Transformation of a private enterprise into a limited liability company: important considerations

Since the Commercial Code defined the legal status of the organisational and legal form as a “private enterprise” (the “PE”), its repeal makes it impossible for PEs to continue to exist in their usual form. From the moment the provisions of Law No. 4196-IX came into force, it became impossible to create new private enterprises, and existing PEs may continue to operate during a three-year transition period, after which they will need to choose another organisational and legal form provided for by law (for example, a limited liability company (the “LLC”)). 

During the transition period (until 28 August 2028), the activities of private enterprises are governed by special rules: the provisions of Law of Ukraine No. 2275-VIII “On Limited and Additional Liability Companies” (the “Law No. 2275-VIII”) are temporarily applied to them in respect of issues not regulated by their statutes or other laws. After 28 August 2028, if no decision on changing the organisational and legal form is made, the provisions of Law No. 2275-VIII will apply to private enterprises, and the provisions of their charters that contradict this law will be deemed invalid.

How was the activity of private enterprises regulated before the Commercial Code was repealed, and what has changed since it ceased to be in force?

The Commercial Code defined a private enterprise as an enterprise operating on the basis of private property of one or more citizens (including foreigners or stateless persons) and their labour, with the possibility of using hired labour. Unlike LLCs or joint-stock companies, no special law was adopted for private enterprises to comprehensively regulate their activities. Accordingly, the legal status of private enterprises was based mainly on the provisions of the Commercial Code, general legislation applicable to all legal entities regardless of their organisational and legal form, and the statutes of private enterprises.

The absence of a special law for private enterprises effectively gave them broad statutory autonomy. It was the charter that determined the key aspects of their activities – the management procedure, distribution of profits, formation and contribution of authorised capital, etc. However, there is now an urgent need to reorganise private enterprises.

After the Commercial Code of Ukraine ceased to be in force, the activities of private enterprises are regulated exclusively by general legislation. This includes, in particular, the provisions of the Civil Code of Ukraine (regarding legal transactions, agreements, property issues), Law of Ukraine No. 755-IV “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organisations” (regarding the procedure for establishing, amending and terminating a legal entity), as well as laws in the field of accounting, taxation and other regulations governing the activities of business entities.

What steps need to be taken to transform a private enterprise into a limited liability company?

At first glance, the procedure seems simple, but as always, the devil is in the details. 

First, the participants of the PE adopt a notarised decision to reorganise the PE by transforming it into a limited liability company. Since the legislation does not provide a procedure for adopting such decisions for PEs, they are primarily guided by their charters. If the PE has only one participant, he or she makes the decision alone, recording all necessary aspects. If there are several participants, a general meeting is held at which a decision on the reorganisation of the PE is jointly adopted and recorded in the relevant minutes. 

At this stage, it is necessary to confirm the decision on the reorganisation of the private enterprise by transforming it into a limited liability company, appoint a commission for the reorganisation of the enterprise (the powers of the reorganisation commission may be vested in the management body of the legal entity in accordance with the charter) and determine the procedure and deadline for creditors to submit their claims to the private enterprise (the period should be from 2 to 6 months).

Within three working days of the decision date, it is necessary to notify the state registration authority and submit the necessary documents to the state registrar for state registration of the termination of the legal entity. Provided that the documents are properly executed, information about the decision to terminate the legal entity through reorganisation shall be entered into the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations (the “USR”) within 24 hours, which shall be considered its publication and the start of the period for the submission of creditors’ claims.

During the period allotted for creditors to submit claims, the reorganisation commission shall consider each claim separately and respond to the creditor no later than 30 days from the date of receipt.

After the deadline for creditors to submit their claims, the participants of the terminated private enterprise must approve the LLC’s articles of association (by a participant’s decision or by the minutes of the general meeting). The charter must comply with the requirements of Law No. 2275-VIII, in particular, it must contain mandatory provisions regarding the name of the company, management bodies and decision-making procedures, conditions for joining and leaving the company, as well as accounting for shares in the accounting system maintained by the central depository. If desired, a model charter may be used, selecting the appropriate versions of the variable provisions.

In addition, the reorganisation commission draws up a transfer deed, which is approved by the participants of the private enterprise and serves as a document confirming the succession of the LLC to all rights and obligations of the private enterprise. Signatures on the deed are subject to notarisation using special notarial document forms.

Documents regarding the termination of the PE and registration of the newly created LLC are submitted to the state registrar, including, among other things, the transfer deed, the participant’s decision, and the ownership structure.

The registrar shall reflect in the USR data on the termination of the PE and the creation of the LLC. It is important that the identification code of the legal entity is retained, which guarantees succession and continuity of activity. 

What happens after the reorganisation is registered?

Information about the termination of the PE and the creation of the LLC is automatically sent to the State Tax Service of Ukraine, the Pension Fund of Ukraine, the State Employment Service of Ukraine, and other state bodies through the USR. As a rule, it is not necessary to notify these authorities separately. However, it is worth checking whether the updated information is reflected in the taxpayer’s electronic account or in the USR extract. The Employment Centre also receives the information automatically if the employer’s status does not change.

As for VAT payer status, as a result of the transformation of a private enterprise into a limited liability company, the VAT payer status is subject to re-registration. The relevant application must be submitted within ten working days of the date of state registration, and if this deadline is missed, the registration will be cancelled. Tax rights and obligations are transferred to the successor. If the LLC meets the requirements of the simplified taxation system, it may choose it. 

Bank accounts opened in the name of the private enterprise are legally transferred to the LLC, as the EDRPOU code remains unchanged. However, in practice, a re-registration takes place: new agreements with banks must be concluded, electronic keys must be updated, and all financial institutions must be notified of the change in detail. It is advisable to destroy the old seal of the private enterprise.

If the participants and ultimate beneficial owners (the “UBO”) have not changed, it is not necessary to resubmit their data upon termination of the PE – they are automatically transferred to the USR for the LLC. If, however, the composition of participants or shares has changed during the creation of the LLC, it is necessary to submit an updated ownership structure. In the future, all changes to the UBO must be entered into the USR within 30 working days.

All contracts concluded by the PE remain valid and binding on the LLC. According to the Civil Code of Ukraine, the LLC, as the successor, automatically acquires the rights and obligations of the PE, so there is no need to renegotiate contracts.

The LLC has the right to carry out licensed activities on the basis of licences issued to the PE for the entire duration of their validity, provided that the licensing conditions are complied with.

Also, the reorganisation is not a reason to end employment contracts – all current contracts remain valid, only the employer’s name has changed.

In conclusion, it should be noted that legislative changes indicate a gradual transition of the Ukrainian legal system from outdated forms of business regulation to modern corporate standards. The abolition of the Commercial Code and the transformation of private enterprises are logical steps towards harmonising legislation with international approaches.

In this context, it is important for entrepreneurs to perceive the transformation not as a formality, but as an opportunity to update internal management mechanisms, increase transparency, and competitiveness of their businesses. Successful adaptation to the new rules will ensure stability and further development of companies in the changed legal environment.