Spin-off (spin-out)

Spin-off (spin-out)

According to Article 56 of the Commercial Code of Ukraine (CCU), the separation of an entity is one of the legal ways to create a business entity (along with the formation of a new, transformation, merger, acquisition, division). In some cases, the procedure of forced spin-off is provided as a mechanism to comply with the requirements of the country’s anti-monopoly and competition laws.

The essence of the procedure “reorganization by spinning off a new legal entity” is stated in Article 109 of the Civil Code of Ukraine (CCU). This refers to the transfer of part of the property, rights and obligations of a legal entity to one or more new entities. The procedure is performed on the basis of the distribution balance. Unlike other forms of reorganization, the spin-off does not result in the termination of legal entities. The algorithm of spinning off a legal entity is connected with state registration of the new subject (new subjects) of business and re-registration of the “old” one, with settlement of accounting and tax accounting issues, observance of creditors’ rights and some other issues.

Patriot.legal specialists are ready to support clients in solving such problems. Our experience of legal support for businesses of all sizes allows us to work as efficiently as possible, without leaving even the slightest chance of problems in the future.

How does reorganization in the form of a spin-off proceed in stages?

Instructions (methodological guidelines) for this procedure are compiled by lawyers for each business entity individually. The objectives to be achieved are taken into account, e.g. to optimize tax burden, to create a firm with narrow specialization, etc. The order of this procedure is consistent with the requirements of the Commercial Code and the Civil Code, as well as the following laws:

• No. 755-IV «Про державну реєстрацію юридичних осіб, фізичних осіб-підприємців та громадських формувань» dated 15.05.2003;
• No. 514-VI «Про акціонерні товариства» of 17.09.2008
• No. 2275-VIII «Про товариства з обмеженою та додатковою відповідальністю» dated 06.02.2018.

Reorganization of a legal entity in the form of a spin-off includes the following stages:

1. The members of a business company make the appropriate decision. Often a general meeting is held for this purpose and minutes are drawn up.
   ***If we are talking about LLC and ALC, such a decision is exclusively in the competence of the general meeting of participants. It must be voted for by ¾ of all participants.
2. Based on this decision, an inventory order is issued. Based on the results of the inventory, a distribution balance is drawn up – the main document for this form of reorganization. This document contains a list of property that is transferred to the new entity(ies), as well as sets out the rights and obligations of the entities.
3. Within one month from the date of the decision on the spin-off, the creditors of the company must be notified. According to the law, this form of reorganization is not considered completed until the claims of creditors are satisfied.
4. Completion of the spin-off procedure is state registration. First, information about the new business entity (new subjects) is entered into the Unified State Register of Legal Entities (USR). Secondly, the legal entity from which the new subject (new subjects) was spun off is re-registered. The date of making entries in the USR and is considered the moment of entry into force of all the rights and obligations that were specified in the distribution balance sheet.

What documents are submitted to the state registrar when a reorganization by division is carried out?

• Application for registration of a newly established legal entity – form 1 (a sample can be viewed on the pages of specialized Internet resources).
• Application on choosing the simplified taxation system and/or application for registration as VAT payer.
• Charter of the newly founded company (or other founding document).
• Distribution balance sheet.
• Application for re-registration of the “old” legal entity – form 3.
• Application for registration of information about the legal person in the USR – Form 9.
• A receipt confirming the payment of the state duty (when calculating the cost of registration actions, this item of expenditure should also be taken into account).

How is the reorganization of an LLC in the form of a spin-off realized in practice?

Qualified legal support allows business owners not to worry about the nuances of the spin-off procedure. However, we want to give a brief explanation of how the key issues in this area are resolved.

Authorized capital

The amount of capital of business entities after the spin-off must be equal to the charter capital of the company from which the spin-off is made. The distribution of shares among the participants in the LLC is made while maintaining the ratio that was prior to the spin-off. To give an example: if a participant owned a 30% share in the “old” company, then after the spin-off he will own 30% shares in both the “old” and the new company.

Taxes

The newly-formed company is not liable for the tax obligations of the original entity. At the same time, tax preferences, if any, will not be granted to the “old” company. The new business entity can choose any convenient system of taxation (including – not the same as the primary entity).

Accounting

From an accounting point of view, the transfer of property and liabilities on a distribution balance sheet does not equate to a sale or gratuitous transfer. It is not reflected in accounting entries. Accounting entries are also not created for the formation of the charter capital of the spun-off organization.

Personnel management

If this is any kind of company reorganization, employees are automatically enrolled in the staff of the newly created business entity. No resolution (order, decree) is issued to this effect. At the same time, information on the newly-formed company must be entered in the employment records of employees.

Relationship with counterparties

In order to maintain the necessary business relationships, counterparties should be informed about the reorganization of the business entity. For this purpose, a notice is prepared and sent out by email. Such a mailing should preferably be done in advance in order to minimize the risk of problems with re-issuing certain documents related to cooperation. In order to conduct the spin-off of a company legally correctly, contact the lawyers of Patriot.Legal!