.
A JSC may issues two types of equity securities – common shares and preferred shares. Holders of a preferred share are entitled to dividends irrespective of the company’s operation, except when as a result of distribution the JSC may become insolvent. As a general rule, holders of a preferred share are not entitled to vote in the general meeting of shareholders. They may, however, receive the right to vote on certain important matters, such as the reorganization and liquidation of a company.
General meeting of shareholders (GMS) of a joint stock company is its supreme governing body. GMS’ decision on certain matters is a must. In particular, it is the GMS that must ultimately decide on liquidation, reorganization (including merger) and distribution of dividends. Any changes to a JSC’s charter must be approved by its shareholders.
A stock company must have its supervisory council and audit committee, if the number of its shareholders exceeds 50. Below that threshold supervisory council and audit committees are optional. A supervisory council is meant as an institution, which oversees the executive management and assists the general meeting of shareholders. A stock company must also have its executive management.
While the Civil Code does set out certain requirements with respect to corporate governance of JSCs, a charter of a JSC is an important document where most corporate governance-related matters, including powers of the JSC’s governing bodies, would be specified. For instance, passive investors, who want to retain a control over the executive management, may use the supervisory council for such purposes, provided the necessary control mechanisms are specified in the JSC’s charter.
With respect to distributions, a general meeting of shareholders of a JSC makes final the decision on distribution of dividends. However, a supervisory council or, in the absence of the council, the company’s executive management must propose and include into the agenda the distribution of dividends. Effectively, the authority to distribute dividends is shared between the management and shareholders (unless the charter contains a different procedure for distribution of dividends).
Dividends must be distributed out of net profits. The Civil Code also sets forth a balance sheet test for the distribution of dividends: a JSC may not distribute dividends if as a result of this distribution the value of the company’s net assets will be lower than the value of the company’ charter (or stated) capital.
Branches and Representative Offices
Foreign investors, who do not wish to establish a subsidiary in Azerbaijan, prefer registering a branch or representative office. According to the Civil Code a branch or representative office, is not a separate legal entity, but part of a legal entity. Therefore, any actions that branch or representative office takes are deemed to have been taken by the legal person itself.
Registration of a legal person in Azerbaijan is primarily governed by the Civil Code and the Azerbaijani Law On Registration and State Register of Legal Persons9. The Azerbaijani Ministry of Taxes is the government authority responsible for the registration of commercial legal entities. As a general rule, a person (physical or legal), who wants to register an entity in Azerbaijan must submit to the Ministry of Taxes, among other things, the decision on forming an entity, charter of the entity, its own identification documents (constitutional documents for legal persons and passport or identification card for physical persons), bank receipt evidencing payment of a state duty.
Foreign entities wishing to register their subsidiaries or branch (representative) offices in Azerbaijan typically submit documents (such as their constitutional documents) which are in a foreign language (i.e., non-Azerbaijani language). Those documents must be legalized, and their Azerbaijani translation notarized locally. Azerbaijan has acceded to the 1961 Hague Convention on apostille, and documents originating from member countries maybe apostilled. Apostille is a certificate attached to a public document, which simplifies the procedure for legalizing a foreign document through approval of consular departments.