Kokhanevich E.. Usachev V.A.

Donetsk National  University of Economics and Trade named after Mykhailo Tugan-Baranovsky 

Private enterprise in Ukraine

Ukraines economic freedom score is 46.3, making its economy the 161st freest in the 2013 Index. Its score is 0.2 point higher than last year, with modest gains in monetary freedom and business freedom that outweigh declines in labor freedom and freedom from corruption. Ukraine is ranked last out of 43 countries in the Europe region, and its overall score is lower than the world average.

Economic freedom continues to be severely repressed in Ukraine. Previous reforms, including implementation of competitive tax rates and minor regulatory changes, have failed to spur broad-based economic development or the emergence of a more dynamic private sector.

Such reforms are more than offset by poor policies and weak institutional structures throughout the economy. Corruption is pervasive, laws are poorly administered, and contract enforcement and protection of property rights are seriously deficient. Progress in privatization and attracting foreign investment has been meager. The primarily cash-based economy is plagued by a lack of sufficient capitalization in the state-controlled financial sector. The potential benefits of trade freedom are undermined by institutional controls on capital and investment.

The minimal number of founders (owners, shareholders) of a Private Enterprise in Ukraine is one corporate or natural (private) person, a resident or non-resident of Ukraine. The maximum number of founders (owners, shareholders) is unlimited if the founders are private (natural) persons. Therewith founders of a Private Enterprise can be either a corporate entity (i.e. only one corporate entity) or natural (private) persons (i.e. unlimited number of natural (private) persons), but not a corporate entity and natural (private) persons all together. This limitation is provided by clause 113 of the Commercial Code of Ukraine.

Relations of owners of a Private Enterprise are not regulated by Ukrainian laws and regulations, therefore it is provided that owners of a corporate entity in this organization form, if they want can regulate all aspects of their relations at their own discretion in Articles of Incorporation (also known as Articles of Association or Statute or Charter or bylaws) including possibility (or prohibition) to sale their corporate rights to any third parties and to establish procedures of taking decisions related to corporate governance (for example, it is possible to provide that decisions are taken by voting, when each owner has one vote or when each of the owners has quantity of votes proportionate to amount of his contribution into the authorized capital of a Private Enterprise (simple or special majority), etc.

Founders (owners) of PE are liable for its obligations within limits of their paid-up share in the authorized capital and if the share was not paid in full also within limits of the unpaid part of the same.

The highest executive body of a private enterprise in Ukraine is its owner(s) (also known as founders, shareholders) or a meeting of such entities, which can adopt any decisions as regarding activity of the PE. However, Ukrainian laws do not provide any requirements as regarding periodicity of such meetings, place of such meetings, etc. Therefore, founders (owners, shareholders of the PE can regulate these procedure in Articles of Incorporation (Articles of Association, Statute or Charter) of the EP on their own discretion).

Each Ukrainian corporate entity, including private enterprise, has to confirm its registration information to the state registrar annually.

The corporate documents of a Ukrainian Private Enterprise are:

- protocols (decisions) of owner(s) (founder(s), shareholder(s)) or protocols of meetings of these entities;

- Notarized Articles of Incorporation (also known as Articles of Association or Statute or Charter or bylaws) with signature and seal of the state registrar;

- Certificate of state registration (also known as certificate of incorporation) with signature and seal of the state registrar;

- reference from the regional department of the State Statistics Committee;

- references from appropriate District Tax Inspection and other state funds and services.

While incorporating a private enterprise in Ukraine it is very important to draft a good Articles of Incorporation (also known as Articles of Association or Statute or Charter) because there are some imperative requirements provided for contents of the same by numerous Ukrainian regulations and from the other hand creation and other corporate procedures for a private enterprise in Ukraine are not stipulated by Ukrainian laws and the same should be established in Articles of Incorporation (also known as Articles of Association or Statute or Charter or bylaws) of such PE in a very clear and detailed way in order to have no problems, conflicts and complications between founders (owners, shareholders) of the private enterprise in future.

Ukraine entered into a recession in the second half of 2012, bringing growth in real GDP for the whole year to just 0.2 percent. GDP declined by 1.3 percent and 2.5 percent y/y in the third and fourth quarters of 2012 respectively, compared to the first half of the year when real GDP grew by 2.5 percent. Slowdown in the global economy and, in particular, lower demand for steel resulted in 5.2 percent y/y drop in Ukraine's steel output and led to weak performance of industrial production (-1.8 percent y/y). Agriculture suffered from lack of precipitation that cost some 4 percentage points of value added in the sector. This was partially offset by robust consumption growth, evidenced by an expansion of retail turnover (13.7 percent) that was fuelled by a double digit increase of real wages. Consumer inflation, however, remained close to zero due to decline in local food prices, postponed utility tariffs adjustments and tight monetary policy. These trends continued in early 2013: industrial production and consumer prices continue to post y/y declines, while domestic demand supports retail turnover growth in double digits.

As regarding incorporation and activities of a Private Enterprise in Ukraine, the law of Ukraine "About commercial entities" and the Civil Code of Ukraine as well do not provide any imperative regulations as regarding the legal issues of incorporation, managing and termination of a Private Enterprise, there only some general provisions as regarding all Ukrainian corporate entities in the Civil Code of Ukraine. The Commercial Code of Ukraine and the law of Ukraine "About commercial entities" also provide very few common provisions on Private Enterprises. The same is regarding relations between founders (owners) of the PE, relations of selling their corporate rights (shares in the authorized capital) among themselves. Therefore there are a lot of issues, which can be drafted in Articles of Incorporation (also known as Articles of Association or Statute or Charter) at own discretion of founders (also known as shareholders or owners) and from this point of view the Private Enterprise is a perfect choice if founder(s) of a corporate entity do not want to be guided in the matters of corporate governance by the imperative law regulations, but want to establish their own procedures for the corporate governance.

Ukrainian Private Enterprise is a perfect choice for commerce in Ukraine and abroad as well, when founders do not plane to transfer (trade) their corporate rights (shares) too often (because each transfer of corporate rights should be made through adoption and state registration of a new edition of Articles of Incorporation). Owners of PE can distribute net profits of the company between themselves and have their liability limited by property of the enterprise and their paid share capital.

Also, each Ukrainian corporate entity, including Ukrainian Private Enterprise, has to file a lot of reports to the regional state tax inspection and to other numerous state bodies during a calendar year and there are provided penalties for those corporate entities and their officials, who fail to do this timely. Reports are not public and cannot be disclosed by state officials to any third parties without consent of the entity. Ukrainian laws and regulations also provide possibilities for the regional state tax inspection and to the other numerous state bodies to check accounting records of a corporate entity from time to time.