Limited Liability Company as a Capitalist Organization: Critique of the “Partnership” Concept

Introduction: There are currently two opposing trends in the way the legal nature of a limited liability company is understood. On the one hand, legislator is increasingly bringing the legal regimes of non-public joint-stock companies and limited liability companies closer together by combining them into a single group of non-public companies. On the other hand, the Supreme Court of the Russian Federation’s recent practice clearly demonstrates an understanding of a limited liability company as a type of partnership. To what extent is the ‘partnership’ approach justified? This issue needs to be studied.

Methodology and materials: The methodological basis of the study is general scientific methods, primarily the method of systems analysis. Specialized legal methods are also employed, including formal legal analysis, historical legal analysis, legal modelling and economic analysis of law (transaction cost theory).

Results of the study and their discussion: The “partnership” model of a limited liability company, in which participants are in contractual legal relationships with one another, is generally ineffective. This is because the addition of another participant multiplies legally significant ties and consequently increases transaction costs. It was precisely as a result of this fundamental factor, which hindered the attraction of direct investment and the turnover of shares in the authorized capital, that legislator was forced to abandon the recognition of the founding agreement (memorandum of association) as the founding document of a limited liability company, thereby completely switching to a capitalist model. The influence of the personality factor of the participants does not in itself entail the recognition of a limited liability company as a modified type of partnership, since a participant has the legal ability to influence the activities of the company within the framework of the legal participation relationship linking the participant and the company, and not through direct legal influence on the activities of another participant. Nevertheless, elements of a partnership are evident when all company members enter into a corporate agreement. However, even in this case, the company does not acquire all the characteristics necessary for it to be considered a partnership.

Conclusions: The model of a limited liability company is more complex than that of a partnership and should not be reduced to the latter. The discretionary nature of the legislation on limited liability companies allows for the application of various models that take into account the degree of involvement of participants in the management of activities. Attempts to make the “partnership” model of a limited liability company universal may lead to a significant decrease in the effectiveness of using this legal form as a means of attracting direct investment and managing separate property.

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