The Essential Corporate Law in Lithuania (1)

These are the highlights if you want to know the essential of Corporate Law in Lithuania.  This entry was drafted by STRATEGUM Dargis ir partneriai for”E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “ STRATEGUM Dargis ir partneriai” is an excellent option in Lithuania.

Corporate law

Popular types of legal persons

If you have adopted a decision to start a business in Lithuania, firstly you need to decide what kind of company is the most suitable for achieving the goals. Having assessed the risk that you want to take, you can choose between limited or unlimited liability company. The following business-oriented enterprises are the most common in Lithuania:
1. Public Limited Liability Company (AB);
2. Private Limited Liability Company (UAB) (the most popular);
3. Small Partnerships (MB);
4. Individual Enterprise (IĮ).
5. Public Enterprise (VšĮ);

It is possible to set up the Closed Joint-Stock Company (UAB), the Public Enterprise (Public Institution), the Small Partnership (MB) and the Individual Enterprise (IĮ) by submitting the necessary documents to the Lithuanian Registry manager electronically via the electronic customer self-service system of the Centre of Registers.

Public limited liability company (AB)

A public limited liability company is a private legal entity with limited civil liability, which means that the company is liable only by its own assets in case of failure the business. The AB may be converted into a private limited liability company, state enterprise, municipal enterprise, agricultural company, co-operative company (cooperative), general partnership, limited partnership, individual enterprise, public establishment, small partnership[1]. Management bodies of AB are the general meeting of shareholders and manager of the company. A collegial supervisory body – the supervisory board and the collegial management body – the board may be formed.

Advantages:

• Unlimited number of founders;
• Shareholders may receive profit by distributing dividends;
• Better prospects for business development;
• The most important decisions are taken by the shareholders by voting;
• The capital of the company may be increased from the company’s funds (retained profit);[2]
• The biggest advantage of AB is the opportunity to attract investors by selling shares by issuing new shares or debentures (shares can be traded on a stock exchange).

Disadvantages:

• Relatively big authorized capital;
• Strictly controlled cash flows;
• If the manager of the company is not a shareholder, his decision-making power is limited and directly depends on the decisions of the shareholders;
• More complex bookkeeping and preparation of financial statements;
• More complex procedure for reorganization and liquidation.

Private Limited Liability Company (UAB)

Private Limited Liability Company (UAB) is a private legal entity with limited civil liability. This means that the shareholders are not liable by their assets for their unfulfilled obligations of the company. The authorized capital of UAB must be at least EUR 2 500. UAB may established by both one and more natural and/or legal persons, and the number of shareholders is unlimited. A shareholder may sell or otherwise transfer (for example, donate, exchange, etc.) his own shares of UAB. UAB can be transformed into public limited liability company, state enterprise, municipality enterprise, agricultural company, co-operative company (cooperative), general partnership, limited partnership, individual enterprise, public establishment, small partnership[3].

The most important decisions are taken by shareholders by voting. Each share grants one vote; therefore, the person who acquired the majority of shares has the greatest influence during the voting at the general meeting of shareholders. UAB must have a sole management body – a manager, and a collegial management body – the board – may be formed as well.

Advantages:

• In the event of a failure of business, the shareholder risks only by the assets that he has contributed to UAB, thus protecting his personal assets;
• In order to attract additional funds, UAB may issue new shares for which the shareholders pay a fixed amount of money;
• Ability to withdraw from business by transferring shares of UAB to other persons or selling business;
• Tax relief for UAB: if the average number of employees does not exceed 10 people and the income tax period does not exceed EUR 300 000, a reduced tax rate of 5% is imposed instead of the usual 15% rate[4].

Disadvantages:

• During establishment of UAB, it is obligatory to contribute at least EUR 2 500 for the authorized capital;
• Shareholders can earn the UAB profit only through dividends (if the company is operating profitably), or by receiving remuneration, but in this case, it will be necessary to pay big taxes.
• Non-public trading in shares. A shareholder intending to sell shares or UAB having issued new shares must first offer shares to other shareholders of UAB.

Small Partnership (MB)

The small partnership is a private legal entity with limited civil liability. This means that members are not liable by their assets for their unfulfilled obligations of small partnership. A small partnership can be established by up to 10 natural persons (there may be one founder). A small partnership can carry out any activities not prohibited by laws.

Although the it is not required to have a minimum authorized capital in small partnership, the members of the small partnership shall pay contributions (their size and payment procedure are determined at the meeting of members), while the profit of the small community is distributed in proportion to the amount of the member’s contribution (other types of profit distribution can be provided for as well).

Advantages:

• Limited liability of members, i.e. if the business fails, the members risk only by their own contribution, thereby protecting their personal assets (for comparison, the owner is liable by his personal assets for unfulfilled liabilities of the company);
• The minimum authorized capital requirement is not applied (for comparison – the minimum authorized capital of the company is EUR 2 500);
• Possibility of withdrawing voluntarily from the business, i.e. a member of the small partnership may withdraw from the partnership by reclaiming his contribution; he may also sell or otherwise transfer the rights of a member to other persons.

Disadvantages:

• Only a natural person may be the founder/member; in total not more than 10 (for comparison, both natural and legal persons may be the shareholder of UAB, and the number of shareholders is not limited);
• Since there is no clear procedure for voting and distribution of profits, there may be disputes between members of the small partnership;
• Bookkeeping of small partnership is only simpler in some cases than UAB (for example, if the small partnership does not have employees, or it is not a VAT payer).

[1] Art. 72 of LC

[2] Paragraph 1 of Article 51 of LC

[3] Article 72 of LC

[4] Paragraph 2 of Art. 5 of LCT