Company registration in Georgia from the perspective of the new Law of Georgia on Entrepreneurs
Company registration in Georgia has been a target for many international entrepreneurs and investors. Georgia, Tbilisi, is known for its fast and easy formation process. Creating a well-functioning market economy and encouraging fundamental foundations is the existence of effective corporate relations. At the beginning of 2022, numerous amendments were adopted to the Law of Georgia on Entrepreneurs, which was aimed to improve business and bring the market closer to European regulations. In this comprehensive overview, we mainly discuss those changes and innovations that were not presented in the previous Law on Entrepreneurs or the ones that existed but now have more detailed regulation than before. In the case you need more detail informaton we are here to help you.
To register a business in Georgia it is necessary to register a company in the Business Registry of Georgia (Register of Entrepreneurs and Non-Entrepreneurial Legal Entities). Before new regulations, only three main requirements for registration were needed: 1) Company Charter – the draft was in Georgian and English languages; it only needed to fill out; 2) Notarized copy of a passport; 3) legal address;
Based on the current Law on Entrepreneurs, a new document is required for the registration of an entrepreneurial company. This document is called the “founding agreement.” The funding agreement includes identification information and provisions of law. In this regard, Partner’s General Agreement is based on the following approach: the statute should be a kind of constitution of an entrepreneurial society, the need for a change of which seldom must stand. In this document following information needs to be indicated and is a must: Business Entity Legal form, Business Entity Official Name, Legal Address, Number of shares placed, Partners and shareholders’ participation in equity, Member/members of the governing body, The scope of representative authority of the members of the governing body, The person responsible for the management and representation of the entity’s authorized user’s e-mail address and his/her mobile phone number and e-mail address of the mobile operator operating in Georgia in his/her possession/use, the E-mail address of the person responsible for the management and e-mail of the subject’s authorized user’s e-mail address, Georgian Phone Number.
Another mandatory document for establishing business is the Company Charter. Before changes, while requesting company registration in the House of Justice the draft was available in both Georgian and English, it was easy to fill out with information and requirements. According to the law, by order N791 of the Minister of Justice of Georgia on November 29, 2021, the standard charters (non-individualized text) of entrepreneurial societies were approved, which can be used according to the desire of the enterprise. There is a standard charter draft, for different forms of societies approved by the Minister of Justice, which can be found on the official web page; However, all of them are in Georgian. We have all charters in English and Georgian ready for you and we will do all necessary amendments based on your specific needs.
Likewise, it is not the only concern. Based on the new regulations, the charter is the main document regulating the ruling process of the company. It establishes the content of the charter for the entrepreneurial community as part of the founding agreement and it includes data: the legal form of the company, subject of activity, shares, restrictions on property rights, ruling regulations, the scope of the partners’ decision, the right to appoint/dismiss the director, the rights of the director, the scope of the director’s decisions, liquidation and etc.
Before the new changes and now there is additional indispensability to present the passport of the founders (partners) and its notarized translation (if the passport is not in English or Russian).
A standard additional necessity is a signature, which must be signed in front of the consultant (Employee of House of Justice) at the time of company registration in order to confirm the signature as well.
The Business Registration Service of the National Agency of Public Registry of the House of Justice is responsible for the formal verification of the submitted documents. Agency only carries out formal creation and in case of any problem, the process is suspended, and the party will be given an additional deadline to rectify the issue. It is a must to know that the submitting person is responsible for the material accuracy of the information.
Changes in business registration procedures apply to the registering authority both during initial registration and when changing the registered data, and scope of the inspection. According to the law, it is the responsibility of the registration body only for the formal accuracy of the submitted documentation and not the material accuracy verification, which implies that he is responsible for the registered data and the compatibility of the registration or other documentation kept with him and safety.
Unified Portal of e-Service – Your company account on www.my.gov.ge/en-us
The 2022 changes also affected the post-registration stages of the company. In accordance with the legislation, a unified electronic portal has been created, on which registration is mandatory and companies will use it in their future working processes. On the portal following should be posted:
Agency decisions on registration
- Documents related to registration proceedings.
- Information published by the public in accordance with the law.
- After completing all the above-mentioned procedures, the company needs to have a revenue service account, pay taxes and operate legally in the business market. This part has not changed and remains the mandatory part of business functioning.
Additional changes to the process of business registration and operations in Georgia since 2022 are:
Entrepreneur brand name - before you start we will do name check
The regulation related to the brand name of the enterprise (the name under which the entrepreneur carries out its activities) has also been changed.
Just as before, a brand name can be any name. However, it is important that a new law has imperative requirements stating what cannot be used as a brand name. Here are the main prohibitions established by law:
- Anti-state / discord or violence approval / inciting / propaganda word or collocation;
- Discriminatory or against public order / universally recognized moral norms word or collocation;
- Misleading additional words;
- Name identical or similar to the state or governmental institution, where such institutions or state has no equity participation;
- Physical person’s name, without his/her consent;
- Identical or similar name that is already registered by other legal entity in Georgia or which is universally known in Georgia, without his/her consent;
- Censored or offensive word or collocation;
The law also defines the responsibility of a person, who illegally uses another legal entity’s brand name. In such a case, this person is obliged to stop such use at the request of the authorized person and to compensate for the damage caused by the illegal use.
An authorized person can claim or require to concede income received by the breaching party for the unauthorized use of the brand name.
There are a lot of identical or very similar brand names in Georgia, including the names of famous brands. We assume that this is the reason why the law grants a two-year period for the entities to get in compliance with the new legislation. After two years the entities that still are not in compliance with the law will receive 3 months period to fix that. If within that three months the entity still does not change the name – it will be regarded as dissolved.
Individual entrepreneurs now may indicate in their title their name and/or surname, but previously it was required to mention both (name and surname together).
Business Letter and Website
Also, new legislative innovation is related to business letters and websites.
According to the changes – all business letters and websites of the entity (a limited liability partnership, limited liability company, joint-stock company) should indicate at least the following information: company name, legal address and identification number.
These requirements of corporate law apply for both material and electronic forms of a business letter. It is quite unclear though what does the business letter mean exactly. Conservative interpretation of this collocation might lead us to any sort of document/file made on behalf of a company, including any sort of email correspondence with any person.
An enterprise that is in process of liquidation shall mention “in process of liquidation” next to its brand name in any business letter.
The same rule applies to a person which undergoes insolvency procedures. This person is obliged to indicate “in process of insolvency” or indicate particular regime of insolvency it has – “recovery regime” or “bankruptcy regime”. The foreign country’s branch office in Georgia should indicate in each of its business letters the registration authority and its registration number.
Information about the company mentioned in the business letter shall also be mentioned on the website of the company (if it has a website). So from 1 Jan 2022, it is mandatory to have at least the following data on the website of the company: a company brand name, identification code and legal address. The administrative responsibility in accordance with Georgian legislation will rely on the person managing and representing a company for the non-fulfilment of these obligations.
This is one of those changes, which will also have an impact on all the legal entities. Compliance with it is required for all Georgian enterprises.
Rules for Submitting Notification by The Registration Authority
The new law consists of rules for the delivery of notification by the registration authority.
The notification will be considered as delivered will be considered in the following cases:
- Once the entrepreneur reads the notification;
- From the moment of delivery of the notification to the legal address or
- On the 15th day after posting the notification on the electronic address.
Registration authority has created an electronic portal for communication and electronic services. The electronic address is the authorized page of the enterprise within this electronic portal.
The existence of electronic addresses will make communication with regulation authorities much more convenient. Most likely, from now on the physical delivery of the notification will be conducted in rare cases which will make regulation of corporate matters much easier and effective.
Management Body / Person
The concept of the director is no longer found in the new Law on Entrepreneurs. Instead of it, the new law has the following collocation – management body/management person. Management of the enterprise can be conducted jointly or severally, as it was before.
There is important change related to emphasizing the management person’s responsibility in front of the enterprise. Particularly, the article on freedom of business decision states that the management person is exempt from the obligation of compensation of damages if it was acting based on sufficient and trustworthy information, based on the interests of the enterprise, freely and without conflict of interests or others’ influence. This exemption does not apply if the management person was acting against the obligations determined by the charter of the company or the state laws.
The new corporate law announced the types of liability for violation o f the competition rules by the management person. The maximum possible term for the violation of the competition rules is increased to 3 years after the resignation from the position. Competition Rules prohibits the management person from being involved/being a manager in the same business activity in another company without the consent of the shareholders.
In case of violation of the competition rules, the enterprise can claim compensation from the management person for the damages together with the agreed interest. Alternatively, in accordance with the corporate law changes the enterprise may claim transfer of the funds/benefits or the rights to claim benefits received from the conclusion of an agreement on behalf of the enterprise or a third party. Mentioned claims are not effective in case the person appointing management person knew that the management person is involved in other business with the same activity.
It should also be noted, that any reservation related to restriction on appointment or resignation of management person/management body (even under an agreement) is considered invalid. We assume that this clause is made to prevent any situation when the company is frozen due to the lack of a director or obligation to have the existing one.
A novelty is also an employment (service) contract that is concluded between the enterprise and the person authorized to represent an enterprise.
Once the decision on appointing of a management person on its position is made (which is enough in order to grant representative rights) – in parallel an employment (service) contract is made between Georgian LLC / JSC / LLP and the management person. Notably, labour law does not apply to such an agreement.
Employment (service) agreement consists of rights and obligations, remuneration rules etc. related to management person. This agreement is subject to civil code norms instead of labour laws.
Service contract for the implementation of the heads of individual rights – responsibilities, compensation rules and others. This contract is not an employment contract and it is subject to the norms of the Civil Code.
If there is no information about the remuneration of the management person in this contract, it is assumed, that the person conducts its activities free of charge. Resignation of the management person automatically leads to termination of employment (service) contract, if not agreed otherwise under the contract.
The new corporate law of Georgia regulates the industry reorganization in detail: types of reorganization, procedures, the satisfaction of creditors, purchase of the shares by the partner. There is a lot of innovations and specifications in this part of the corporate law.
Termination of the Enterprise
The new law on entrepreneurs mentions three stages of termination of the enterprise:
1. Enterprise Dissolution
The basis for the dissolution of the enterprise may be the decision of the partners; Violation of the requirements of the law related to the mandatory number of partners; Enforcement of the criminal court verdict; enforcement of the decision of the court on the basis of partner’s application/lawsuit; Other basis provided by the charter.
The novelty is the basis when the partner’s application/lawsuit may be ground for dissolution. For such dissolution, the partner shall have an important basis, which shall be determined in each case individually. The important basis might be considered when one of the partners intentionally or due to gross dismissiveness violates the law or obligations under the charter of the company. Another case might be when the partner cannot execute its obligations and it becomes impossible to reach the goal of the enterprise.
At the same time, the interest of other partners in extending the existence of the enterprise should be taken into account as well. Enterprise dissolved on the basis of partner’s decision might still continue existence if 3/4th of votes of the general meeting agrees with it and process of transfer of assets of the company is not yet initiated.
2. Liquidation of the Enterprise
The liquidation process starts after the dissolution of the enterprise and a respective liquidator is appointed, who shall satisfy the requirements of the managing person. During the liquidation process, the enterprise still has a status of a legal entity, however, the brand name of the enterprise shall also be mentioned: “under liquidation process”.
The law requires the liquidators to publish on the electronic address or on their own webpage a statement and simultaneously inform the creditors about the dissolution of the enterprise and invite them for the satisfaction of their claims. The enterprise that is under liquidation process shall distribute assets of a company on partners pro-rata to their shares in the company. A particular date is specified for this depending on the basis of the dissolution of the company.
3. Termination of Registration
The liquidation process is completed after the full distribution of the enterprise’s property. Liquidators shall apply to the registration authority to register liquidation of the enterprise, on the basis of which registration authority terminates the registration of the enterprise.
If after the liquidation process it turns out that there is property left in the name of the company or that the liquidation process is not finalized – the court will appoint a liquidator again in order to finalize the liquidation procedure.
Limitation Period and Rescission, Right and Timeframe of Appeal
A separate chapter in the law deals with the statute of limitation period and statutes of rescission, powers and deadlines for appeal. Novelty is the determination of rescissions rights separately. Term for rescissions was determined for up to 6 months. The norm defines the list of persons who has a right to rescission with respect to the decision of the general meeting, board of directors and management body/ person decision. The claim for rescission shall be submitted within 1 month (no later than 6 months after the decision), however, if the general meeting was invited and conducted with gross violation of the law or charter the term for the rescission increase up to one year.
The law imperatively stipulates that the missed timeframe for appealing a decision shall not be resumed.
Types of shares of Georgian Limited Liability Company (LLC)
Important changes that the new Law on Entrepreneurs has brought is the easiness of attracting capital in the enterprise. Particularly it is done through granting LLC a possibility to issue authorized shares and other types/classes of shares.
The capital structure became more flexible and it became more similar to the characteristics of the Joint Stock Company structure. These novelties will make the process of financing the company easier for the investors through participation in equity.
The law stipulates the division of the shares of the capital of LLC on subscribed shares, issued and authorized shares:
- The subscribed share – such share is considered as placed, if it is issued by the LLC to the other person in return for remuneration, irrespective of the fact of its payment. The subscribed share should be distinguished from the subscribed capital, whose main function is to form the initial capital of the company (i.e.: The authorized capital (statutory capital, legal capital, charter capital, subscribed capital) and is mandatory only in case of the joint-stock company.
- Issued shares – shares the decision of issuance of which was made by the body determined by the decision of the partners or by the charter or made by the partners. The issued shares are registered in the register and do not give rise to any rights and obligations before placement. The placement of shares is carried out by the head of the LLC.
- Authorized shares – a share that may be issued and placed in the future at the discretion of the partners. The amount of the allowed share, the class, the corresponding share in the capital of the limited liability company, as well as its nominal value (if such a value is established) shall be reflected in the founding agreement of the limited liability company.
Under the New Law on Entrepreneurs, shares may be of nominal value or without such value. If the LLC has only shared with a nominal value, the amount of capital invested should be the sum of the shares with a nominal value.
According to the charter, the shares may be divided into classes. Shares that give rise to identical rights and obligations are merged into one class of shares, hence the face value of all shares in one class must be the same.
The validity term for partners’ prevailing purchase right for shares issued by the LLC was increased from 10 to 14 days.
The legislator has imposed new restrictions on dividend distribution: Dividend distribution on partners is not permitted if there is a high likelihood, that in the next calendar year it may lead to the impossibility to meet the due obligations within the execution of its ordinary and or planned activity. Also, it is prohibited to distribute dividends if the assets of the enterprise might not be enough to cover its obligations and placed capital amount.
Purchase of Own Share by LLC
Another important novelty is that the corporate law directly allowed LLC to purchase its own shares, for which the contribution is already fully made.
It is not allowed for the LLC to purchase such a share of it that grants unlimited vote rights or the right to get the property of the LLC after its liquidation. If LLC still conducts this action it shall sell its share or terminate it until the end of the calendar year when it was purchased.
It is important that LLCs still don’t have a minimum subscribed capital amount requirement. However, of course, this stil l allows LLC to determine its minimum subscribed capital amount requirement.
The new law also establishes partners’ exit/firing prerequisites and procedures discussed below.
Withdrawal of a Partner from the Enterprise
Partner maintains a right to withdraw from the enterprise, just as in the previous version of the law. However, the new corporate law specifies the circumstances when the partner is allowed to withdraw from the enterprise. Particularly s/he can withdraw if her/his interests are under significant damage because of the actions conducted by other partners or managing person or there are other reasons, such as:
- Activity of an enterprise changed dramatically;
- LLC has not distributed dividends for the last three years, although the financial performance of the company was sufficient for such distribution;
- LLC has made a decision with respect to changes of rights on the specific type of shares;
- Other partners have made a decision to take the obligation of additional contribution, which also applies to the withdrawing partner;
- The price of the shares of the withdrawing partner shall be determined by the agreement between the parties. The auditor might be appointed in case of disagreement.
Expulsion of a Partner from LLC
In case of existence of important basis – the expulsion of a partner from LLC company is possible only in case of the lawsuit from the LLC and respective decision of the court.
The important basis exists when the actions of the partner have significant damage on LLC’s interests or remaining of such partner in shareholding of LLC might be damaging for its further activity. Importantly, LLC shall inform in advance such partner that not stopping mentioned activity might lead to his/her expulsion.
Such partner’s voting right or his/her other intangible rights might be paused on the basis of claim from LLC. Partner is deemed to be expelled from the moment when the decision of the court enters into legal force.
Property rights of the expelled partner are protected by the obligation of the LLC to pay him/her fair compensation in return for the shares.
An additional important novelty is the possibility to use technical means for voting in general meetings. The vote will be counted only in case the voting right of the person is sufficiently identifiable. Approval of notary or usage of electronic signature is mandatory during the electronic communication.
Obligation to Bring in Existing Charter Compliance with the New Law. It is important for all the Georgian existing enterprises that they shall fix the registration data in compliance with the requirements of the new law within 2 years after its entry into force (until December 2023). Contact us for more details. We will make all necessary changes request by the law for you. Locally or remotely.