Note 1: This post is an update to our first post about organizing a company in Moldova. While that post was pretty general and explained our initial reasoning this one will attempt to explain the results of that reasoning over the last few months and a few preliminary recommendations for other entrepreneurs (ok, this got long. Conclusions Recommendations will be in Part 2 [COMING SOON]). We will be writing a further update on this topic later on with more solid recommendations. (small update below)
Note 2: This post is covering quite a lot of experience had over a long period of time. The topic is dense and often technical. Please comment if things are unclear and I will add more information. Also, as usual, please feel free to tell us how stupid we are. Everyone can learn from that.
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Selling Shares vs Adding a Founder:
The Necessary Documents for Adding a Founder
Notarizations, Apostilles, Translations and DHL
So Begins a Tale of SRLs and LLCs...
The path to success is almost self evident!
I'll begin where the last post ended which was with a discussion of the process that we decided to embark upon. That was to organize the companies basically as follows:
I'll let you all guess which silhouette represents which manager...
So to describe what you're seeing there we founded a Moldovan SRL called "Smoke House SLR" (they refused to believe it was one word and we didn't fight it). Additionally we founded an American LLC called "The Moldova Company LLC" in Virginia. The purpose of the LLC, as described briefly in the previous post, is to escape from some of the more challenging bureaucratic differences between a Moldovan SRL and an American LLC. These all...
involved shareholder management and were mentioned in the previous post and will be elaborated on much more later.
Clarification: In our post about founding the SRL we mentioned that we decided to split the company 33%-33%-34% with the intention of each transferring 33% to the American company and leaving the legally required 1% in the hands of our Moldovan member. This turned out to pose problems as the two American members might not be viewed as actual investors because we would not show up on any Moldovan documents. This is the reason we decided to keep 3% in Moldova and not 1%.
In order to begin this process the following very important question needs to be answered. It informs every step of this process and has a significant amount of nuance.
Should you a.) use the LLC to found the SRL directly or b.) found the SRL as individuals and incorporate the LLC as a member later?
We selected option b.) for the following reasons:
The rest of this post is an explanation of how this choice played out. Many sections will be common no matter which way you go with this but I can only reliably speak to our path through this maze. I will try and ask a friend who has gone the other direction to post his thoughts at some point. In the mean time if there's anyone else reading this who has thoughts comment and we can talk. At the end of the day I believe our choice was correct because of point 1 aka because we could start functioning as the SRL immediately. Read on and make your own call.
Having decided on our course of action the next step was to found the companies. I have already described that at length in this post so I'll skip it here. With both companies founded and our all powerful Moldovan stamp in hand we set about connecting the companies. In order to get advice on this point we consulted a friend who is a lawyer and who agreed to advise us. After doing some research and talking to the people at the State Registration Office he came back and told us there are 2 options we could chose (quick side note- if we went in and asked it is most likely that they would just have ignored us and we would still be floundering about. Having a lawyer for some reason forces them to acknowledge you. We have found this to be true all too frequently in the silliest of places).
Option 1: Sell our shares to the LLC.
This process would be us simply selling our shares to the LLC and best reflects our initial intentions when setting out on this path. The problem with this is that unlike in an Virginia LLC where this is all done via internal company contracts in Moldova pretty much everything you do needs to be registered with the state which maintains very strict ownership and governance information on your company. This means that we would need to conduct 3 different "reorganizations" of the SRL corresponding to 3 sales of interest. See where this is going? That means 3 different bureaucratic processes and 3 different opportunities to pay fees (link to fee schedule - Romanian).
Option 2: Add the LLC as a new member and dilute our own shares to the necessary percentage by increasing the statutory capital of the company.
This option basically allows you to accomplish the change in 1 transaction but has some nuance that requires explaining. First is the idea of statutory capital which is extremely important here. This is basically the capital investment that makes up the ownership of the company. The way Moldovan law treats this idea is one of the key reasons that SRLs here create a shareholder management problem vs LLC. Under the law the statutory capital is the primary thing the company is responsible for in the case of dissolution, etc. (I'll ask our lawyer for clarification on this and update the post later). For this reason the government strictly controls how it is managed. The easiest way to explain this all is via an example:
An Example to Attempt to Explain Statutory Capital:
Two men want to start a company. One, call him Bob, has $90,000 ($90k) to invest. The other, call him Warren, is an investment genius and has $10,000 ($10k) to invest. In America Bob and Warren could shake hands and agree that while Bob is providing 90% of the startup capital Warren is providing 70% of the value and therefore structure their company that way (Bob 30% and Warren 70%). In Moldova this is not possible because of the statutory capital problem. In Moldova Bob will have to create the company and then sell 70% of the shares to Warren for $10k. This $10k however, is not in Bob's pocket not in the company. In order to put it back into the company Bob has 2 options. a.) Increase the statutory capital or b.) loan the money to the company for zero % interest. Option a.), however, is a problem because by increasing the statutory capital he is now diluting Warren's shares with his own money. Option b.) also has problems because the company's responsibility for that loan is different than the statutory capital investments (e.g. in the event of the company going bust Bob will get his $10k back first even though Warren owns 70% of the company). Furthermore, if the company is in Moldova but Bob is a citizen of another country (in this case Bob could be another foreign company as well) then the loan in Option b.) needs to be reported to the Moldovan National Bank where it will be subject to a 5-7% interest per year.*
*Update pre-print: since writing the first draft of this rather long post we have come to believe that the 5-7% interest is not charged if the lender is a member of the company. I cannot yet confirm this and will make another update to this information when we find out for sure
Now this all goes a ways towards explaining why we have an LLC. The way it can be used to join the SRL and the LLC without multiple sales transactions is by increasing the statutory capital of the company in such a way as to dilute shares to exactly the desired percentages. So assuming each of the three investors has invested the minimum required initially (1 lei/%) and the investment is 33-33-34 (lei & percent); and assuming that the LLC wants to invest 9700 lei in the SRL; then each investor needs to invest have invested 100 lei personally by the end of the transaction to maintain a 1% stake. In this case the investors would be investing 67-67-66 lei respectively.
Congrats if you followed that. Please decompress with this picture of a cat
this kitten is happy because its eyes are closed and it was subjected to none of the above information
Section Conclusion: We decided on Option 2 in order to avoid multiple bureaucratic transactions with the state. Either way the statutory capital exists, it just manifests differently.
So with these various decisions behind us it was now time to figure out what the full process of adding a founder was. Our lawyer friend made some trips to the State Registration Chamber and a few problems immediately emerged. Namely, they told him that he needs to present the following documents in order for the process to proceed:
We wound up having a number of problems here but they crux to it all is #2 the "Extras." In Virginia there is no such document. Now all states are different, but in Virginia all you have to do to register an LLC is hop online and proceed through a 3 minute online process. In that process they check the name for you to make sure it's unique and you name your "Registered Agent." This person is responsible for receiving legal mail on behalf of the LLC and may or may not be a member (often you hire a law firm to do this for you). If your Registered Agent is NOT a member then your LLC is effectively totally anonymous from the standpoint of Virginia (not true for the IRS... they always know). Moldova is unamused by this.
no one here is amused by either your "truth" or your "logic"
This point led to a very long (over 2 months) process of trying to unlock a magical combination of documents that they would accept. Through that process there were more than a few jabs made at our character by Moldovan officials who were convinced that we were hiding something. This also put our poor lawyer through the ringer as he was forced to try and understand both sides of this mess. Here is the combination of documents that they have agreed to accept (we haven't yet finalized this as we are still waiting on some other Moldova-side documents).
1. The LLC's Articles of Organization
They were very unhappy about this. Our lawyer and I created our own terms to describe the problem as the "Small Articles" and the "Big Articles." Basically the "Small Articles" are actually the Articles of Organization issued by the state of VA. They Basically say "This is a company registered on such and such a date with this Registered Agent in order to conduct business that is allowed under VA law." The "Big Articles" refer to our Operating Agreement. In VA an Operating Agreement is not required by law and is not filed with the state. Because of this the state retains no knowledge of the governing rules of the LLC, the membership or the ownership allocations. All of this is managed by internal documents.
The State Registration Chamber REALLY wanted our "Big Articles" and refusing to provide them was a controversial decision on our part. The reasoning behind it though seems simple enough to me. Firstly, they want them issued by the state of Virginia. This is not legally possible. Secondly, we allocate our ownership in a way that does not remotely reflect their "statutory capital" system. Combined these 2 points convinced us that they would never accept our Operating Agreement as real. The reason for this is easily one of the most frustrating parts of doing business in Moldova. It is frequently difficult (at times nearing impossible) for people here to reconcile the differences between different bureaucratic systems (there will be an upcoming post explaining more examples of this and how it hinges on a notion of "responsibility"). After much back and forth they finally, begrudgingly, accepted that the "Small Articles" were all that there were when we introduced them to...
2. A Statement of Information by the Registered Agent
This document took the place of an “Extras”. Virginia has nothing like this (the helpful people on the State Corporation Commission's helpline confirmed this with a chuckle... evidently I was not the first to be in this situation). This isn’t true for all states as California does have this information available (link here). The problem of the "Extras" eventually became so much of an impasse that we decided to create one and make it look super official. It is issued by the company and signed by the Registered Agent (since the agent appears in the "Small Articles" this ties things back nicely. This is the way that we found around this problem and it seems like they have accepted it (final update to come when all the paperwork finally goes through).
Much of this data overlapped with the documents confirming the LLC's existance from Virginia. The critical additional information was #6, #7 and #8.
**Update: this process is now complete and they did in fact accept this document. I believe that the key here was the Appostile. Because Moldovan Notaries are responsible for the content of the document as well as the signature (as opposed to the kid at UPS who just looks at your license and stamps the page) this became much more official to them.
3. Confirmation of the Monetary Transfer
See the my upcoming post on banking and wire transfers (link to be added when posted)
4. A Contract From the LLC Confirming Its Intention To Enter Into A Partnership
The State Registration Chamber indicated that they will accept this in Romanian which saves on translations (see below)
5. A Contract From the SRL Confirming Its Intention To Enter Into A Partnership
This contract is very standard by Moldovan terms and can be drawn up by any competent lawyer.
6. A Photocopy of the Driver's License of the Registered Agent
This was necessary because they made the complaint that the John Smith (name changed... makes more sense if this was his real name) signing the documents might not be *the same* John Smith that was registered with the company. Once again we were at an impasse until we realized that John Smith had to notarize all the documents for apostilles (see below). Basically, at some point there seems to be a name / ID number saturation where they are mentioned enough as to be "official enough."
7. A Certificate of Organization of the LLC
This is issued by the state of Virginia online when you register the company.
Next we must make all of those documents "official" by Moldovan standards. This begins with...
1.) The Notary (America)
All of these documents must be notarized to be accepted by the Moldovan Government. That said, the Moldovan Government, nor any foreign government, will take my word for it that a notarization in the state of Virginia looks however I say it does. For this there is the notion of apostilles (aka international notarizations). For all the Virginia/International documents you need these. They start pretty simply at a normal notary (for me it's my local UPS store) and then go through a state process. For Virginia it's like this...
Ok, so what is this strange word apostille? Well firstly, it's French which is why it sounds so odd. Beyond that it is basically an "international notarization." The concept of apostilles was created by a Hague convention of 1961 known as the Apostille Convention.
Who knew that the Hague was more than gondolas and war criminals?
This convention provides for a process by which countries can "certify" local notarizations for international use. In American this is done state by state the first image of this blog is a Virginia Gold Apostille - I have become a collector of sorts...). Every state has a different system and fee structure for these and they seem to vary from $5 to $50 a pop. This is a pretty major consideration if you are considering managing a foreign small business via an American LLC. If you incorporate in Delaware these cost $50 each. In Virginia they are $10 for the first and $5 for each subsequent document from the same notary. For a small business this is a BIG DIFFERENCE. Documents 1, 2, 6, and 7 above needed an apostille. We additionally prepared about 6 more documents because in Moldova be have become used to problems (the main one being that the person that gave us that list might not work the day we come in. In that case we want both barrels loaded with Gold Apostilled document-buckshot for them).
Oddly this is google's first result for "golden buckshot." Get your's today.
Ok, so you have all those documents. Now you need to send them to Moldova. Call it poor planning, call it inexperience, we weren't ready for all that bullshit to take a month to put together. When it came time to send them back we didn't have a whole lot of time. We opted to sent them back via DHL for maximum speed and security. They were able to send the documents back to us in about 4 days for around $150. As much as it sucked to pay it was worth it. This crew is professional. Why does this matter? One time I was living in Kazakhstan and sent a package via the regular post. It was chocolates and a birthday card. When they arrived it was designer lipstick and a birthday card. My girlfriend was still pleased but confused as to my sudden knowledge about lipstick. I was confused about her offer to "wear" my gift when we next met (confused and intrigued...). Bottom line? Use DHL.
I smile because I get paid enough that I don't have to resort to chocolate theft.
These apostilles and accompanying documents must be translated into Romanian for the state to comprehend them. This applies as well to documents 1, 2, 6 and 7. We got a deal through a friend but it still cost us 750 lei ($50). This also takes time naturally.
5.) The Notary (Moldova)
Finally we have one more notary. Everything that has been translated needs to be notarized as a translation and as an "official copy." Again this applies to documents 1, 2, 6 and 7. Generally any notary may perform translation services and do the notarization as well (it was included in the 750 lei mentioned above). I just wanted to mention it if you were feeling like hot-shit and thinking that you can translate something yourself. Not so.
Sections to come... wire transfers, banking thoughts and conclusions and recommendations from this process. Stay tuned...